Chapter 6

Legal and Ethical Behavior

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Learning Objectives

Explain how legislation constrains a retailer’s pricing policies.

Differentiate between legal and illegal promotional activities.

Explain the retailer’s responsibilities regarding the products sold.

Discuss the impact of government regulation on a retailer’s behavior with other supply chain members.

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Learning Objectives

Describe how various state and local laws, in addition to federal regulations, must be considered in developing retail policies.

Explain how a retailer’s code of ethics will influence its behavior.

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Exhibit 6.1 - Ethical and Legal Constraints Influencing Retailers

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Exhibit 6.2 - Primary U.S. Laws thatAffect Retailing

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Exhibit 6.3 - Examples of Laws Designed to Protect Consumers

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Pricing Constraints

Horizontal price fixing

A group of competing retailers (or other channel members operating at a given level of distribution) establish a fixed price at which to sell certain brands of products.

Vertical price fixing

A retailer collaborates with the manufacturer or wholesaler to resell an item at an agreed-on price; also called resale price maintenance or fair trade.

Price discrimination

Two retailers buy an identical amount of ‘‘like grade and quality’’ merchandise from the same supplier but pay different prices.

Deceptive pricing

A misleading price is used to lure customers into the store and

then hidden charges are added; or the item advertised may be

unavailable.

Predatory pricing

A retail chain charges different prices in different geographic areas to eliminate competition in selected geographic areas.

LO 1

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Pricing Constraints

Buyers and sellers use a variety of defenses that enable some types of price discrimination to occur. These defenses includeCost justification defenseChanging market conditions defenseMeeting competition in good faith defense

LO 1

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Promotion Constraints

The ability of the retailer to make promotion decision is constrained by the:Federal Trade Commission ActWheeler-Lea Amendment of the FTC Act

LO 2

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Exhibit 6.5 - Promotional Constraints

LO 2

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Deceitful Diversion of Patronage

The retailer publishes or verbalizes falsehoods about a competitor in an attempt to divert patrons from that competitor.

Palming off - A retailer represents that merchandise is made by a firm other than the true manufacturer.

LO 2

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Copycats, Pirates, and Counterfeits

Wei-Tau LeeJuly 14, 2009

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The Numbers2008 counterfeit seizures: 272.7 million USD

2007 figure: ~500 billion dollars/year industry

38 % increase since 2007

The Ranking (US Customs):

No. 1: China – 81% (221.6 million USD)

No. 2: India – 6%

Numbers in Asia (28% lost profit for mfg.)

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Definition

Counterfeit: (adj) Made in imitation so as to be passed off fraudulently or deceptively as genuine; not genuine; forged: counterfeit dollar bills. (n) An imitation intended to be passed off fraudulently or deceptively as genuine; forgery.

Dictionary.com

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Converse or Canvers, That is the question: Apparel

Is this a counterfeit? Common brands:

Nike & Adidas Air Qiaodan Prada-Cole The concept: Name

brands for cheap(er).

Source: www.counterfeitchic.com

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Apples and Oranges: Electronics

Counterfeit iPhones & Nokia

New & Improved! SEG Plaza – World's

largest source of counterfeit phones

It blows (literally)Source: www.xorgane.com

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Pimp my Great Wall: Automotives Cheezy names Everything

Imaginable Safety issues

1 Star crash rating

Quality issues NOT only China Geely's 2008 profit

(4:46 min)

Source: www.eng.wcetv.com

Source: www.motorauthority.com

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Pizza, Eh?: Food

Success of Starbucks in China Annual sales growth: 30% 400 stores (180 in mainland)

Success of MacDonald's 2012 stores (2008) Not cheap, but well serviced

Changes to food culture Produce Eating habits

Source: www.logoblink.com

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Others

Softwares: Computer games, OS, applicationsCds/DVDs: Musics & moviesPharmaceuticals: MedicineWebsites: www.baidu.com, www.youku.comCertifications: CCCCelebrities

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Origins and SolutionsSome origins of counterfeit

Ex-partners

Former workers

Local competitors

Chinese police: Nothing

Coca-Cola Method: Product & distribution

Budweiser Approach: Packing technology

Technology Approach: ASIC/Microcontrollers

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Conclusion

Makes up for lack of creativity, technology, and money

Case A: Fool the customers

Case B: I know it's not real, and it was never intended to be

real

Full of opportunities

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Citations1. "CBP, ICE Release Annual Report on Counterfeit Goods Seized". U.S. Customs and Border Protection . July 13, 2009 <http://www.cbp.gov/xp/cgov/newsroom/news_releases/january_2009/01082009.xml>.

2. Rinkunas, Susan. "The hidden cost of counterfeit goods". July 13, 2009 <http://swissidco.isuisse.com/pdf/5-Artikel.pdf>.

3. "Counterfeits account for up to a quarter of unit sales and cause manufacturers to lose up to 28% of profit in Asia". Spire Research and Consulting. July 13, 2009 <http://www.spireresearch.com/pdf/archive/press/PR-Mar07Counterfeit.pdf>.

4. Meredith, Robyn. "The Counterfeit Economy". Forbes. July 13, 2009 <http://www.forbes.com/forbes/2003/0217/078sidebar.html>.

5. Kassem, Suzy . "Kooky Sneaker Knock-Offs". About.com. July 13, 2009 <http://sneakers.about.com/od/wheretobuysneakers/tp/KookySneakerKnockOffs.htm>.

6. Ziegler, Chris. "Exploding cellphone kills Chinese man". July 13, 2009 <http://www.engadget.com/2009/02/02/exploding-cellphone-kills-chinese-man/>.

7. "Geely profit doubles on increasing China stakes". Business Times. July 13, 2009 <http://www.btimes.com.my/Current_News/BTIMES/articles/20090417015303/Article/>.

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Deceptive Advertising

A retailer makes false or misleading advertising claims about the physical makeup of a product, the benefits to be gained by its use, or the appropriate uses for the product.

Bait-and-switch advertising - Advertising or promoting a product at an unrealistically low price to serve as “bait” and then trying to “switch” the customer to a higher-priced product.

LO 2

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Deceptive Advertising

When the FTC challenges any claim contained in advertising or promotional material, several requirements must be met before the commission can find actionable deception.The FTC must prove that the challenged claim is

contained in the advertisement.The claim must be deceptive.The deceptive claim must be material.

LO 2

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Deceptive Sales Practices

Two illegal practices are:Failing to be honest or omitting key facts in either an

ad or a sales presentation.Using deceptive credit contracts.

LO 2

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Product Constraints

Product safetyRetailers have little to say about product quality or

safety as most retailers do not produce the goods they sell but purchase them from wholesalers or manufacturers.

According to the Consumer Product Safety Act, retailers have always had specific responsibilities to monitor the safety of consumer products.

LO 3

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Product Constraints

Product liability lawsDeal with the seller’s responsibility to market safe

products.Invoke the “foreseeability” doctrine, which states that

a seller of a product must attempt to foresee how a product may be misused and warn the consumer against hazards of misuse.

LO 3

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Product Constraints

WarrantiesExpressed warranties - Either written or verbalized

agreements about the performance of a product and can cover all attributes of the merchandise or only one attribute.

Implied warranty of merchantability - Made by every retailer when the retailer sells goods and implies that the merchandise sold is fit for the ordinary purpose for which such goods are typically used.

LO 3

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Product Constraints

WarrantiesImplied warranty of fitness - Implies that the

merchandise is fit for a particular purpose and arises when the customer relies on the retailer to assist or make the selection of goods to serve a particular purpose.

LO 3

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Supply-Chain Constraints

Territorial restrictions - Attempts by the supplier, usually a manufacturer, to limit the geographic area in which a retailer may resell its merchandise.

Dual distribution - A manufacturer sells to independent retailers and also through its own retail outlets.

LO 4

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Supply-Chain Constraints

One-way exclusive dealing arrangement - The supplier agrees to give the retailer the exclusive right to merchandise the supplier’s product in a particular trade area.

LO 4

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Supply-Chain Constraints

Two-way exclusive dealing agreement - The supplier offers the retailer the exclusive distribution of a merchandise line/product in a particular trade area if in return the retailer will agree to do something for the manufacturer, such as heavily promote the supplier’s products or not handle competing brands.

LO 4

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Supply-Chain Constraints

Tying agreement - Exists when a seller with a strong product or service requires a buyer (the retailer) to purchase a weak product or service as a condition for buying the strong product or service.

Tying is not viewed as a violation per se, but it is generally viewed as illegal if a substantial share of commerce is affected.

LO 4

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Exhibit 6.8 - State and Local Regulations Affecting Retailers

LO 5

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Ethics in Retailing

Ethics - Set of rules for human moral behavior.Explicit code of ethics - Written policy that states

what is ethical and unethical behavior.Implicit code of ethics - Unwritten but well

understood set of rules or standards of moral responsibility.

LO 6

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Ethics in Retailing

Three retail decision areas that involve ethical considerations:Buying merchandiseSelling merchandiseRetailer–employee relationships

LO 6

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Ethical Behavior in Buying Merchandise

Product qualityRetailers develop laboratory testing programs to verify

that the quality of private-label products and manufacturers’ own brands, adhere to stricter ethical and environmental standards that go beyond existing government regulations.

SourcingRetailers can use private investigators to check out

vendors to make sure they are not buying from unsavory characters.

LO 6

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Ethical Behavior in Buying Merchandise

Slotting fees (slotting allowances) - Fees paid by a vendor for space or a slot on a retailer’s shelves, as well as having its UPC number given a slot in the retailer’s computer system.

LO 6

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Ethical Behavior in Buying Merchandise

BriberyIt occurs when a retail buyer is offered an inducement

for purchasing a vendor’s products.Markdown money - A modern version of bribery

where retailers charge to suppliers when merchandise does not sell at what the vendor intended.

LO 6

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Ethical Behavior in Selling Merchandise

Products soldSelling practices

LO 6

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Ethical Behavior in the Retailer-Employee Relationship

Misuse of company assetsJob switchingEmployee theft

LO 6

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Exhibit 6.9 - National Retail Federation Principles on Customer Data Privacy

LO 6