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You are here: Home > Current Topics > Mind your Business > 30 May 2005 |
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Image: Are sales of perfume by the major fragrance houses acting against the public interest or should they be allowed to exploit the investment they have made in developing such fragrances? Copyright: Karoly Kiralyfalvi, stock.xchng When was the last time you went buy some perfume or aftershave? It might have been as a gift, it might have been a treat, and it might have been a simple necessity! Where did you go to buy it and what sort of perfume/aftershave was it? If it was a 'high quality' brand from one of the large fragrance houses like L'Oreal or Chanel the chances are you might have gone to one of the specialist stores that deal in such goods. Once at these stores you are faced with counters carefully laid out with attractively designed merchandise and are confronted by staff that are trained to understand your needs and to find the right product for you. It is this value added that contributes to the higher prices that you are likely to pay for such fragrances as Gucci, Armani, Clinique and Christian Dior. These brands will point out that you can get detailed information about the product and advice about how to use the perfume or the cosmetic appropriately to enhance your requirements. Men are not immune to this either. The market for men's toiletries has expanded in recent years and is now worth an estimated £685 million in the UK according to market analysts, Mintel. Advice about grooming products for men is just as important to the service as is that provided for women. Compare this however to a trip to Superdrug and Poundstretcher. The same fragrances could be on sale on the shelves in those stores but without the support and back up of the trained staff. The trade-off is that the price of the fragrances might be significantly less than that paid in the high profile department stores such as Harvey Nichols, Harrods, House of Fraser and Debenhams. There has been a running battle between the likes of Superdrug and the fragrance houses regarding the discounting of products. Superdrug attempted to obtain stocks of 'exclusive' brands to sell in their stores at much reduced prices compared to those on offer at the major department stores. The fragrance houses claimed that selling their products in stores such as Superdrug devalued them because customers were not getting the full value of the experience of buying such products. Superdrug argued that the fragrance houses were denying them access to stock and that this constituted a breach of competition regulations. Superdrug claimed it was merely seeking to offer customers choice; those that wanted the full service could still shop at the department stores but those who wanted the products without the associated 'fuss' could access them at Superdrug at very competitive prices. In 1992, the Competition Commission investigated the issue and arrived at a number of conclusions in its report published a year later.
Image: Buying perfumes from stores like Harrods may be expensive but is the additional service worth the extra price? Copyright: T. Al Nakib, available from stock.xchng. The case of the fragrance houses acted as the basis for other firms who might claim that they can offer value added at the retail outlet and therefore limits the range of outlets they choose to distribute to. If it proves difficult for the outlet to secure supplies from the manufacturers, the biggest ones amongst them may go searching for supplies in other countries and, assuming they can secure them cheap enough, import them into the UK to sell at discount prices. The whole issue provokes an interesting debate between the right of a firm to protect its investment in developing its brand and the benefits to the consumer of competition - in whatever form it takes. |
A monopoly is a market structure where one firm dominates the market. In its purest sense, a monopoly provider is the only supplier and is therefore both the firm and the industry. However, this simple definition hides a multitude of degrees of monopoly power exerted not only by a single firm but also by groups of firms who may be acting together to protect their combined interests whilst engaging in a competitive market in another.
The fragrance market is such an example. The market itself is highly competitive with a number of fragrance houses competing for sales totalling well over $20 billion worldwide. The monopoly, therefore, may appear in the way in which the fragrance houses choose to sell their products to retail outlets. In pure competition terms, there should be no restrictions on any retail outlet getting hold of the perfumes they want to sell to customers. In reality, there are other issues to consider which the Competition Commission clearly took into account.
Most of the fragrance houses have been in existence for many years. To develop their name and the brand image that is associated with it takes many years of investment and careful brand positioning and promotion. Companies like L'Oreal and Chanel are associated, deliberately, with an image of exclusivity, luxury, quality, sophistication and escapism. To get to the position where customers associate a name like Chanel with those attributes takes many years of careful business planning. Such companies, therefore, believe that they have a right to protect their brand image and the investment they have put into it.
Image: Monopoly is not just a case of one firm dominating the industry, it can be characterised by many forms of monopoly power where the firm or a group of firms' actions can restrict competition in some way. Copyright: Monica P., stock.xchng
They feel that companies like Superdrug and Poundstretcher, who may be perceived as catering for the lower end of the market, will not offer the sort of environment that reflects what customers come to expect from the fragrance houses' brands.
To ensure that this quality is maintained, a selective distribution agreement requires the outlet to meet certain criteria laid down by the fragrance houses. These might include the lighting in the stores, the point of sales displays, the knowledge and expertise of the staff, the furniture and flooring where the perfumes are sold and so on.
The fragrance houses argue that this is what customers expect from their products and thus it is part of the brand image. Selling fine fragrances on the cheap in a 'pile em high sell em cheap' environment damages the investment put in by the fragrance houses over many years.
The Competition Commission suggested that there was not a scale monopoly in the industry - in other words not a case where one firm or a few firms dominated the industry to the detriment of the public interest - but there was a complex monopoly in existence.
A complex monopoly occurs where a group of firms totalling over 25% of market share engage in actions, not associated with formal collusion (i.e. an agreement to work together) which may result in a distortion of competition or which prevents or restricts competition. Some complex monopoly situations may be deemed as being against competition legislation by the Competition Commission but it will base its judgments on the case being considered and the extent to which the restrictive nature of the competition may act against the public interest. In any event, such behaviour may constitute tacit collusion - where there may be some form of unwritten understanding that exists to raise profit levels above normal.
In cases where a business is unable to secure the supplies they need, they may well look to sources of supplies outside of the normal distribution/supply chain. This is where parallel imports come in. Firms may be able to secure from the supply chain if there has been an overproduction of stock, if they enter into an agreement with a manufacturer to supply them with stock (maybe without the brand owner's knowledge) or if they are bought in a country where the tax regime is lower and thus allows the firm to be able to secure supplies at lower cost.
In the EU, free movement of goods should mean that a business can secure supplies manufactured anywhere in the EU and then re-sell them within the EU but they may find themselves up against problems if they try to buy from outside the EU (say the United States) and sell in the UK. Tesco tried to do this with Levi jeans and faced a challenge from Levi over this practice.
