How legal abuse inhibits retailing

Germany’s efforts to protect its retailers from competitive forces is a threat to the industry. It lulls companies into a false sense of security and stunts the sector’s growth, says John Shannon

A recent ruling by Germany’s Federal Supreme Court has highlighted the reluctance of some European retailers to come to terms with increased international competition.

The case, brought by a lobby group called “The Centre for the Fight against Unfair Competition”, focused on the practices of the American mail order company Lands’ End. Lands’ End has a relaxed returns policy, entitling dissatisfied customers to full refunds at any time and for any reason. The practice works well both for customers and the company. Increased sales and customer loyalty more than outweigh the cost of the few that might abuse the system.

However, the German court has ruled that by advertising this policy, Lands’ End is violating German law covering free gifts. Absurdly, the company is allowed to operate its returns policy (at least for the time being) but is prevented from telling customers about it.

The arguments in defence of this position are hard to swallow. One is that the cost of offering such a guarantee drives up the cost of the products themselves, and consumers are consequently forced to pay un-necessarily high prices (if this were the case there is nothing to stop consumers looking elsewhere).

Another objection is that the guarantee is just a gimmick, because if a large number of customers de-cided to demand a refund, the company would not be able to pay up.

There are echoes of Germany’s protracted struggle with the issue of comparative advertising in this latest clampdown on advertiser freedom. To many business people the idea of allowing comparative advertising was unthinkable. Yet since rules were relaxed, comparative advertising has quickly been assimilated as just one more marketing tool, to be used only when appropriate.

Similarly, the current outcry against telling consumers about marketing practices which in most other countries would be deemed not just acceptable but beneficial to the customer, is at best an overreaction and at worst deliberately anticompetitive.

The episode suggests a business mentality which is out of step with broader changes occurring within the international retail scene. According to the McKinsey Quarterly, “the business is now following the lead of other industries by globalising, chiefly because of an expanding consumer arena, technological advances, deregulation and the retailer’s need to grow. The prime movers in this process, such as Carrefour, Wal-Mart and Ahold, are creating new rules for retailers in general – expansion-minded or not”.

Against this background any attempt to duck competition is ultimately self-defeating. As the Wall Street Journal comments: “Rules such as those in Germany are incompatible with at least the spirit of the single market Europe is trying to build… Better that Europe’s sheltered retailers should learn to fight fair now, lest they get clobbered later.”

John Shannon is president of Grey International

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