Discount value of premium brands

Upmarket brand owners are on the offensive. In their gun-sights is the practice of discount retailing which, in their opinion, is steadily corroding the premium value of their market proposition.

A rash of examples testify to the scale of the problem. Only this week, the eponymous US designer Calvin Klein settled out of court with his licensed clothes manufacturer and distributor, Warnaco. At issue, the fact that Warnaco had sold CK-branded clothes through allegedly unlicensed retail discounters. The terms of the settlement have not been disclosed, but it would appear that Warnaco has at least partially recanted.

Meanwhile, in the European Court of Justice, Levi’s and Tesco are hammering out the last chapter of a dispute that started back in 1998. Levi’s claims that Tesco is not a fit and proper outlet for its premium-priced goods. Tesco retorts that it has every right to source cheaper branded goods from outside the EU if it so wishes. Free trade demands nothing less.

Less litigious, but perhaps more momentous in the long term, is Mercedes’ decision to cull the vast majority of its franchised UK dealerships in favour of direct-sale outlets, ÃÂ la Daewoo, wholly owned by the car maker. Mercedes studiously plays down any connection between its plan and the likelihood of an imminent repeal of block exemption status, which allows car manufacturers to operate a quasi-retail oligopoly across the EU. There is little doubt, however, that it fears looser controls over sales outlets will lead to eroded brand value.

And it is probably right. There is more to the premium brand owners’ argument than hypocritical greed. Take the example of an upmarket fragrance from one of the leading fashion houses. Much of the item’s perceived value lies in its mystique and comparative rarity. Little enough of these qualities is likely to survive being routinely placed by the toothbrush rack in a local chemist outlet, thanks to the devious workings of a rampant grey market.

But while there may be justice in this argument, that is no reason to suppose it will win the day. Retailers have a huge advantage. They can portray themselves, if somewhat speciously, as consumer champions engaged in a price-cutting slugfest with the overmighty. All the more effectively, now that widespread familiarity with online communication is focusing consumers on the issue of price transparency.

Premium brand owners, on the other hand, will have to be supremely careful not to paint themselves into a corner. Whatever they may say about protecting the environment in which the product is sold, the popular perception is that they are trying to manipulate the market to the disadvantage of consumers. This perception is heightened when they engage in litigation.

Ultimately, this is a battle the brand owners cannot afford to lose. If they do, they will suffer doubly. Consumers will commoditise the brand; and stock markets will punish brand valuation in the balance sheet, with a consequent loss in shareholder value. But, can they win?

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