Image has value. For many luxury products, the image is the component of the product with the highest value. Consumers enjoy luxury products largely because of their reputation, exclusivity and the shopping experience.
The scenario of the luxury branded product turning up in a discount sale or a shabby down-market outlet is the brand owner’s nightmare. When a luxury product can routinely be snatched out of jumbled bins in cramped stores, it quickly loses its cachet. And when the product image is compromized, demand by high-end consumers drops.
So what can brand owners do to protect their image? Does the law allow them to influence the retail price of their products? Are there ways for manufacturers to prevent their products from being sold at mass discounter outlets without violating the law? For these sorts of questions, the cartel prohibition (article 101 of the Treaty on the Functioning of the European Union and its equivalents in national legislation) is relevant. It prohibits anti-competitive agreements between competitors, but also certain agreements between producers, wholesalers and resellers (so-called vertical agreements) that govern the conditions under which the parties may purchase, sell or resell goods or services.
Restrictions on competition in vertical agreements may result in various competition restrictions. Exclusivity arrangements and non-compete obligations, for instance, can cause market foreclosure for alternative suppliers or buyers. They may reduce inter-brand competition between different sales channels and they may limit the freedom of consumers to purchase goods or services in certain locations.
However, vertical agreements may also provide positive effects, which can justify an otherwise prohibited restriction of competition. Consequently, some restrictions in vertical agreements may be justifiable (for a defined period) where, for example, certain retailers in certain sectors have a reputation for stocking only quality products, or where a producer can increase its sales by imposing a standard of uniformity and quality on distributors. This enables manufacturers to create a brand image and thereby attract consumers.
One of the most far-reaching ways to protect brand image is to set fixed or minimum retail prices for branded products. In European competition law, such resale price maintenance (RPM) is absolutely prohibited, despite the objective advantages it may have (like being able to reward retailers that do extensive promotion or provide high-quality service). European competition law gives prevalence to the principle that retailers should be able to compete on price. Producers or wholesalers may make non-binding recommendations or set maximum retail prices, but in order to prevent luxury products being sold at discount outlets, they have to take other measures.
Restrictions designed to create and protect brand image are, in some circumstances, allowed in the context of selective distribution. In a selective distribution system, products are sold only to authorized resellers that are selected on the basis of pre-defined qualitative and/or quantitative criteria. Sales to non-authorized distributors are prohibited, which leaves only authorized resellers and final customers as possible buyers of the products. Selective distribution thus prevents products from ending up with retailers that do not meet the standards.
Setting up a selective distribution system requires preparation. The selection criteria should be carefully drafted, to ensure they are reasonable and proportionate to the brand image they seek to protect. Suppliers may set quality criteria for the locations from which their products are sold and may even prohibit sales from any location that has not been pre-approved. While Internet sales may not be prohibited, quality criteria may be set for the websites used by authorized resellers.
Of course, there are some limits. Even selective distribution agreements may not include so-called hardcore restrictions of competition. It is, for example, not allowed to impose exclusive or minimum purchase obligations, although resellers may be required to stock a minimum volume or to carry a certain product range. Also, clauses that restrict the territories in which resellers are allowed to sell the products are prohibited. Authorized distributors should be free to conduct marketing activities and to approach and to sell to any customer, regardless of the customer’s location. The general principle that no fixed or minimum resale prices may be set also applies to selective distribution.
It should be noted, finally, that the fashion sector is currently under the magnifying glass of numerous competition authorities throughout Europe. In March 2015, the UK’s Competition and Markets Authority opened an investigation into suspected anti-competitive arrangements in the clothing, footwear and fashion sector. Also that month, the Italian Competition Authority opened an investigation into fashion agencies and a trade association. Then in May, the European Commission launched an antitrust competition inquiry into the e-commerce sector in the EU, focusing on sectors where e-commerce is most widespread, including clothing and shoes. If contractual restrictions are imposed on resellers to protect brand image, it is more important than ever to ensure that these remain within the boundaries of competition law.