Resale Price Maintenance: a fashionable issue for luxury brands

19 Apr 2017 , 3:00pm

Empowered by social networks and digital devices, today’s luxury goods consumers are dictating increasingly when, where and how they engage with luxury brands, experts say[2]. Not only are consumers demanding more customised and personalised luxury experience, but they are also increasingly expecting it at lower prices[3].

Moreover, consumers have been able to seek discounts and promotions because of their uptake on e-commerce and digital tools, which has created price transparency across brands and regions. The McKinsey report “The state of Fashion” indicates that online sales in luxury have grown at a steady pace from 3 percent of sales in 2010 to 12 percent of sales in 2017[4].

Running counter to cost-reduction measures, companies are attempting to increase sales by responding more rapidly to consumer demand. Indeed the final delivery to the consumer’s home is where the true battleground exists for luxury players. Whether feeding instant gratification or building out delivery channels, brands have pushed boldly into the digital era where customers globally have virtual access to fashion shows and buy collections at the click of a button[5].

In that context, the challenge for the retailer is how to maintain coherence and the same luxury shopping experience across different purchase and delivery channels – whilst making the economics work. Accordingly, the above-mentioned report indicates that performance of luxury players in 2017 will vary according to the individual dynamics of specific market segments and categories, but the biggest winners will be those companies with coherent channel strategies[6].

Resale Price Maintenance 

In an effort to safeguard the integrity of their brands while boosting their sales and margins, luxury manufacturers frequently impose vertical restraints -- that is, policies that limit the conduct of both the manufacturer and its downstream trading partners. These include policies such as resale price maintenance (“RPM”), minimum advertised prices, exclusive territories, and exclusive dealing.

RPM is a pricing arrangement in which manufacturers establish prices – minimum, maximum or fixed – to be adopted by distributors/resellers. Minimum RPM in particular can play a key role in facilitating successful distribution strategies, as it provides the manufacturer with an instrument with which it can elect the level of retail promotion services consistent with its objectives for its brand.

Challenges for luxury brands 

Luxury goods players have long known of the potential pitfalls of providing price guidance or recommendations to retailers. Recent activity by regulators across the European Union, as the “Preliminary Report on the E-Commerce Sector Inquiry” [7], makes it clear that there remains a very real risk that regulators are as ready as ever to investigate guidance that crosses the line of becoming resale price maintenance. The European Union confirmed its view according to which RPM facilitates price collusion between retailers on prices or it can lead to a race to the bottom in terms of retail prices[8].

The Brazil context 

In Brazil, price restrictions such as RPM (as well as the suggestion of resale prices to distributors and retailers) may constitute an antitrust violation in case it has as its actual or potential effect (i) the substantial lessening of competition, (ii) an arbitrary increase in profits, or (iii) abuse of a dominant position[9]-[10]. It is for Brazil’s antitrust authority, the Administrative Council for Economic Defense (“CADE”) to review whether the arrangement has an economic rationale and what are its effects on competition.

RPM arrangements that raise the most significant competitive concerns are those that provide for minimum or fixed resale prices[11]. These concerns are usually associated with two main aspects. The first is the risk of collusive practices, since these types of RPM arrangements enhance price transparency and facilitate tacit collusion among distributors.  This may come to deter the entry of new and efficient distributors, contributing to overall harm to consumers. The second aspect is the manufacturers’ unilateral increase in market power, which may by its turn substantially lessen competition in the upstream market and deter innovation in the downstream market. 

On the other hand, RPM arrangements may lead to efficiency gains and increase in welfare. One of the most important efficiency gain is the elimination of the “free rider” problem, which arises from scenarios where a given customer or firm gets the benefits from the efforts of others but does not contribute its share toward the general good[12]

This ambiguous nature of RPM agreements – at times to harmful competition, and at others, beneficial– leads to the need for contractual arrangements of this sort to be reviewed on a case-by-case basis by CADE.

Enforcement and monitoring 

CADE’s case law on RPM is scarce. Some precedents recognise that RPM is not illegal per se and must be analysed pursuant to the rule of reason. Under such rule, a given conduct will be deemed to be anticompetitive to the extent that it causes – or is at least capable of causing – a substantial limitation in competition and/or damages to consumers in the affected market. 

There appears to be consensus that the mere suggestion of resale prices is incapable of harming competition, and there has been at least one case where CADE considered that fixed resale prices imposed by a beer manufacturer on its distributors were lawful because there was no competition among such distributors[13].

It was not until the SKF case, concluded by CADE in January 2013, that an actual in-depth analysis was undertaken. In this case, CADE was rigorous with auto-parts manufacturer SKF to an unprecedented extent, adopting a very strict approach to RPM. CADE’s view shifted from a rule of reason approach to one that resembles European Commission’s approach to these contractual arrangements. As a result of this precedent, it seems that RPM agreements – especially those that prescribe minimum or fixed prices – will be scrutinised by CADE in a much more rigorous manner, albeit not under a blunt per se approach.

In fact, CADE has no longer the burden to prove the anticompetitive effects of the RPM agreement; rather, this anticompetitive nature will now be presumed and parties to the agreement will have the burden to prove its efficiencies, which CADE has highlighted must be carefully put forward and specifically refer to the efficiencies associated with the RPM agreement under scrutiny[14].

Key considerations 

Based on CADE’s precedents up to now, before deciding to adopt any policy that interferes in the reseller price formation process in Brazil, it is recommended to consider the following:

  • Formalisation of the price policy ease the defense before CADE in comparison with the adoption of the same policy informally. Absence of formalisation could be considered as evidence of illicit conduct, as well as evidence of dishonesty by the producer towards CADE.
  • In case of price suggestion, it is recommended not to foresee or suggest any coercive mechanisms in case of infringement by the reseller, neither track the reseller’s price.
  • Never accept, in any hypothesis, the adoption of minimum resale prices requested by resellers as it could represent possible evidence of cartel, which turns the practice illicit per se.
  • In the hypothesis of CADE’s investigation, the company should demonstrate that the commercial practice generates efficiencies in a level that overcomes possible damages to competition and benefits customers: protection against free riding in the service or publicity between retailers, double margin elimination, intangible assets protection (e.g., product or brand reputation), investments in the supplier’s business and inter-brand competition reinforcement. Furthermore, it is important to demonstrate that these efficiencies should not be generated by other means.

In summary, the bottom line for brand owners seems to be that they should continue to be vigilant to ensure that their arrangements with distributors cannot be construed as enabling them to set distributors’ retail prices (or impose minimum resale prices).


 

[2] According to Deloitte’s report “Global Powers of Luxury Goods 2016 – Discipline Innovation”, page one, available at https://www2.deloitte.com/global/en/pages/consumer-business/articles/gx-cb-global-powers-of-luxury-goods.html. Access on March 23, 2017.

[3] According to the McKinsey report “The state of Fashion 2017”, page 26, available at http://www.mckinsey.com/industries/retail/our-insights/the-state-of-fashion. Access on March 23, 2017.

[4] “The state of Fashion 2017”, page 28.

[5] “The state of Fashion 2017”, page 30.

[6] “The state of Fashion 2017”, page 12.

[7] “Preliminary Report on the E-Commerce Sector Inquiry”, page 284, available at http://ec.europa.eu/competition/antitrust/sector_inquiry_preliminary_report_en.pdf. Access on March 24, 2017. The Independent Retail Europe’s opinion on the Preliminary Report, available at http://ec.europa.eu/competition/antitrust/e_commerce_files/independent_retail_europe_en.pdf, refutes the European Union’s view on RPM in pages three and four. Access on March 23, 2017.

[8] RPM is considered a “hardcore restriction” in the wording of the European Commission’s Guidelines on Vertical Restraint. This means that including such a restriction in an agreement will give rise to the presumption that the agreement is anticompetitive on the basis that it can (i) facilitate collusion between suppliers or distributors; (ii) drive up prices for the brand(s) concerned; (iii) lead to the exclusion of smaller competitors; and/or (iv) undermine innovation or dynamism in distribution. However, parties will be able to rebut those presumptions only if they can prove that the efficiencies of Article 101(3) of the Treaty on the Functioning of the European Union are actually met.

[9] A company (or group of companies) is presumed to have dominant position when its share of a given relevant market is equal to or greater than 20%, or when it is capable of changing market conditions (alone or in coordination with other companies).

[10] Article 36; item IX, of Law No. 12,529/2011.

[11] Pursuant to CADE’s Resolution No. 20 of June 9, 1999.

[12] Other efficiency gains made possible through RPM are the following: (i) it protects the technological development of products; (ii) it protects the product’s image; (iii) it increases interbrand competition;  (iv) it encourages new firms to enter the downstream market since their profits are secured by RPM; (v) it secures minimum mark-ups for distributors that bear the risk of introducing a new product into the market; (vi) it allows for short-term commercial campaigns in a franchising system, which may be beneficial to consumers; (vii) it manages demand uncertainty, since RPM assures distributors that prices will not decline even if demand is low. 

[13] 1997 – Kibon case (No. 0148/1992): RPM analyzed under the rule of reason, CADE concluded that the conduct was merely a price recommendation (noncompliance had no consequences) and considered Kibon’s lack of market power. Same approach followed on later cases: 1999 – Ferrero do Brasil consultation (No. 0046/1999); 1999 – Volkswagen case (No. 0089/1992); 2011 – Publishers case (No. 08012.001743/2002-40); 2011 – Everest case (No. 08012.009674/2008-16); and 2012 – Ambev case (No. 08012.001626/2008-71).

[14] Same approach followed on Sinditanque case (No. 08012.007002/2009-49).