Elizabeth Knight
September 13, 2012
The Age
NEXT week Australia’s high-end department store, David Jones, will deliver its year-end results and update the market on aspects of its online strategy – a major part of which will be progress in price harmonisation between goods sold online and in its bricks-and-mortar outlets.
Cosmetics is a major battleground between online only and traditional retailing – it’s a challenge that goes to the heart of supply chain and the deals done between manufacturers and their authorised retailers.
No doubt DJs boss Paul Zahra will be keeping a very close watch on the legal stoush between one of his big cosmetic suppliers, Estee Lauder (and its brand offshoot MAC), and discount department store Target.
MAC has accused Target of buying, advertising and selling counterfeit beauty products amounting to engagement in misleading or deceptive conduct and infringement of trademarks.
The products were advertised at prices about 40 per cent less than the recommended retail.
If Target has found the genuine MAC article through what is known as the grey market and can get it on the shelves for a massive discount, then the established supplier relationship with its authorised retailers, David Jones and Myer, must be rethought.
If Target has been duped into buying an imitation product, the ramifications for its own sourcing department and supply chain are not good. It would call into question whether other types of product acquired through parallel importing are genuine.
No one is suggesting Target would have sold the MAC products if it knew them to be fake. There are plenty of unscrupulous retailers – particularly online – but Target would not risk its reputation in that way. There is plenty riding on the outcome for both sides and for other retailers.
Bricks-and-mortar operators have long argued that there are pitfalls for consumers who buy in the grey market – one is product warranties are often second rate or non-existent, and the other is being assured the goods are not ripoffs.
The high-end brands have been dealing with the likes of Prada handbag fakes for years before online retailing, but most are obvious to buyers on inspection and there has to be an element of buyer beware when these goods are purchased outside the mainstream retail markets.
Indeed, genuine goods have found their way to all manner of stores, thanks to production overruns, excess stock being onsold and goods dumped and discounted for being outside their use-by dates.
But the Target-MAC situation sits in another league. If the stock is genuine, how did Target manage to source such a large ongoing supply? Target says it was obtained from a local supplier via a MAC offshore wholesaler.
Did Target engage in sufficiently rigorous background checks of its supplier and its supplier’s supplier? Will the public be eligible for refunds on their MAC purchases?
If it turns out the MAC product is fake, will it result in an overhaul of the retailer’s sourcing criteria?
Even among large chain retailers parallel importing from the grey market is not unusual. For example, JB Hi-Fi buys some product from the grey market that it sells more cheaply through its online store, which competes with product it buys direct from the manufacturer and sells in its physical stores.
Target buys other product through parallel imports but, thanks to sensitivities around the legal case, it was reluctant to discuss broader supply policies yesterday. Whether Target’s claim that it is the genuine article is correct will be clearer after it has the results of the independent testing it has sought from another scientific laboratory.
Short of a forensic face-off between two scientific teams, we should know the outcome before the court hearing starts (at a yet-to-be-determined date).
In the meantime, Target has taken MAC products off its shelves in what it describes as a gesture of good faith (this might also mitigate the legal damages if the products are found to be counterfeit). If Target has managed to get its hands on a genuine supply then there is no legal impediment to selling it. But it would be a devastating blow to Estee Lauder and MAC. Maintaining brand image and distribution is vital to retaining pricing control. Having its product discounted across the large department store chain would undermine its upmarket status.
Taking this legal action is a shot across the bow to non-authorised sellers – particularly online retailers – that the manufacturer will be paying close attention to supply lines. In the meantime in the industry, Estee Lauder is renowned for being tardy with its authorised retailers about renegotiating supply contracts to allow for price harmonisation.
There is some recent evidence that the price points for some of the more popular Estee Lauder products are coming down but it still lags many of its competitors.
Online cosmetic sites are still selling product at deep discounts to the major authorised retailers
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