Levi’s margins will shrink to fit

At the beginning of this week, the big supermarket chains were confidently preparing for an early Christmas. ‘Prices will plummet on an enormous range of goods – from Levi jeans to Clinique skincare,’ intoned Tesco’s world non-food buying director.

Wal-Mart-owned Asda, meanwhile, was no less cocksure in planning what it called its ‘biggest ever’ range of grey-market designer goods.

The focus of all this excitement over cut-price premium goods was a seminal ruling by the European Court of Justice. It was poised to conclude an action brought by Levi-Strauss against Tesco three years previously, when cut-price jeans sourced in the USA first appeared on the supermarket’s shelves. Many (not least Tesco) felt the case was a foregone conclusion, especially after a curiously abstruse interim judgement, which appeared to weight the scales in Tesco’s favour.

In the event, the bunting was premature: Levi has unexpectedly carried away the judgement. Not that this will prevent the supermarkets from selling cut-price designer goods, but their useful – if cynical – positioning as consumer champions has received a severe knock. The wind has been taken out of their sails, or so it would seem.

However, this is far from the landmark judgement for branded luxury goods that some manufacturers might have us believe. For a start, Tesco may decide to appeal the decision in the UK courts (the final judicial destination recommended by the interim ruling). Certainly there is plenty about the judgement which is questionable. The European court has not outlawed ‘grey’ trading – which would have been tantamount to retail price maintenance – it has merely restricted sourcing to the European Union. This still amounts to a restrictive practice where Levi jeans are concerned, since it prevents Tesco going to the US (its original source of supply for cheap Levi’s jeans). The reason why prices in the States are very much cheaper is because Levi does not, or cannot, promote its jeans there as premium products. The local US market will not sustain that positioning. So the premium pricing strategy of Levi’s, it could be argued, is a European artefact sustained by the force of law, not by market forces.

In any case, legal wrangling aside, the drift towards lower prices has the inexorable force of Canute’s waves. Supermarkets will not desist from their attempts to erode premium pricing strategies (except their own, of course), because in the first place there are better margins to be had in the non-foods sector, and in the second they have the concentrated market power to do so. Perhaps more important, however, is the fact that they know they are on to a winner with consumers. Sooner or later brand owners who hide behind artificial price constraints will meet with the same kind of treatment meted out to the car manufacturers two years ago.

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