Creative Leisure News - Business-Wise

Mike's often irreverent, thought-provoking analysis of the industry-- with an occasional guest columnist.

What Can Happen When You Shaft Independents

A common, sad story.

By Mike Hartnett (November 20, 2006)

Actually, this is only half the story: I received emails from two independent retailers complaining about a particular well known manufacturer. It's not pretty, but I received the emails too late to invite the vendor to tell his side.

I'm not mentioning the company or product by name, because I don't have the vendor's version of events. Still, I've heard a number of stories like this over the years, so this has a ring of truth to it.

The basics: The company unveiled a machine that was, by industry standards, expensive and required a wide variety of accessories. The vendor insisted that retailers sign a contract promising not to advertise the product below a certain price. If a retailer violates the agreement, apparently the company will not continue to sell products to that store.

Later, the company raised the price to retailers but kept the suggest retail price the same, thereby squeezing the retailer's margin if she followed the MSRP.

Then the independents discovered that Michaels was allowing customers to use their 40% off coupon, putting the independent at a severe price disadvantage. Now Wal-Mart's in the act, selling the item at substantially below what any independent could reasonable sell it for.

And one independent has now been waiting more than a month for her re-order of certain accessories. Somehow, she suspects Michaels and Wal-Mart don't wait that long.

The legal issues.

Michaels wasn't advertising the item at 40% off, so it wasn't violating the contract. Wal-Mart wasn't advertising it at any price. But is the contract legal?

Years ago when the chain stores began to grow and flex their muscles, there were numerous distributors complaining bitterly that some manufacturers' pricing policies were illegal. The complaints grew so loud that HIA invited a lawyer who specialized in these matters to speak at two HIA shows.

At each seminar, the lawyer would give a brief presentation and then take questions from the audience. The legal basis for all of this is the Robison-Patman Act, which says once company A sells a product to company B, company B can then re-sell the product for any price. Company A is not supposed to put any constraints on company B.

Sounds simple enough, doesn't it? But the lawyer's answer to every question from the audience ("What if Company A ....") began this way: "Well, it's hard to say...."

What I learned from those seminars is if you think you're being treated illegally, you need to sue the culprit. That means spending thousands of dollars and months (years?) of your time. Then you or the other side would appeal the verdict, and only after the appellate court's decision would you really know if you were on the winning side.

So what's left? The only option remaining for the independents is to put the company's products on sale, get them out of their stores, and never order from the company again. And make sure the company knows why.

It just might happen.

So the company is legally safe. Morally, that might be a different story. A different story, but not an unusual one. The Nov. 13 edition of the Wall Street Journal had a revealing article about a very small pen manufacturer who suddenly caught the attention of Wal-Mart, Office Depot, and drug stores.

Part of the story includes the under-staffed company deciding to postpone filling orders from its independent retailers � who had kept the fledgling business alive in its early years � in order to fill an order from a chain store.

The owners don't mean to be unethical, but from the beginning their dream was to be a large, successful company, and they feel the answer is to get into the chains. It's a classic case that has happened numerous times in our industry, and a prime example of the adage, "Be careful what you wish for; it just might happen."

Here are two scenarios: The chain stores take the pens, sell millions, and the owners live happily ever after. The other scenario is not so rosy.

The owners go into debt to finance the expansion into the chains. Because of its pricing and shipping policies, the company loses its independent business. Fairly soon after landing on the chains' accounts, the chains demand lower prices and greater entitlements. Then a competitor offers the chains a lower price; the owners either meet the price or lose the business.

At least in this case we're talking about pens, which are always in demand in one form or another. The comparable scenario in our industry would be a little different: The company loses its independent business and can't ever get it back because the independents are gone. Because of teaching and personal service, the independents had helped create the category's popularity.

As the independents fade away, so does consumer interest. Now the company's products aren't in such demand any more. By now, because of expansion to meet the chains' demands, the company has a much higher overhead and dwindling sales � and nowhere to turn.

(Note: Agree with Mike? Disagree? Email your thoughts to CLN at mike@clnonline.com. To read previous Business-Wise columns, click on the titles in the right-hand column.)

xxx