What are the Implications for Selective Distribution?
By Xavier Derville and Jean-Noël Kapferer
Has the strategy of selective distribution, on which luxury brands depend for survival, evolved in the modern distribution world? Combining their expertise in the luxury industry, the authors elaborate on why luxury brands should be ever more meticulous in their practices through their analysis on selective distribution in relation to the Coty case, one of the hotly debated topic on both sides of the Atlantic in December last year.
On Wednesday, 6 December 2017, the European Court of Justice delivered its judgment in a legal procedure concerning Coty (the global leader in fragrance ahead of L’Oréal, LVMH and Chanel) and Amazon (the world’s third-largest distributor and No 1 e-commerce platform). The court had been asked to give its opinion on whether Coty was entitled to prohibit its authorised retailers from selling on unauthorised platforms (in this case Amazon) where the use of such platforms is discernible to the consumer. Coty had filed proceedings before the German courts to have one of its authorised retailers banned from selling on the Amazon platform with the name Amazon appearing. The German court hearing the case took the view that such a ban would be contrary to competition law.
However, Coty filed an appeal and the Court of Appeal referred the case to the Court of Justice of the European Union (CJEU). The CJEU ruled in favour of selective perfumery. The Court validated the ban imposed by Coty on its authorised retailers, prohibiting them from selling on unauthorised third-party platforms where the use of such platforms is discernible to the consumer. It is a sign of the times that this decision by Europe’s highest court received a great deal of attention on the other side of the Atlantic, despite nominally affecting only countries governed by European law. An opinion piece even appeared in Forbes magazine, with the interesting headline Coty may have won the battle, but Amazon will still win the war.
Why so much interest on both sides of the Atlantic? Because of the importance of the European single market? According to the latest figures from consulting firm Bain, in 2017 Europe did indeed regain its position as the top region for sales of “personal luxury goods”, just ahead of the Americas (North and South), both thanks to the hordes of Asian tourists who snap up luxury goods when visiting the continent and owing to a rise in domestic demand. But that is not the real reason behind the widespread interest in the ruling in this case. Basically, it represents another step towards the legitimisation – or not – of the very concept of selective distribution in the post-digital era. From the United States to Europe, China, Japan and Korea, every country has endorsed – albeit conditionally – selective distribution strategy, which seeks to protect the value of a luxury brand by ensuring complete vertical consistency between the image of the creator, its reputation, the goods and services, and the places where the brand is sold or experienced by the customer both online and offline.
Selective distribution, on which luxury brands depend for survival, is nevertheless still subject to intense scrutiny all over the world. When it comes to luxury perfumes, the debate that has been raging in EU courtrooms for over 50 years is far from over. It rears its head each time a new player (hypermarkets, discounters, category killers, etc.) emerges in the modern distribution world. Now it is the turn of online platforms such as Amazon and eBay, followed by Alibaba, JD.com, etc., in their quest for unlimited growth and the distribution of anything and everything, including luxury goods. The debate will be reopened in Europe when it comes to agreeing the new legal framework applicable after 2022.
U.S. and European commentators are now focussing their attention on the GAFA companies, hailed as the very opposite of selective distribution. It makes for a good story, but they are missing the point. Selective distribution has been around for decades. It is, however, closely watched by the competition authorities. There is no need for selective distribution to fear a new operator from the United States or Asia. Manufacturers should not be on tenterhooks, wondering if the latest form of distribution will sound the death knell for selective distribution, as was the case first with hypermarkets, then eBay between 2008 and 2010, and now Amazon. What luxury brands need to do is make sure that their own selective distribution practices are meticulous: that is the main thrust of this article.
The future of selective distribution is very much in the hands of the brands themselves. While pro-Amazon consumerists decry a rear-guard action by luxury brands, denying their customers the purchasing convenience offered by efficient e-commerce platforms (such as Amazon Prime), manufacturers must insist on the need to preserve in the long term the value and intangible strengths of their brands. Prestige brands need selective distribution. Brands must adhere to this principle of value retention. Manufacturers must therefore be very careful how their own selective distribution system is implemented. There can be no half-measures. A brand is either selectively distributed or it is not. Let’s be honest, a brand cannot claim the protection granted to this system if it does not implement it to the letter. The problem is, with the continued growth of the luxury market worldwide, selective distribution can be undermined by licensees, their resellers and their local partners who do not play by the rules.
The crux of this article is that while selective distribution has great appeal for luxury and high-end brands, it also requires consistency at all times. However, one thing brands fail to grasp, or underestimate, is that claiming they practice selective distribution without really doing so can be seriously harmful to the longevity of the brand. What happens is that the brand slowly ends up bridging the “image gap” between itself and these new distribution operators. This article shows how luxury brands can unwittingly end up in this situation as they set out to conquer the world, and how they can get themselves out of trouble. With Amazon or Alibaba on the prowl, manufacturers must exercise the utmost care and consistency in managing their selective distribution system. This requires rigorous selection of authorised retailers and a relentless struggle against unauthorised resellers and their suppliers. It basically comes down to determining whether the operator, digital or otherwise, meets the objective selection criteria set by the brand. When deciding whether or not to work with digital operators (or any operator indeed) , three aspects should be given careful consideration:
- First, if the brand requires the operator to be running one or more physical points of sale already, it must be determined whether or not this requirement is met and whether or not these points(s) of sale meet the selection criteria set by the brand;
- The second is to determine whether or not the operator’s website(s) meets the selection criteria set by the brand;
- Last, but not least, is to ensure that the operator’s own shop-sign image does not detract from the prestige of the brand. This question can be answered with the aid of a consumer survey.
What is selective distribution?
With a system of selective distribution, the manufacturer sells only through resellers it has personally selected, and prohibits them from reselling its goods to other, unauthorised reseller-distributors. The selection criteria relate to aspects such as the quality of the physical point of sale or website where the product will be sold, how the goods are to be marketed, as well as the reseller’s own shop-sign image. The types of points of sale that make up a selective distribution system can vary widely, from independent multi-brand retailers (as is the case of watchmakers/jewellers worldwide), points of sale belonging to regional, national and even international chains (Sephora in the case of cosmetics), dedicated counters or multi-brand sections in department stores, shops at airports or on board ships, in duty-free or duty-paid zones and, of course, high-end multi-brand websites (such as Farfetch, Rent the Runway, Yoox, Ventes Privées.com, Mr Porter, and Luisa Via Roma).
Selective distribution should not be confused with exclusive distribution, which consists in having a single distributor selling the products in one or more countries. It is also different to integrated distribution (monobrand stores in city centres or at airports). Monobrand stores are the result of vertical integration (DOS: directly operated stores), not the selection of points of sale for approval as distributors. Some major houses, for example in the perfume industry, may use both monobrand stores and selective distributors.
Luxury and premium brands are created not with the aim of dominating the market but rather to establish a reputation, to set the standard, and to attain unparalleled recognition. With such prestigious origins, the brand must strive for vertical consistency, i.e., from top to bottom: everything from the creator, through the products, the services, the experience, right down to the distributor must be perfect. That being so, it is natural for a high-end brand to opt for selective distribution from the outset: authorised points of sale will be much more involved and convey the image of exclusivity of the brand. They must offer consumers the ambiance and customer service they are entitled to expect from top brands. Trading up necessarily involves making the exclusive distribution criteria more rigorous: Apple is a typical example.
Selective distribution: an enduring practice that has kept pace with changes in distribution
Selective distribution, for example in the perfume industry, started in Europe and has evolved over the course of more than half a century. This is where it has reached a certain degree of sophistication. It owes its longevity to the fact that it has ceaselessly, without any major difficulty, embraced new types and channels of distribution (specialist perfume stores, department stores, airport duty-free outlets, regional/national/international perfume chains, and websites). It has subsequently gone on to flourish in other countries around the world where it is authorised subject to certain conditions, such as the United States, China, Japan and Korea, by adapting to the types of distribution found there. It has survived despite challenges from certain forms of distribution such as discount supermarkets or pure players, not by virtue of any immutable right, but – as will be seen below – as a result of meticulous application of the selection criteria and, when it comes to the reseller’s shop-sign, consulting the consumer through surveys.
The distribution sector for goods and services regularly sees the arrival of disruptive players. This is why selective distribution is regularly called into question and re-examined. It has always been closely monitored by the competition authorities and national courts, so concerned are they with promoting progress through increasingly open competition. However, when it comes to the perfume sector in the European Union, the EU competition authorities have time and again found in favour of selective distribution, albeit always after the system has been put back under the microscope. In the United Kingdom, discounter multiple retailer Superdrug took on the distributors of luxury perfume brands, who ultimately won, but only after a year of investigation by the Office of Fair Trading, with the involvement of more than 20 companies. Similarly, it took four years of wrangling to reach a conclusion in Galec (Groupement d’Achat Edouard Leclerc) v Commission/Yves Saint Laurent Parfums and Parfums Givenchy. As for the new VABE (Vertical Agreements Block Exemption) regulation issued in 2010, it came in the wake of almost two years of discussions in which eBay played an active part.
In the European Union, it is the responsibility of the national authorities to enforce EU competition law while providing manufacturers with legal certainty in the establishment and defence of their selective distribution networks. Indeed, it is no good them having their selective distribution system declared lawful under EU law if they cannot also defend it against unauthorised resellers or against outsiders – pure-play e-commerce companies – trying to squeese more profit from their large customer base. Before the Coty case, the German competition authority had been very critical of the restrictions on sales via e-commerce platforms, especially as regards Adidas and Asics. Coty v Amazon proves that this legal certainty is not guaranteed since the opinion of the European Court was needed to bring the German authority back into line with the court’s position.
In Coty v Amazon, the Court of Justice was careful to remain consistent in its stance, taking the very opposite view to the German court of first instance, and ruling that Coty was entitled to prohibit its authorised retailers from selling on unauthorised platforms (in this case Amazon) where the use of such platforms is discernible to the consumer. Coty had the right to prohibit an authorised reseller of Coty fragrances from selling in a discernible manner on Amazon. For example, if the authorised distributor’s website is hosted by a third-party platform, the supplier can demand that customers do not access the distributor’s website via a site bearing the name or logo of that third-party platform. On the other hand, if the e-commerce platform is only a service provider for the authorised retailer and does not appear visibly to consumers, this formula is authorised by EU law.
However, the case before the German courts is still ongoing. Frankfurt Court of Appeal, which had referred the case to the European Court, is due to deliver its verdict in July 2018. The manufacturers must be happy with this, as they need legal certainty to implement their strategy on an international scale. The authorities are monitoring the situation closely, and this should push manufacturers themselves to be vigilant and consistent.
Moreover, since 2000, the Commission has been promoting the development of the Internet, seeing it as a means of achieving the single market, an opportunity for consumers and a source of employment. It is keeping a close eye on the situation, with investigations on barriers to electronic commerce (2015 – 2017), for example. It will open the debate once more when it is time to renew the legal framework in 2022.
An added-value strategy tailored to specific situations
As part of a value-creation strategy for its brand, a manufacturer should use selective distribution to increase the perceived quality of its offering, which includes not only products (themselves traded up) but also services and the aura of exclusivity attached to the brand – in other words, competitive advantages other than price. Such a strategy, founded on “competition not based on price”, targets that segment of consumers who are sensitive to the quality of products, their packaging, communication, the distribution framework and personalised advice.
Typical situations that warrant the use of selective distribution:
- There are brands for which selective distribution is indispensable, for instance, in the fashion, premium accessories, fragrances and cosmetics sectors. These brands consistently integrate the very high quality of their products with communication and the sales environment in a coherent, rigorous vertical approach. When luxury watch brand Bell & Ross was launched in 1992, its two founders identified the 100 stores in the world they wanted to use as distributors. Similarly, the launch of the high-end golf brand Callaway owed its success (apart from to its famous clubs, the aptly named Big Bertha) to the decision to go with highly selective distribution in the United States, then worldwide. Nevertheless, managing selective distribution is not simply a matter of the number of stores but rather the selection criteria that a retail store, whether brick-and-mortar or online, must satisfy if it is to measure up to the expectations and the image of the brand, or its creator. A premium brand unequivocally means having top-quality, sophisticated products sold via selective distribution but there must also be the sales capacity to develop the brand and cover the related high fixed costs.
- Many brands use selective distribution in an attempt to create a “premium” segment, in which price is no longer the driving factor behind the decision to buy. In this case, the consumer is sensitive to service, advice, attentiveness, and the aura of exclusivity and prestige associated with the brand, and – more so than the inherent quality of the goods or the communication – to the experience offered by each point of sale, both online and offline. Faced with a market that had become somewhat mundane, the brand Royal Canin (bought by the Mars group in 2003) made a decision that seemed crazy at the time: to turn its back on the 30% of its turnover achieved in hypermarkets and restrict its sales to selective distribution, in this case via veterinarians. This decision, so daring at the time, saw the brand’s turnover increase eightfold (from 192 to 1,533 million euros between 1993 and 2009). Profits rocketed from 4 to 272 million euros, multiplying by 78. Today, it is the ultimate quality reference in the highly demanding pet-food market.
- Selective distribution is on the increase in many sectors: clothing and shoes; consumer electronics; electrical household appliances; computer games and software; toys and childcare articles; media (books, CDs, DVDs and Blu-ray discs); cosmetics and healthcare products; sports and outdoor equipment, and house and garden products. In May 2017, following an inquiry lasting over two years, the Commission published its report on barriers to electronic commerce in these various sectors. It found that almost 20% of the companies surveyed had introduced selective distribution systems for the first time.
- Selective distribution is born of consistency, which is indispensable, between the brand, the product and the distribution. Conversely, when distribution becomes more commonplace and less selective, the brand declines in value: this can happen to brands that grant production and distribution licences, which become less fussy about the choice of outlets for these licensed products, gradually leading to over-distribution of the brand. Calvin Klein, for example, filed a momentous lawsuit in the U.S. in 2001 against Warnaco, its sole licensee for all its jeans, after Warnaco distributed Calvin Klein jeans through well-known US discount chains such as Sam’s Club and Costco. A costly lawsuit was averted thanks to a last-minute settlement. Then there is Burberry which, before its spectacular comeback between 1997 and 2005 under Rose Mary Bravo, was primarily distributed in just three countries, the UK, Spain and Japan, where it made most of its profit thanks to the Japanese infatuation with visible logos like the famous tartan. However, Burberry had a single local licensee in Japan, which did not see a problem in ubiquitous distribution. In Spain, the brand also suffered from over-distribution in too many multibrand stores. In general, stretching a brand beyond its core competence often undermines the selectivity of the brand’s distribution. Chanel, for example, licensed the distribution of its sunglasses and spectacles to Essilor-Luxottica, and now Chanel eyewear can be found all over the high street. The licensee has its own volume targets to meet if it wants to make a profit after paying the royalties charged by the premium brand.
- Selective distribution reflects the development of dematerialisation in marketing, moving from offering consumers a product to offering them a complete multisensory, service-based experience. The point of sale then becomes the venue for this experience which, through a combination of service, story-telling, ambiance and new technologies, enhances the image of the customer and the brand. This, incidentally, is the challenge facing the Internet, i.e., how to offer the same level of experientiality so essential for high-end brands. Technological progress is making this challenge more and more achievable. Burberry is said to be the most connected fashion brand as the Internet actually enhances the in-store experience and the interactivity of shop windows, while at the same time supplying a continuous stream of tailored online content (music, pictures and crowd-sourcing, intended for social networks). This turns the brand’s physical stores, as well as its social networks and the Internet, into virtual experiential touchpoints that are constantly reinvented. Victoria’s Secret has led the way in this field.
Recent research confirms that the ability of major luxury brands – with sales always on the increase – to maintain their desirability and their price depends on the feeling of exclusivity they manage to preserve, something that is inextricably linked to distribution: Is the brand available everywhere? What is the setting like, how much personalised attention is attached, what other brands is it next to? These days, selective distribution appeals to many brands, including non-luxury brands, because it can boost their development. It creates additional value, on the one hand by delivering a superior, uniform exclusive service – both before and after purchase – and on the other hand by offering a unique experiential framework to enhance the brand, projecting an aura or image of quality or even exclusivity.
One thing’s for sure, every time a brand falls in perceived value, the diagnosis is the same: is it still in fairly selective distribution? When this happens, there is a need for a reverse strategy, “from mass to class”. However, it is more difficult to close existing sales outlets than to refuse to open new ones. In the United States, an operator is free to choose its trading partners. However, once a commercial relationship is established with a reseller, it is harder to break off business relations, especially if the reseller has itself invested in selling the branded products of the operator in question.
Digitalisation is revitalising selective distribution
Even though e-commerce still accounts for only 9% of sales of personal luxury goods (Bain, 2017), more and more consumers are choosing to buy from brands’ websites or multibrand platforms rather than the brands’ own brick-and-mortar stores. This is known as the omnichannel world, where the customer comes into contact with the brand through multiple touchpoints and decides when and where to conclude the transaction. The online market is expected to account for one quarter of sales of personal luxury goods by 2025, becoming the world’s third-largest luxury market alongside the U.S. and China. Even now, some 60% of luxury purchases are made after web activity (social networks, websites, searches on Google or Baidu). Omnichannel behaviour is already the norm for luxury buyers. The “consumer journey” winds its way through both online and offline territory. It is therefore necessary to rethink the purpose of what is called, somewhat inaccurately now, a “store” (a word that alludes to former functions, namely storage). To make customers continue to visit stores, it is necessary to provide “retail-tainment” facilities. In Korea, Japan and China, three countries very much at the forefront of e-commerce, millennials’ favourite pastime is going shopping with their friends (even if the purchase is actually made later on the Internet).
All distributors of premium products are now wondering what the future holds for the physical side of distribution. Should they continue to expand it, or reduce it? The answer is that millennials, the customers of tomorrow, do want to continue to visit stores, just not necessarily in the form they have today. The solution is to make the point of sale a destination like no other. Millennials love Sephora because they can try out all the new niche brands continually introduced by the chain, have fun with the connected mirrors and virtual reality, and immerse their five senses, whereas online shopping engages only sight and hearing. Under pressure from the digital world, the point of sale must become the principal place of experience, strengthening the bond with the brand, the brand’s desirability and its community of fans. You don’t build a religion without temples, places for renewing believers’ faith. All this involves absolute control over the customer experience at the brand’s points of sale. Hence the need for selectivity.
With competition intensifying both online and offline, there is increasing interest in more selective, even exclusive distribution. This is why, even though the most obvious aspect of a more selective distribution strategy is the reduction of the number of “gateways”, in reality this reduction is simply the result of more stringent selection criteria. Because that’s how it works. Take Moncler, for example. In its quest to become THE name in high-end down jackets worldwide, in the wake of the arrival of more affordable competitors such as Ralph Lauren or Lacoste, Moncler began shutting down stores across the world, reducing the number from 2160 in 2010 to 1800 by September 2013. At the same time, it focussed on its exclusive flagship stores (DOS): by the end of 2016, it had just 190 of these shrines to Moncler values and service. Its new global competitor Fusalp plumped from the outset for an even more exclusive form of distribution in the most upmarket locations (Aspen, Courchevel, etc.).
Luxury brands are no longer reluctant to distribute via the Internet, seeing it as a solution to one of the industry’s structural problems (at least as regards fashion goods): unsold stock. Because of the need to refuel consumers’ desires through the medium of creativity, some luxury fashion ranges can unwillingly be over-produced. So what happens to them at end of, or even mid-, season? This is why many major luxury fashion houses, such as Kering or Richemont, use e-commerce platforms to avoid the stigma surrounding sales in outlet stores, something that unequivocally signifies that the brand is no longer a luxury name. It’s a need fulfilled by successful e-platforms such as Farfetch, Net à Porter and Yoox. These platforms do not belong to the regular retail network of the brand: they have been created to offer luxury brands a service by proposing goods from previous collections, during a limited period of time in an upscale environment. They need to be strictly controlled by the brand to ensure that the environment, the packaging, delivery services, return logistics, and customers’ experience are at the highest level, compared to the brand regular network. Today some platforms such as Rent the Runway even allow you to rent luxury goods instead of buying them, which works very well for unusual products that are harder to sell. It is not for nothing that, on 19 February 2018, Chanel took a financial stake in Farfetch, following in the footsteps of Richemont with Yoox- Net à Porter.
Lastly, we can no longer talk about luxury and the Internet without mentioning Chinese customers, who already account for 32% of purchases by value of all “personal” luxury brands. On 1 August 2017, Alibaba, the No 1 Chinese e-commerce company, with its two platforms TaoBao (CtoC) and TMall (BtoC), announced a new distribution opportunity for luxury brands in China, via a dedicated platform within TMall called Luxury Pavilion. Its competitor JD.com followed suit with Toplife in October 2017. The brainchild of Jack Ma, Alibaba’s charismatic CEO, Luxury Pavilion is based on a new form of selectivity: customer selection. Not only are the brands invited to open a store in Luxury Pavillion carefully chosen, but the customers are themselves hand-picked using big data, providing an intimate knowledge of their e-commerce purchases in China, and shortly further afield, as the Alipay payment app is rolled out around the world. Only the top-spending luxury goods customers (based on annual purchasing records) are selected for this invitation-only platform. It is an approach worth considering: several brands have already taken up the invitation from TMall’s Luxury Pavilion in China, such as Burberry, Boss, Estée Lauder, La Mer, Guerlain, and Maserati.
However, it must be borne in mind that Alibaba’s approach based on customer selection is radically different from the form of selective distribution practiced in the European Union. In the EU, any consumer, regardless of purchasing power, can access and buy a luxury product in the fashion/accessories or fragrance/cosmetics sectors. The only condition “imposed” by the brand owner – in its own interest and that of the consumer – is that the point of sale or the website must meet the objective selection criteria that it has set. From a commercial point of view, the brand owner can thus reach not only affluent or very affluent consumers but also less-well-off consumers, or “excursionists”, who will thus be granted access to the world of the brand through products at affordable prices. This applies especially to perfumes and cosmetics, although less so to extreme luxury goods with a higher price tag. In the system proposed by Alibaba, the approach is more restrictive or conservative since it is reserved for very affluent consumers, who are offered a unique setting and experience with no risk of purchasing a fake.
This method based on creaming off customers does not correspond to the reasons why an exception has been made for selective distribution by the competition authorities in Europe and other countries, an exception they have justified by the need to preserve the very nature of these goods, including their aura of exclusivity.
Letting the consumers have the final say
Selective distribution requires complete consistency between the brand, the product, the brand communication and the method of distribution: if the method of distribution is not in line with the other aspects, the image of the brand will be tarnished in the mind of consumers. In the ongoing struggle with brick-and-mortar operators, and now online players, who are eager to get round the restrictions imposed by selective distribution to get their hands on premium products, the ultimate question will be whether or not the image of these operators affects the prestige of the brand.
All luxury and premium brands must constantly walk the tightrope between sales volume and image preservation, their perceived quality based on their price premium. Every year in the U.S., Dom Perignon must decide whether it should continue to be sold in Costco, the world’s seventh-largest discounter distributor, which is also its biggest customer over there. And where would sales of Moët et Chandon champagne be if the brand was not present on the shelves of hypermarkets like Auchan and Carrefour?
Constantly pestered by brick-and-mortar discounters and online platforms, luxury brands must be able to issue a flat refusal, based on solid facts, to any discounter whose ambition is to distribute a premium brand, thereby attaining the holy grail, which selective distribution represents in their eyes. It’s a legal minefield, not least because one has the feeling that the root of the problem is the discounter themselves, and selective distribution a way of avoiding them. However, it is not (as claimed in some recent opinion pieces in the US press) a case of mounting a rear-guard action, but of stressing the merits of a system of selective distribution validated by the competition authorities in countries all over the world for premium brands and goods. The consumer can have the final say, especially when it comes to the criterion of shopsign, through surveys. Consumer surveys can help businesses make decisions by enlightening the brand manufacturer as to the compatibility between the image of a potential new distributor and the prestige of its own brand.
In 1990, in the United Kingdom, a luxury perfume brand surveyed consumers on whether its image would be tarnished if it decided to approve a request for authorisation from a major British food retailer, X. More than 80% of consumers said that the brand’s image would suffer. The supermarket’s request was turned down.
Shortly afterwards, this same brand was approached by Superdrug (perfumes, photos, confectionery, food, sandwiches, etc.). It conducted a new consumer survey to determine whether its image would be negatively affected if it decided to approve the sale of its goods through Superdrug, whose image was founded primarily on a good quality/price ratio and whose outlets were of average quality. The results of the survey clearly indicated that consumers felt that the image of the brand would be undermined if it decided to take on Superdrug as a distributor. However, despite the results of the survey, the brand decided to go with Superdrug for purely commercial reasons.
Some time later, another British food retailer, Y, approached the premium brand. The brand carried out a new consumer survey and found that the percentage of consumers interviewed who considered that “the sale of goods under this brand in stores of the chain in question, Y, would damage the prestige of its brand” had fallen significantly in comparison with the survey conducted prior to the agreement with Superdrug. This shows the strong impact that distribution can have on the image of a brand when it decides to sell through points of sale of lower quality whose image is detrimental to the brand.
This example underlines the importance of distribution in how brand image is perceived and why the shopsign criterion matters. Indeed, the concept of a shopsign goes far beyond its name alone: it relates to the image that surrounds the operator’s name. Surveys can help when making a decision on where to position a brand. But – as we have just seen – the quest for volume sometimes leads to consumer opinion being ignored.
The logic followed by management in such a case is always “sell where they shop!” In the United States, for example, the term “destination stores” refers to points of sale of mediocre quality where the presence of high-end branded goods muddies the image of the brand in the eyes of consumers. Such a course of action disregards the impact on the image that selling via non-selective distribution will have. It amounts to sacrificing the long term for the short term.
To be or not to be …selective?
While everyone agrees on the virtues of selective distribution, it is a major strategic choice, which also has its drawbacks. Because it limits the number of resellers and prohibits them from selling to unauthorised resellers, selective distribution has been under a great deal of scrutiny by the competition authorities in most countries, and in particular the EU competition authorities in Europe since 1970. Unless it is chosen from the start, opting for selective distribution can mean a fall in sales in the short term, as it requires withdrawal from retail outlets of lower quality.
The saying “you can’t be half pregnant” applies to selective distribution. You either embrace it or you don’t, there are no half measures. And the choice must be made at a global level since consumers would be disconcerted to find a selective brand in the European Union was not so in the United States or China. This type of thing can happen when local management is given free rein. The situation must be turned around by bringing local practices into line with the global strategy. It is an especially pressing matter these days given the boom in shopping tourism, the main reason why Asians go on holiday. At present only 7% of the Chinese population have a passport allowing them to travel, but this figure is set to double. Hence the need to ensure that the brand’s standing is the same in all destination countries.
Some companies believe that they are engaged in selective distribution when this is not entirely the case in reality, and therefore in the eyes of the law. They do not realise their mistake until they come up against an unauthorised distributor, online or offline, and suddenly find that their defence is undermined. How can this happen? Too often in practice, when opting for selective distribution the brand fails to select retailers based on the quality of their sales outlet, or even to get them to sign a selective distribution agreement. In both cases, the brand reduces its chances of legally defending the selective route it has chosen if discount distributors who do not belong to its network decide to protest their exclusion.
Some of the reasons why even the strongest brands fail to follow the process of implementing selective distribution through to the end, are the control of licences and the difficulty in convincing their local partners – in the various countries – to put selective distribution in place. The spectacular growth of the luxury sector is due to brands’ not only constantly expanding their business geographically but also extending their range of products outside of their core competence, in collaboration with powerful partners, who are themselves often relayed by local partners. Chanel has granted only one licence worldwide, to Essilor-Luxottica for eyewear. As a result, the brand has ended up on the shelves of mass consumer distribution chains such as Atol and Krys. It is a typical example: if a brand uses highly specialised powerful licensees, the latter may have a different strategy from their own and prioritise sales volumes to the detriment of image protection, even if they have led the licensor to believe otherwise.
How, then, can a brand get its contractors to commit to selective distribution? To avoid laxity that can jeopardise a luxury brand as it pursues growth in more countries, more circuits and via more licensed products, two precautions are imperative: it is necessary to constantly push selective distribution on partners by demonstrating the shared strategic and commercial benefits, and it is also necessary to provide extensive, ongoing training to teach local teams, in very practical terms, the criteria for selecting resellers, whether online or offline.
Therefore, from the legal point of view, the brand must include in its licence agreement the obligation for the licensee to implement selective distribution and the right to terminate the agreement if this obligation is not fulfilled. Various different obligations may be imposed on the licensee:
- establishment of a specific distribution network for the brand,
- a team and sales forces dedicated to the brand,
- comprehensive regular reports on how distribution is faring in each country (breakdown of turnover and number of authorised points of sale by distribution channel),
- discussion at least once a year with the brand on how the distribution of the brand is going,
- the right for the brand to carry out at any time a distribution audit and a consumer survey on the positioning of the brand,
- an obligation to train and send the local sales force on training courses on the selective distribution proposed by the brand.
The brand must monitor compliance with these obligations.
Another stumbling block to effective implementation of a genuine selective distribution system is the refusal by local partners to pay the costs of a brand-specific form of distribution, for example the costs of a dedicated sales force. This is typically the problem when a group that has been selling somewhat mass-market brands decides to segregate some of them to trade them up.
In major global wine and spirits groups, in each country the same sales force markets the full range of brands to retailers, as well as to restaurants, cafés and hotels. If one such group wants to trade up some of its brands by restricting them to certain points of sale, refusing others, this can cause trouble on two levels. When implementing a selective distribution system, reluctance from the current network of authorised retailers is often a problem. This is because premium goods have often been granted as thanks for major purchases of everyday brands. Loss of this lever is not received very well by the sales force itself. Furthermore, to trade up a brand you need a specialised sales team, otherwise the approach is not credible, but this can lead to very high direct costs in smaller countries, where the overall volume is low.
Last obstacle in the field, in practice it can be difficult for a brand to get a chain of points of sale established in several countries and make a selection from these points of sale based on the selection criteria of the brand and not on those of the chain. The chain will argue that as its business concept is the same throughout, all points of the chain should automatically be approved by the brand if the brand is satisfied with this concept. However, this does not take into account the fact that, for example, the quality of the point-of-sale environment can vary from one point of sale to another. In addition, the approved multibrand retailers within the selective distribution network may be reluctant to follow the strict instructions on merchandising provided by the brand, especially if they are multiple retailer chains. Lastly, it can be difficult to have the brand strategy taken on board by self-employed sales agents who sell several brands and are employed by distributors as their sales force in some European countries.
Halfway is no way
Let’s be clear from the start: distribution with little or not enough emphasis on quality can negatively affect consumer perception of the brand. Decreasing the product’s appeal in their eyes will ultimately result in a decline in sales or a lowering of the brand’s psychological price. A store offers a direct, first-hand experience, which has a lasting impact. This impact is positive if the experience is memorable and negative for a high-quality product that is found in most mass distribution channels. One wonders whether the withdrawal of Cartier’s Must product range, which had represented a desire to enter much more “accessible” points of sale, cannot be explained by the negative feedback effect of this range on the prestige of the Cartier brand itself. It is interesting to note that in Europe, too, Levi’s has withdrawn the dedicated brand Levi’s Signature from 15 retail chains where it was sold at half the price of the iconic Levi’s range. On paper, Levi’s Signature was meant to be a standalone brand, but in reality, consumers saw it as Levi’s becoming accessible to the masses.
A brand that drifts along in the middle of the stream runs the risk of being caught in a fatal current. Authorised retailers in a selective network who focus on the quality of their point of sale and their service may be demotivated by the arrival or retention in the network of stores that do not have the same level of quality. There is the risk that they will neglect distribution of the brand (or even abandon it for the benefit of other brands) or pay less attention to the attractiveness of their retail space. The brand cannot then force retailers to maintain a certain level of quality in their retail space in the absence of a contractual obligation in this regard. And in view of the expansion of the distribution segment not focussed on quality, new retailers may also refuse to sign the selective distribution agreements offered by the brand. If the brand still decides to supply these retailers even though they have not signed a selective distribution agreement, the brand will be unable to defend its network. Indeed, it will not be able to take action against these retailers if they resell to unauthorised retailers since they have not made any contractual commitment to the brand not to do so.
This triggers a chain-reaction decline in the quality of distribution, which will further weaken the image of the goods in the minds of consumers and accelerate the fall in sales. This situation may eventually lead the brand to lose control over its distribution, as it is unable to act against any retailer reselling its products outside of the network.
In the European Union, in the absence of an explicit selective distribution agreement and selection criteria that are clear, objective and measurable, it will be difficult for the brand to prove the existence and validity of its distribution system under EU competition law, and thus to win in court if the brand’s distribution system is challenged by an unauthorised reseller. The brand will ultimately be in a weakened position vis-à-vis distributors with an unattractive retail space demanding authorisation. The latter can indeed validly claim that their points of sale are of a quality at least equal to that of the least-quality-focused authorised retailers.
Conclusion: greater care and consistency
The future of selective distribution is therefore in the hands of the manufacturers. It always has been and still is. An added-value strategy requires perfect vertical consistency in the client experience. Selective distribution owes its longevity to its ability to adapt to new forms and channels of distribution and to logistics that promote trade and meet the new needs of consumers. It has developed alongside these new forms of trade, sometimes even integrating operators provided that their image does not harm the brand equity patiently built up by the premium brand. It is therefore a mistake to simply see the issue as pro- vs. anti-Amazon, Alibaba, et al. The legitimacy of selective distribution is no longer in question from a legal point of view. On the other hand, for any given brand, maintaining its selective distribution strategy is entirely in its own hands; it will be whatever the brand wants it to be.
Between the repeated challenges thrown up by the arrival of disruptive operators and the watchful eye of EU and national competition authorities, luxury brands have no choice but to be ever more meticulous in their practices; selective distribution cannot be done by halves! The more the brand itself neglects its distribution, the more it is bridging the gap that can linger in the minds of consumers between its brand image and that of the next new operator who comes knocking on its door. By then it will be too late.
About the Authors
Xavier Derville is an expert in protection and enhancement of high end and luxury brands through distribution, contracts, Intellectual Property, relations with European Institutions and arbitration. General Counsel at YVES SAINT LAURENT PARFUMS (1986-1998), LACOSTE (2001-2014) and recently at Zodiac Pool Holding, he acquired a solid expertise in distribution worldwide (Americas, Europe, Middle East, China and Japan). He was an ENA postgraduate fellow in European Studies (2012).
Jean-Noël Kapferer, Ph.D Kellogg Business School (USA), HEC Paris Emeritus Professor, is a research fellow at INSEEC Luxury (France). Worldly reputed expert on brand management, he has published many reference books – The Luxury Strategy (with his co-author V.Bastien, former CEO of L.Vuitton), How luxury Brands Grow Yet Remain Rare, The New Strategic Brand Management– and recently co-authored Advances in Luxury Brand Management. He holds executive seminars in Europe, the U.S.A., China, Japan, Korea and is a frequent contributor to LBI Luxury Business Institute (Seoul, Shanghai).
