Customer rights a grey area in distribution ban

The European Court of Justice decision to ban non-European grey imports is bad news for brand owners. The decision to back Silhouette, the sunglasses maker, in its attempt to restrict its distribution outlets may be a legal victory. But the price of winning this battle will be to hasten losing the war: this is not an issue of law, but of branding and trust.

The best thing brands like Adidas, Levi’s, or Calvin Klein can do now is to say “thank you” to the European Court and voluntarily change their distribution policies as quickly as they can. Yesterday’s strategy is no longer tenable. The fact that changes in distribution could threaten their exclusive, luxury image – and their margins – is irrelevant.

Their business model is past its sell-by date anyway and nothing their brand managers can do will change that. Worse, their attempts to justify their current model’s pricing and distribution strategy simply compounds the problem. Brand managers who argue that the wrong retail environment will sully their fashionable image, for example, raise a question mark about their attitude towards their consumers.

If consumers feel a trendy retail environment genuinely adds value, they will choose to shop in one. Brands which get their image right can still command juicy price premiums without such tactics. Just look at Coca-Cola.

Arguing that customers get better service and advice in specialist outlets doesn’t wash either. It just insults the intelligence of the customer, which isn’t clever marketing practice. The message is, “you are too thick to know what’s good for you, so we have to restrict your options”.

Yet if customers want better service and advice and genuinely believe they will get it by going to a specialist outlet, they will do so. So why deny them the choice? The hi-tech products’ defence that the higher margins delivered through restricted distribution will fund future technological developments is also shaky. It puts the cart before the horse.

When manufacturers deploy technology to deliver demonstrable product superiority, consumers are invariably prepared to pay a premium for it. Successful marketers get their premium by delivering genuine value, not asking for subsidies. Just look at Procter & Gamble.

Marketers may feel that grey imports raise genuine matters of principle relating to trademark protection. They may feel that in deploying arguments like those above they are doing their duty for their brand. In this case, the opposite is true.

The fact that they feel the need for artificial props such as restrictive distribution suggests they lack faith in their own brands. By defending these props, they risk killing the very brands they value so much because they are forgetting the basic, unavoidable, prerequisites of successful brands – trust and value.

The job of a brand is to deliver best possible value to its consumers. Once it stops doing that, for whatever reason, it loses its reason for existing. And once a marketer starts defending such a failure to deliver superior value, he risks forfeiting the bond of trust with his consumer.

Yet the clear message now reaching British consumers is that the real reason these brands charge higher prices is because they want to. Which means these brands are not on the side of their consumers, but of greedy manipulative corporations.

No brand can sustain such a position for long, as the press reaction suggests. The Daily Mirror attacks brand owners’ “scandalous restriction”. The Sun says their practices are “a rip-off”. Even the Financial Times talks of “Grey Import Whitewash”.

The European Court judgment “encourages brand companies to unfairly exploit European consumers”, it comments. The media rottweilers are straining at the leash, because they know that no amount of sophisticated brand-speak can obscure the fact that these brands’ business practices have passed their sell-by date.

The brands prospered on the back of a highly successful business model where advertising, branding, distribution and pricing strategy all reinforced each other.

But that model is now unravelling under the combined pressures of increasing globalisation, consumer sophistication and marketing literacy, the proliferation of new technologies and changing retail structures.

Take luxury brands. Traditionally, they attained their status because they used exquisite materials, were hand-crafted by craftsmen and could only be afforded by the very rich.

Today, they are mostly mass-manufactured and mass-marketed, using materials and processes similar to other brands. The exclusive, luxury image of many of these products is, increasingly, a sham and the people who have made it so are their own marketers, through their pursuit of mass-market volumes.

If these marketers want to protect their brands’ image of exclusivity, the solution is not to restrict distribution but to be truly exclusive: to restrict production. The fact that supermarkets can buy the brands through the grey market is evidence of oversupply – the exact opposite of real exclusivity. Now, as the borderline between luxury, fashion and mass-market brands blur, both operationally and in consumers’ minds, so the margins must follow. The antics of the supermarkets are not the cause of the problem. They are just a symptom.

From a short-term financial point of view, it may seem suicidal to do anything but continue defending the status quo.

However, from a strategic marketing perspective, it is suicidal not to change tack. Far from stopping the rot, the European Court decision can only accelerate it, because it has brought the issues of trust and value into sharp, public focus.

In fact, many of the brands concerned are robust enough to flourish in a changed market. But the longer they continue on their current course, the more they risk handing consumer trust of their brands to the likes of Tesco and Asda.