Rebates a Grey area

July 20, 2010: When does a rebate cross the line to become a tool of price manipulation, or more ominously, a secret commission?

Before examining that important question, it should be noted that heavy-hitters in the retail world who cannot defeat their competitors by fair means long ago decided that devious means should be used, and they have become masters at the game.

They particularly target market share-sensitive companies who are much easier to manipulate, or small companies struggling to get a foothold in the big league.

Unless they (the suppliers) are very clever operators, both targets will come through the process financially the worse for wear, but there will be considerable collateral damage to others in the process.

Is this problem today related only to the photographic industry, or is it a common problem for small business across all categories? Just ask small mixed businesses trying to compete in the soft drink and grocery markets.

(It’s worth noting that although Big W doesn’t categorise its 15 cent prints as a loss leader, at the store level it will admit to losing money on sales of Coke to get people in the doors.)

Check with your local privately-owned liquor outlet, or your friendly hardware retailer. They will tell you horrendous stories of bullying and price gouging in a battle they are gradually losing. Does this ring a bell?

‘Large breweries and wine merchants are now focused on the supermarket chains and we are treated like second-rate citizens,’ an independent liquor retailer told me this month.

What is notable is that the independent liquor retailers account for slightly more than 50 percent of all liquor sales, including the high margin, high quality products. Sound familiar?

It does sound a bit like the photo industry and the position specialist retailers now find themselves in. Here’s where the bell tolls: independent liquor retailers are beginning to parallel import in order to compete in an industry that has similar odours emanating from it to the photo industry.

Specialty photo retailers are undervalued in the industry; they stock a wider range of products, sell the high end (higher margin) products more effectively, and answer thousands of questions that mass merchants can’t handle. They support their customers.

As one photographic store operator said recently: ‘If it wasn’t for the specialty stores, companies like Canon, Nikon, Panasonic and Sony, for example, would have to employ dozens more support staff to answer thousands of additional questions on the phone.

‘But apart from that aspect, they would not be nearly as profitable as it is definitely the specialists that deliver the margins to the large distributors.’

And that is the nub of the problem – the dichotomy between large volume, price-based retailers and the specialty retailers who employ expertise, offer a wider support range of products, form relationships with their customers and have much higher costs per unit sold.

They quite often do the spadework for the client before he/she then goes off and buys the product cheaper at a chain, or worse still, privately imports the product from overseas.

There is a growing suspicion by many smaller photographic operators that they are paying too much for their specialty products. They believe they are subsidising many of the special prices that the big guys advertise – prices which are quite often less at advertised retail than the wholesale price the smaller guy is asked to pay.

That situation leads to thoughts of private parallel importing and in many cases these thoughts turn to actions. Some dealers claim that they have no other choice if they are to stay in the game.
So the unintended consequence of massive price differentials between classes of customers is to actually sponsor increasing amounts of ‘grey market activity’ and reducing the capacity of many retailers to not only source locally, but to carry a broad range of stock.

In the more severe cases, it is causing the closure of stores because they simply cannot compete and no longer see a future in the industry. But what it really points to is the need for a government enquiry into all aspects of retailing as predictably, there are some dark corners that need illumination – and the revelations are likely to be both amazing and scandalous.

In relation to commercial parallel importing here is the wild card: Specialist legal advice is that if it can be shown that retailers are forced to parallel import in order to compete, there may be a case for the local subsidiaries of world brands to support their global products under warranty in Australia, provided those imports are genuine, brand new when imported, and obtained from an approved legal source for the products.

If that were to happen we can only assume that the local offices would charge-back warranty service to head office in Japan.

The real point of this article, though, is to focus on rebates to big retail operators and to question when a rebate crosses the line and forms part of the retailer’s profit in a back-handed payment, and when it is fair and reasonable. If it were found that big distributors were complicit in secret arrangements designed primarily to reduce fair competition, then it would not be a good idea to stand anywhere near the fan.

Our representative organisations should be pressing government for an enquiry into the retail/distribution system in Australia to flush out questionable practices which might either be illegal or borderline—leading to instability and ultimately, unfairness to the consumer.

– ‘Iris Blatter’
(Name supplied but withheld on request)


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