War on the streets

These are desperate times for brand owners. Their struggle with retailers for access and control of consumer markets took a new twist last week when the High Court backed the sale of grey market imports in the UK. The ruling paves the way for retailers such as Tesco and Asda to sell top brands legally at knockdown prices and appears to be another nail in the brand owners’ coffin. Grey imports affect primarily niche and luxury brands, but the mass-market brands have also seen their ability to communicate directly with consumers heavily degraded through retailers’ control of distribution and the rising costs of advertising. Roger Baird investigates how brand owners will respond to last week’s High Court ruling on grey imports.

Last week grey goods importers cracked open a few bottles of Bollinger, probably cheaply imported from France through Bulgaria, and toasted High Court judge Mr Justice Laddie.

For the first time in years, the High Court found for the importers and against brand owners, in a case brought by Zino Davidoff against A G Imports. Grey imports – where leading brands are bought cheaply in overseas markets and sold at knockdown prices in the UK – have suddenly been given a legal backing they always lacked. The Parallel Traders Association claims the grey market is worth about &£2bn a year in the UK.

Davidoff pursued the case to the High Court, accusing A G of importing its perfumes, which include Cool Water and Davidoff Cool, without its permission and selling them at a discount price. But Justice Laddie accepted A G’s argument that once a manufacturer has sold its goods it is giving its consent for them to be sold on anywhere at any price, as long as the goods arrive in acceptable condition.

Andy Millmore, a partner at law firm Macfarlanes which represents AandG Imports, outlines the importance of the ruling: “Before this case, a lot of people thought the grey market would wither and die in the UK. This revives it.”

However, the case muddies the waters rather than providing a definitive ruling. Further clarification is not expected until the European Court of Justice rules on the appeal in the next 12 to 24 months.

In the meantime, the case will spark debate across the whole of the European Union.

A number of other high-profile cases will come to trial in the UK this year. Levi’s is challenging Tesco for selling its goods without permission, and Ralph Lauren is taking on Littlewoods for much the same reason.

Despite last week’s setback, brand owners are still pressing ahead. The Levi’s and Tesco case is expected to come to trial in October. A Levi’s spokesman says: “We are looking at a date in the autumn for the case to begin.”

What is at stake is whether brand owners will still have the right – independently of retailers and distributors – to set prices for their goods across the world.

Until last week’s decision, the brand owners had been holding sway. The 1998 Silhouette ruling was one of a number of cases over the past five years that put brand owners firmly in the driving seat. The ruling takes its name from the Austrian high quality spectacle manufacturer which brought the case.

These cases rely on the 1988 European Union trademark directive, which bars brand owners’ products intended for sale outside the EU being sold inside its borders. Brand owners say this ensures the goods are handled and sold by accredited distributors and retailers, which means that the customer buys top quality goods accompanied by good service.

Brand owners also say their business depends on sizeable margins because it takes high investment to develop and manage their products. Not only are marketing costs high, but significant funds are spent on research and development.

Not surprisingly, PTA member Bill Doody disagrees. He says: “The original trademark directive was meant to protect trademarks from being duplicated or counterfeited. The Silhouette case corrupts this directive and makes it anti-competitive legislation. It gives brand owners the right to control supply and distribution. This gives them the power to wipe out competition.

“This argument about marketing is spurious. The difference in pricing is not all taken up by marketing. Items bought at retail price in the US can still be shipped back to the UK and sold for a profit,” he adds.

The PTA points to some typical discrepancies in pricing. In the US, the latest model Volkswagen Beetle costs &£10,000, in Germany it sells for &£14,000, and in the UK it costs &£16,000. A 50-millilitre bottle of Yves Saint Laurent Jazz men’s fragrance can be bought wholesale in the US for &£5, but &£11 in the UK.

Doody adds: “Brand owners are simply partitioning and exploiting markets. There are few countries where you pay more for branded goods than in the UK.”

Robert Swift, a partner in law firm Linklaters and Alliance – which represents Davidoff – contends that uniform pricing is the last thing grey importers want. “Importers exist by buying goods cheaply in one market and selling them off in a higher market,” he says.

On price, Swift argues: “Different markets have different circumstances and that affects pricing. People in Europe can afford to pay one price that others in developing countries cannot.”

Competition and consumer affairs minister Kim Howells, giving evidence to a Trade and Industry Committee, said there was a case for changing European law to allow cheap branded goods to be imported in to the EU. His remarks coincided with the Davidoff judgment.

Howells said it was ” almost impossible to justify differences in prices between the UK and abroad. It is quite clear trademark owners are selling almost identical products at different prices in different markets”.

Most observers believe that over the next two to three years the EU will allow some importing of grey goods in its borders. Most believe this will lead to a rounding down of branded goods prices resulting in standardisation across global markets.

However, Linklaters Swift says: “Who is to say that brand owners will not level prices up? They will have to protect their margins. They may pull out of developing countries where consumers cannot afford these prices, or sell different products there.”

Another option, for clothing brands in particular, will be to change their production schedule to every quarter instead of twice a year.

Andy Milligan, a field director at branding consultant Interbrand, says: “This would mean that by the time the importers get their hands on a line it would be quite old, but the brand’s new line will still have cachet with customers.”

Others point out that if brands such as Nike or Calvin Klein begin to suffer image losses, this would allow brands which were previously highly exclusive like Prada to move down a notch and occupy the vacated ground.

Despite the fact that the manufacturers, retailers and distributors usually depend on each other, no party is in the mood for compromise. Brand owners want those margins. Retailers like Tesco and Littlewoods are affronted that they are not allowed to stock the best brands. Distributors, on the other hand, can make a killing if they do not end up in costly litigation.

It will be left to the lawyers – and most importantly – the politicians, to sort out. And politicians know it will play well with voters if they rule that luxuries should cost less.