Legal Aspects of Omni-Channel Distribution
MUNICH, Germany – Internet has been a game changer in many industries which turned the analog ‘old world’ nearly upside down. In the European bicycle industry manufacturers and distributors were still used to and felt quite comfortable to control their distribution channels. But that’s changing with the market entrance of omni-channel distribution.
In Europe especially the Netherlands and UK are seen as forerunners for what’s to happen in all EU markets. It’s no longer a question ‘if’ the websites of all major brands will feature virtual shopping carts for online sales but rather ‘when’ they will start. In the ‘old’ situation market dominating and strong companies faced certain restrictions such as in terms of freedom to contract.
Thanks to internet terms such as pure and hybrid players, social media, conversion rates and native immigrants became part of our business vocabulary. Hundreds of new players at retail level considerably changed the rules of the game, first and foremost the such developments have been to my observation not as disruptive as they have already occurred in the ‘classic’ sporting goods field which includes primarily athletic footwear and sports apparel. This may have to do with the fact that bicycles of their very nature are less apt to be sold over the internet than e.g. a pair of sneakers.
'How brands can control the flow of their products and the distribution channels'
Selective distribution suitable?
This might also explain why quite a number of branded bicycle and bicycle component manufacturers are now discovering distribution schemes such as selective distribution as a suitable and also attractive option for them to regain control over their sales of branded goods to the extent permitted under applicable European national laws, foremost competition laws.
Questions are frequently asked how brands can control the flow of their products and the distribution channels. This set of basis rules will explain manufacturers and brands about their playing field.
Freedom to contract
From a European Community law point of view (the national situation may differ in some European countries), smaller to medium-sized companies, which are neither strong in their market nor dominating in their specific product category, do enjoy the freedom to contract with any customer they want and to refrain from supplying accounts they dislike with their products.
Contrary to widespread stereotypes, that once a customer relationship has been created at vertical level, it cannot be terminated, or at least without certain complications such as a compensation, it is within the scope of the entrepreneurial freedom guaranteed by the European Treaties that a company is basically free to change its distribution policy. Obviously cartel authorities throughout Europe tend to narrow product categories as much as possible.
Market dominating companies
The more product segmentation takes place, the higher the brands’ market shares. When the German Federal Cartel Office, reviewed the selective distribution system of Adidas, it did not base its considerations and deliberations on the ‘sporting goods’ market as such, but stated that the market of football jerseys would be the relevant one, since such category has its own characteristics and sales policies, if one thinks e.g. of the sale of replica jerseys of champions league clubs. Consequently, Adidas’ market shares in Europe in this specific field surpassed the 30% threshold limit easily and Adidas was classified as market dominating company.
Exhaustion of rights doctrine
It is very common and most understandable that brand owners want to exercise a maximum control over the sales of their products. Yet, it is a widely recognized principle, that once a certain product has been put legitimately on the European market, the rights of the manufacturer/EU importer will in principle be deemed exhausted. This implies that in general a brand owner does not have any control over such products anymore for example to which third parties these are resold (the so-called European wide ‘Doctrine of Exhaustion’).
Non-discrimination of online retail channel
Regardless of how big or how small the company is, it constitutes a severe violation of EU competition laws to discriminate or even to forbid online sales per se at retail level. Such conduct would fall into the same category of so-called hard-core restrictions like for instance the interference with the autonomous pricing policy of a retailer. Yet there are exceptions to such rule and this is important to bear in mind, if e.g. a manufacturer/importer of bicycles or bicycle parts intends to exercise a higher amount of control of its distribution channels in Europe than others. There are legally valid reasons to establish a selective distribution system which may, initially, cover either one or several key markets only, or Europe as a whole.
Selective distribution is not a one-way street only, where brands impose contractual obligations on their customers in terms of ‘you shall/have to/must not’, but will only work if devised as a two-way street. Further, it is not a ‘copy and paste’ tool. Brands have different priorities; their customer structure might be different; moreover their product portfolio and their concepts how their brands should be treated and presented both at off-line and online level by a retail partner may substantially differ. Once established, one of the major benefits will be that, brand owners will be lawfully entitled in a kind of closed shop system to prevent their retail customers from selling the respective branded products to any outsiders, which are not part of the system.