By Lisa Johnston
New products on display at the American International Toy Fair, held in N
Buying groups have long been a force within the consumer electronics retail industry, but they are assuming ever-greater importance to independent dealers as national specialty and discount chains extend their reach.
The missions of these groups vary. Some buying groups or co-ops focus upon reducing the acquisition cost of products, thereby enhancing the ability of their members to compete with larger players. Others also focus on developing programs to assist their members in the promotion and sale of products. Usually, these marketing programs are far superior to what an individual member could produce and are provided at a much lower cost. Some groups focus equally in the purchasing and marketing areas.
Whatever its mission, a well-run group creates efficiencies of scale that not only benefit its members, but also benefit the public by reducing the pressure to increase prices, and, in many instances, result in lowering prices. In some cases, the benefits a member receives from his group can mean the difference between survival and failure.
As much good as buying groups do, they have always been viewed with some degree of suspicion by the federal and state agencies charged with the responsibility for enforcing the antitrust laws. This column will discuss a few of the antitrust issues that confront many of these groups and will provide recommendations that will help minimize the exposure of the group and its members. However, please keep in mind that it is not intended to be viewed as rendering legal advice or service, and that readers should not act upon this information without seeking professional counsel.
Territorial Restraints. Just how do the antitrust laws relate to the operations of a buying group? Perhaps the problem area most frequently encountered by groups arises when applicants for membership are turned down on the basis of geographical location. Members of a group generally do not want the group to admit a new member who is in direct competition with one of them for several reasons. They include:
Group discussions of industry issues are more open if competitors are not present.
Less likelihood of an antitrust violation arising within the membership of the group if none of them are competitors.
One competitor might get a "free ride" on the marketing efforts of another in his same area.
The use of the same marketing materials of two competitors in the same territory could create confusion, particularly if they are using different prices on those materials.
All of the above are legitimate concerns. However, significant antitrust issues can also arise if territorial restrictions are not handled correctly. The following antitrust principals should be taken into account:
It is illegal per se for competitors to agree upon the geographical territories within which they will limit the sale of their products.
If members of the group are receiving better prices from vendors than competitors who are excluded from the group, the excluded competitors may have a claim under the Robinson-Patman Act and perhaps under state law as well.
A solution to the first issue is to limit only the use of a group's marketing materials to designated geographic locations. Each member would therefore be free to sell its products anywhere outside of the designated territory, so long as the marketing materials are not used outside that territory.
With regard to the Robinson-Patman Act problem, there are numerous defenses that may be applicable. In addition, the problem might be avoided by allowing the competitor to participate in the purchasing program, but not in the marketing program. Before any group undertakes any territorial restrictions with regard to its activities, it should consult closely with legal counsel.
Price Fixing. Perhaps one of the most dangerous areas of antitrust law that confronts buying groups is the prohibition against price fixing. What makes this area of antitrust law so dangerous is that these types of violations can easily occur, sometimes almost unknowingly. Whether done intentionally or unintentionally, price-fixing violations are at the very top of the list of priorities of the governmental enforcement agencies. In fact, the enforcement agencies are more likely to seek incarceration for price-fixing offenders than they are for any other type of violation of the antitrust laws.
The most common price-fixing concern among buying groups arises when a group uses common advertising and includes the same prices in those advertisements. Safeguards can be implemented to reduce the risk of a price-fixing charge being brought in this situation. The most important one would be to have the manufacturers determine what the prices should be, after receiving input from the members on an individual basis. The amount of market share that the group has would also be an important factor to consider in evaluating its exposure to a price-fixing charge. This is another area where legal counsel should be closely involved in establishing the safeguards.
A second price-fixing concern arises when a group enters into a contract to service a national account. For instance, small distributors might join together in an effort to service a large retail account. Frequently in such arrangements, the members of the group agree to sell to the national account within each of their individual locations for a uniform price.
While this is literally a form of price-fixing, the government has given favorable business review letters when appropriate safeguards are included. One important safeguard would be to avoid a group discussion among competitors in selecting the prices to be charged to the national account. Legal counsel can assist a group in minimizing price-fixing concerns.
A third potential problem area exists for groups that hold meetings for their membership. Adam Smith once said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public on some contrivance to raise prices." While discussion of prices in and of itself is not against the law, such discussions quite often do lead to either an implicit or sometimes an explicit understanding among the participants of that conversation as to how they will set their prices.
What measures can a group take to protect itself and its members from charges of price fixing? The answer lies in the establishment of an effective antitrust law compliance program. Such a program would include written guidelines that would include basic ground rules as to what can and cannot be discussed at meetings. The group should also have legal counsel present at its membership meetings.
Despite the potential legal pitfalls that confront buying groups, there is no denying that these groups can and do serve a useful and legitimate purpose in our society. A group that is aware of what these pitfalls are and how to avoid them has already won half of the battle. Those groups that establish well-designed antitrust compliance programs and carefully adhere to their guidelines will win the rest of the battle.
In almost all cases, when businessmen have a legitimate objective in mind, there is a way to accomplish it, even if it requires following a slightly different path. So it is when a group travels through the obstacle course of antitrust law. Hopefully this article will help groups identify and negotiate the obstacles.
This TWICE webinar, hosted by senior editor Alan Wolf, will take a look at what may be the hottest CE products at retail that will be sold during the all-important fourth quarter. Top technologies, market strategies and industry trends will be discussed with industry analysts and executives.