High Court Appears Split on Price Fixing
The Supreme Court appears divided over whether to overturn a 96-year-old ruling that bars manufacturers from requiring retailers to sell their products for a set minimum price. Often referred to as the Dr. Miles rule for the manufacturer that sought to fix retail prices of its patent medications, the ruling is one of the most famous and long-standing in anti-trust law.
The case before the court involves Leegin Creative Leather Products, City of Industry, Calif., whose brands include the Brighton line of accessories, and Kay’s Kloset, a privately owned store in Dallas. Leegin refused to do business with Kay’s Kloset after the owners refused to raise prices on Brighton handbags, which they were selling for less than the retail price set by the manufacturer. The owners subsequently sued Leegin, claiming that it was enforcing an agreement to fix prices. A jury ruled in their favor, and Leegin was hit with a $3.6 million judgment for violating the rule against retail price fixing that the Supreme Court set down in the 1911 case of Dr. Miles Medical Co. Leegin wants the judgment reversed.
Leegin’s attorney, Theodore Olsen, the U.S. solicitor general during the first term of the current administration, argued in briefs that discounted prices “degrade” the Brighton brands. He said forcing retailers to charge higher prices could benefit consumers by helping ensure the stores would have enough money to provide desirable services to shoppers. Olsen urged the court to repeal the Dr. Miles rule, which he called outmoded and misguided, and throw out the verdict against the handbag maker.
The Bush administration, along with the National Association of Manufacturers and other business groups, backed Leegin. But 37 states and the Consumer Federation of America urged the court to retain the ruling, saying its repeal would hurt discounters as well as shoppers. In its brief supporting the retailer, the Consumer Federation of America asked, “Absent the ban … would there ever have been a Sears & Roebuck, an A&P, a Walgreens, a Kmart or a Wal-Mart, as we have come to know them? The evidence suggests not.”
The Dr. Miles ruling gave rise to the “manufacturers suggested retail price” (MSRP), and circulars promoting that a retailer’s price was too low to advertise as manufacturers retained the right to restrict retailers from advertising their products below a set minimum.
Weekly Retail Fix
THE NEWS: SAM’S REALIGNS STORE-LEVEL MANAGEMENT
BENTONVILLE, ARK. Sam’s Club is changing the management structure in its stores. In the realignment, approximately 250 positions will be eliminated, Wal-Mart Stores announced last week. The company said it’s replacing five lower level management positions at each Sam’s Club location with three new higher level and higher paying assistant manager positions. —
“This is not a cost cutting effort. We expect a slight increase in payroll upon completion of this change,” said Sharon Orlopp, senior vp of Sam’s people division.
THE FIX: Differentiation would better help Sam’s
Since Sam’s decided that its refocus on the business customer was too narrow, it has sought to find ways to make its clubs more attractive to primary shoppers, i.e., women. And that’s a pretty tough row to hoe, as Costco has done a pretty good job at satisfying the club customer in general and BJ’s has been going after female shoppers for several years now, with some success.
Having fewer managers with more direct responsibility could create a tighter knit club-level management and shorten lines of responsibility and accountability. Yet, without differentiating the offering, execution isn’t going to overcome all of Sam’s challenges.
That being said, a store-level management realignment might be overlooked at other retailers, but, this being Wal-Mart, everyone has to make a big deal about it. But that’s the price you pay as the big guy on the block.
Weekly Retail Fix
THE NEWS: TOYS ‘R’ US EARNINGS GAIN 40.1%
WAYNE, N.J. Toys “R” Us today posted net earnings of $199 million for its critical fourth quarter, which meant it turned a profit for the fiscal year ended Feb. 3. But special charges and gains had an impact on its numbers. —
Sales for the previous fiscal annum were $142 million, the difference translating into a net earnings increase of 40.1% year over year. For the last fiscal year, Toys “R” Us posted net earnings of $85 million versus a net loss of $384 million for the previous period.
Operating earnings in the fiscal 2006 fourth quarter gained 53.1% to $571 million versus $373 million for the fourth quarter of fiscal 2005. For the last fiscal year, operating earnings were $649 million versus an operating loss of $142 million for the previous period.
THE FIX: Improved shopper experience ups comps
Of course, any observer has to take into consideration special financial circumstances. Fiscal 2006 operating earnings were positively impacted by $96 million from gains on property sales, slightly offset by restructuring and other charges. In fiscal 2005, operating earnings were negatively impacted by $410 million in costs relating to the merger of the company, as well as $58 million of costs and charges relating to contract settlement fees, restructuring and other charges.
Still, sales were trending up at last year’s end. Net sales gained 15.8% to $5.7 billion. In the full fiscal year, net sales advanced to $13 billion, up 15.2%.
Comparable-store sales for the Toys “R” Us’ U.S. division gained 0.6% in fiscal 2006, and that represents the division’s first comps increase in six years. Comps at Babies “R” Us were up 4.8% and those at Toys “R” Us international were up 2.6% for the fiscal year.
Jerry Storch, chairman and ceo of Toys “R” Us, said the company is “pleased with the strides we made in fiscal 2006 to improve at all levels of the organization and reposition the company for profitable growth over the long term.”
He said the company’s new management team has been focusing on executing a strategy that would turn the retailer into a global toy and baby products authority.
“This translated into higher overall sales, positive comparable-store sales, improved gross margins and strong operating earnings growth for the 2006 fiscal year,” Storch asserted. “The key to our strategy has been improving the customer shopping experience in our stores. We are accomplishing this by delivering a more compelling merchandise selection, better service and a cleaner and more comfortable shopping environment.”