High Court Rules Manufacturers Can Set Prices
The U.S. Supreme Court ruled yesterday that manufacturers have the legal right
to set minimum prices for goods sold through retail stores. The ruling overturns
a 96-year legal decision that had put pricing in the hands of retailers and,
in the process, may change the relationship between merchants and manufacturers.
The case brought before the nation’s top court pitted Leegin Creative Leather Products, a manufacturer of a wide range of casual and dress leather products under a variety of labels including Brighton, Leegin, Onyx, Justin, Tony Lama and others, against Kay’s Kloset, a retailer in Texas.
In the late nineties, Leegin had created a trade promotion that classified certain retailers as participants in its “Heart Store Program.” To take part in the program, retailers agreed to certain merchandising conditions and minimum selling prices.
Kay’s Kloset was among the specialty retailers that participated in the program but according to the Opinion of the Court, “a Leegin employee visited the store and found it unattractive.” Following the visit, the parties agreed that Kay’s Kloset would not continue in the program after 1998. The store did continue to carry Leegin products, specifically its Brighton line.
In 2002, Leegin discovered that Kay’s Kloset was moving Brighton merchandise but at 20 percent below the manufacturer’s recommended minimum. The retailer argued the pricing was necessary for it to compete against others also discounting Leegin merchandise while the supplier said Kay’s Kloset was, among other things, contributing to a devaluation of the brand.
When Leegin requested the discounting stop, Kay’s Kloset refused and the Brighton line was pulled from the retailer. It was then that the retailer brought a suit, which argued that Leegin was in violation of a 1911 ruling (Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373) that determined minimum prices set by manufacturers were anticompetitive and therefore illegal.
In its new ruling, the Supreme Court has taken the position that manufacturer-set minimum prices do not always discourage competition and in some cases encourage it. In essence, the Court has decided that the minimum pricing issue needs to be determined on a case-by-case basis.
Justice Anthony Kennedy, writing for the majority, concluded, “Vertical agreements establishing minimum resale prices can have either pro-competitive or anticompetitive effects, depending upon the circumstances in which they are formed.”
The Justice wrote, “A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between. Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate.”
By not adhering to minimum prices, the Court maintained, discounters were able to essentially let competitors do much of the heavy lifting required to make a sale.
“Consumers might learn, for example, about the benefits of a manufacturer’s product from a retailer that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees. Or consumers might decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem because it prevents the discounter from undercutting the service provider. With price competition decreased, the manufacturer’s retailers compete among themselves over services.”
Discussion Question: How will the Supreme Court ruling in the Leegin vs. Kay’s Kloset case affect the relationship between retailers and manufacturers?
This is a very interesting court decision that will probably have minimal impacts in the food industry.
It may make sense for high-end product manufacturers to insist on minimum pricing (golf clubs, perfume, watches, etc.) because of the limited distribution network often employed for these types pf products.
Outside of minimum markup laws for products such as alcohol and dairy products mandated by state law, I don’t see Food/CPG manufacturers setting everyday retail price minimums — if anything we might see some manufacturers setting minimum promotional pricing for their products.
Finally a victory for brand managers. I struggled with this issue early in my career as a representative for a premium mass-marketed beauty brand. Because of the upscale demographic of the brands’ consumers combined with the loyalty and frequency of trips, retailers treated many of their items as a loss leader.
Under the prior law, a company could spend $1B per year telling their consumer “Because You’re Worth It” and a retailer could say “At Private Label Prices.” Not a great way to reinforce the image and equity of a premium brand.
I believe this is a positive step toward allowing brands to invest with confidence. I do not believe that it hurts consumers. If a brand sets minimums that are too high, there will be plenty of new brands willing to come in and undercut.
This is a bonus to the branded luxury goods segment of retail. The discounters will no longer be able to ride the coattails of the full-service/high value merchants’ expenditures on advertising and brand building, which is usually funded by the manufacturer or distributor. Most luxury brand manufacturers and distributors do not want to increase market share by sacrificing market position. The Apple example is a good one. How many discounters would love to get their hands on iPhones around 5:15 PM today?!
Knock offs will not gain increased market share any more so than the current situation because the consumer for the original will not trade down, and the consumer for the knock off cannot trade up. It is up to the authorities to curtail counterfeit product, as they have been trying to, and the bureaucrats who would regulate pricing can now be put to good use stopping the criminals.
This sort of retail price control forces competition. Savvy entrepreneurs examine a market segment and see opportunities for mid-level product lines, in terms of value, service, and price. Even luxury brand marketers avail themselves of these opportunities (Lancome/L’Oreal, General Motors/Saturn), albeit many in the private label venue (Estee Lauder/Kohl’s American Beauty Brand).
Not every consumer wants or can afford to buy luxury products, but all consumers want access to more products, and as our population grows and disposable income increases at every economic level, every industry needs to grow at every level.
Lack of price control on high-end consumer products tends to break down the upper segments of our economy in terms of consumer appeal and brand loyalty, to the inevitable decline of venerable businesses that helped to build the economic infrastructure of this country (Bullocks, John Wanamaker, I. Magnin, to name a few).
If the minimum fixed pricing ruling stands, our legal system is basically creating a monopoly for that specific product. The creative retailer, however, will get around this ruling by putting together packages that include products without the pricing constraint. Minimum pricing guarantees profitability and is 180 degrees from a free market system! Let the market dictate – the market created the giant retailer – it’s a little late to try to level the playing field.
We originally discussed this case when it came up before the Supreme Court. I am glad George caught the Court’s decision. Our original discussion centered on the Internet in particular and the fact that the lack of vertical price constraints has allowed those retailers without any physical presence an unfair advantage. We all know people who shop our stores and then go to the Internet to buy. Now the Court has ruled that “not all vertical pricing is bad” and basically said that “the rule of reason” should apply.
This “decision” seems like a real revenue generator for their colleagues in the legal profession. It says that manufacturers are welcome to specify constraints on selling prices but that they can only be enforced or ignored on a case by case basis.
In his decent to the Court’s decision, Justice Breyer discusses the Court’s investigation in 1975 when they did away with pricing agreements. At that time, state laws ruled and the court found that in states with set pricing, retails were 19 to 27 percent higher.
There are a lot more angles to this whole thing. On one hand it seems to be a benefit for the Brick and Mortar operators because their “service” for maintaining a local inventory and sales force can recover their expenses. On the other hand, the Brick and Mortar operator is faced with the same constraints and cannot adjust prices to take care of stock overages. All of a sudden the Brick and Mortar operator finds its backroom littered with items that won’t sell at the dictated minimum price.
It remains to be seen how this all works out, especially how the “rule of reason” is interpreted. It may become a one on one type of situation where manufacturers are forced to enforce their prices on a case by case basis. With the reach of the Internet, even a small retailer can sell a lot of product. The question becomes, “Is it worth the expense for the manufacturer to pursue legal recourse?”
This will have little to no effect on the way things are done today, which is unfortunate. The tide of the commoditization and the decline and ultimate demise of brand loyalty will continue.
The exception will continue to be the perceived high end goods so many desire and spend upon. Items in the middle tiers will continue to erode into relative obscurity over time.
If more than five manufacturers enforce this, it would surprise me. The power of eBay and Amazon pretty much short circuit pricing control. If manufacturers want to control retail pricing, it can be easily accomplished without resorting to a Supreme Court ruling.
And how about couponing? Isn’t this a way of discounting product and still ringing it at full price? The Supreme Court, in its infinite wisdom, never considers common sense and modern marketing methods when making decisions. This will have the same net effect as the tree falling in a forest where no human is near enough to hear. It will make noise but no one will pay any attention.
This case was indeed discussed earlier, at which point I remarked:
“Cases like this are often a delight because the results often don’t follow the usual 5-4 or 6-3 splits (the numbers may be the same, but the players are different.)”
Unfortunately, the ultimate holding DID follow “the usual 5-4 split” in every way: and this, in turn, leads me to view the decision as an ideologically-based anti-regulation decision, rather than a sound policy. How much – if any – difference it will make in the real world, I’m not sure.
This ruling will have significant impact on the entire retail industry. For CPG companies, they will now have the means to control how low a retailer may sell a new product for.
Too many times, new items are unable to establish a fair price/value relationship with the consumer due to heavy discounting by retailers. Now CPG companies have a tool they can use, although it will only be the big boys who will have the clout to make it work. The technique they will use is to first establish a minimum retail price. CPG companies can then start reducing the level of trade spending and shift those dollars into advertising and other non-price oriented activities that will build brand equity.
Brand loyalty continues to slip due to the price oriented merchandising activities retailers have relied on and the level of trade spending supplied by manufacturers. This ruling, if used properly, can be a first step by the smarter CPG companies to begin to wean themselves from the trade fund addiction.
I’m troubled by this ruling, because it overturns a century-old rule of law and sets up a situation in which pricing decisions may be litigated on a case-by-case basis. Reviewing the court’s brief, I see no discussion of common retail clearance and markdown practices or how this ruling might affect these decisions.
The news coverage may be ascribing excessively broad implications to this ruling. The case involved what may be considered luxury brands of personal leather goods that were discounted by a boutique retailer. Applying the court’s findings to products such as corn flakes or soft drinks seems like a stretch. On the other hand, some common practices, such as forward-buying and diverting, may need to be re-examined in light of this ruling.
Luxury goods manufacturers and retailers have long devised legal workarounds to keep price images elevated. One option is to cut off the flow of prestige goods to a misbehaving retailer. I am concerned, however, that this ruling may be felt by consumers in such categories as consumer electronics, appliances, and other high-ticket, infrequently purchased items that are regarded today not as luxuries, but as necessities.
Leegin vs. Kay’s Kloset is a lifesaver for traditional retailing. It allows manufacturers to clearly choose whether they want the volume of no-service discounters (Wal-Mart, internet discounters, etc.) versus the quality of customer service retailers (traditional department stores such as Lord & Taylor, full-service mom & pop stores, etc.). The Supreme Court was totally realistic in its assessment: no-service discounters transfer costs onto high-service retailers. Apple solved this problem by building its own stores, with excellent service, and enhanced its brand immeasurably. Apple isn’t seeking to have its computers sold at 3% markups, achieving 3 times its current market share. They’d rather have a modest market share, great profits, and a great brand.
I’m eager to read others’ thoughts, as my read of this ruling is that the headlines don’t align well with the details. Leegin, who implemented the pricing floor, lost in this ruling. Yes, yes, the Court, by hearing the case at all, has said that it will now consider these matters on a case-by-case basis–effectively saying that the old 1911 ban is not the be all/end all. But the fact that the Court, once again, sided with the anti-trust (anti price-floor) position suggests that we are a long way from the suggestions in the Reuters headlines.
The question isn’t whether manufacturers or retailers will win – it’s whether consumers will lose.
On one hand, manufacturers won’t have an incentive to set higher prices in categories where private label is already underselling them. However, in premium CPG segments, price setting will help to distinguish brands and drive perceptions of quality. Also, a kind of “price creep” for all but the bottom tier products, will set in.
On the other hand, price setting by luxury goods manufacturers could morph forms of “massclusivity”. Sure, Target will still partner with Mizrahi, but getting D&G on the cheap is less likely for the average Jane. This shift could open more opportunity for knock-offs and rip-offs, as consumers, trained to get brand names at a discount, make a ready market for luxury on price. Hello China.
Without reading the ruling (and without pretending to be a legal expert), it comes as a surprise from a Supreme Court that has tended toward less intrusion on social issues. This leans toward more intrusion, or at least less ability for “free markets” to determine what consumers will pay.
As far as its effect on manufacturer/retailer relationships, I’m not sure there will be a profound change in the short run. Manufacturers have continued to have some tacit ways to control the pricing agenda (by withholding co-op funds, for example, if not by actually cutting off distribution). They will now need to be more thoughtful about their distribution choices up front if they intend to manage the prices for their products.
Interesting, in its ability to allow manufacturers to have some control over their brand. The Apple example Mark cites is an excellent one in terms of showing how pricing and place control can vastly improve the perception and experience of the product.
For a lot of manufacturers, however, their pricing is kept in line as much by private label as by anything. If the retailer can continue to offer a low priced alternative that consumers view as reasonably comparable, many manufacturers will have difficulty supporting higher prices.
This does give some power back to the branded manufacturers and an opportunity to really think about how pricing influences their perception. It also gives them a chance to build some quality back in and charge for it if they think there’s demand for it. It will be interesting to see how that plays out.
The court has told manufacturers they can now set the minimum prices for their goods sold through retail stores. What the ruling doesn’t prevent is retailers determining what products they can sell in the future. Is this a destroyer or a boon for private label? Stay tuned.
This will foster the growth of specialty stores and high-end department stores as more merchandise becomes available at sustainable margins.
As a former retailer and now a consultant for small retail apparel and accessory stores, I am thrilled with this ruling. The honest moderate-to-better merchants spend their money on staffing, education, merchandising and advertising for wonderful quality products. Then they are blindsided by the discounter selling the same thing. Customers see it, touch it, try it on in the better stores, THEN find the discounter and buy it. Finally, perhaps the specialty retailer will get their share! Jerry Kohl and Brighton have always tried to do what’s best for their retail customers. I salute them, and appreciate their efforts and hope it works this time!
This is not the death blow to consumers that many proclaim. As an earlier post eluded to, eBay and Amazon make it near impossible to enforce.
It appears from the comments that the Justice Department did think this out. It often happens that discounters ride on popularity created by those who actually work to build the brand.
The dirty little secret though is that that this has been going on for years. Brands such as Levis, Ralph Lauren, etc. just don’t sell to those who wont agree to sell on their terms.
As the popularity of eBay and discount internet sites grow, you will see more of this. Premium brands do not want their products associated with “Bottom Feeding.”
This decision is a major blow to consumers, small retailers and internet sellers.
It provides a method of supporting the price and giving large dealers and corporations leverage over consumers.
The major companies will tell all dealers that they cannot sell below a certain price, or they cannot advertise below a certain price. That means that consumers will have to go to the dealers that the manufacturers want them to go too.
An example of this is Honda America. Honda generators were sold nationwide on the internet at roughly 1/2 of manufacturers suggest list. Honda decreed that all dealers MUST advertise the products at Suggested Retail prices and could not advertise lower prices or discounts on the internet. WHY? Because consumers would not buy products from local dealers when the consumer could see on the internet that the local prices were double what internet sellers sold for.
The Result? Well all the internet sellers lost the business and the consumers were duped into believing that the “street price” of products was the same as in retail stores. The retail stores got all the business and consumers now pay twice as much. Did the retailers provide more services? More advertising? More anything? NO They just wait for customers to come in and pay the “Price” as dictated by manufacturers.
In the power industry the results are the same with other rules like this one. Manufacturers demand that dealers only sell in certain “territories” (as if the manufacturer’s owned the territory) and that any sales outside their territory “harmed the brands reputation” or “did not provide the consumer with adequate service,” neither of which is true.
The fact is that when retailers do not compete, prices go up. If retailers cannot compete on price, it is nearly impossible to compete on service which is nearly invisible.
The bottom line is consumers pay more, large dealers with territory interests will get more sales by doing less, not more.
Is this good? We think its a disaster for American business and the consumer. The largest companies will get richer and the smallest competitors will lose business and die off.
Is this what you the consumer want? If not start writing your elected representatives because higher prices for everything, including gasoline, food, clothes, machinery, cars and more are on the way.
Manufacturers will be in a little stronger position. For a few brands in mid-size and small retailers, the power will increase significantly. In most cases it will not. Manufacturers will choose to do business with the devil and in the long run, this legislation will have the opposite effect of what was intended.
Small retailers or those offering high levels of service will be forced to play by the rules. The big players (Wal-Mart, Target, Best Buy) will either coerce the production of exclusive derivative products. Same brand, same essential features, a minor change (cosmetic or insignificant feature), different model number and not covered under their MAP (minimum advertised price) or UMRP (Universal Minimum Retail Price) policies.
Where derivatives are not practical, manufacturers will have to consider the value of their business with a major player vs. enforcement of their policy.
I believe that I understand the intent of the court, but don’t think they understand the power of a Wal-Mart, Target or Best Buy.