What are the Implications for Selective Distribution?
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.
The future of selective distribution is in the hands of the luxury brands themselves.
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.
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).