The below is the reworked version of a recent KER message that is in today’s newspapers. Thanks must be given to a KER subscriber/attorney for giving this version a review for legal accuracy.
Should you have not read the earlier version of this essay and are particularly interested in related events, please refer to the following hot links:
For background on RPM, go to http://en.wikipedia.org/wiki/Resale_price_maintenance
North Face isn’t the issue
If there is a problem, it is the high school students who have decided to wear this brand of expensive mountaineering gear to school.
Korea JoongAng Daily
May 10, 2012
Recently I ran into a journalist who asked me, “Did you read about North Face here? I can’t make it out. They are being hit by a fine for keeping their prices too high!” Later, I hosted a dinner with a highly respected international corporate attorney. I asked him what could be going on from a legal perspective. His answer was succinct: resale price maintenance (RPM).
Learning RPM’s definition and why it can be viewed as illegal price fixing, I did some research on what may seem to be arcane Western law. Yet, understanding this concept, and considering why North Face Korea is being hit with a record fine, offers some insight into how South Koreans think and act.
I learned the prohibition of RPM is intended to allow the public (consumers) to enjoy a social good at a fair market price. Price fixing by producers and retailers deprives the public from buying at prices that retailers and consumers deem to be appropriate. One perspective is that after a retailer has taken possession of goods, it should be the right of the goods’ new owner to negotiate at whatever price he chooses on the open market.
But there are arguments against RPM restrictions. For example, if some retailers offer drastically discounted prices after other retailers have invested in educating the market or promoting the products, the discounters are unfairly free riding on the promotion costs paid by higher-priced retailers who need to recoup their promotional investments.
Another argument against RPM is that it’s up to the producer to determine its own marketing strategy. If a company wishes an upscale brand, it may insist that its goods are retailed at luxury prices. In such cases, it is incumbent upon the producer to provide goods of sufficient quality and to assist the retailer with superior promotion plus after-sales support; otherwise the market will freely make alternative buying decisions.
Moving from the theoretical to local current events, we shift our gaze upon South Korea’s over-competitive, status-obsessed society. North Face jackets have become serious status symbols among high school students here, so much so that the apparel has become a major social problem.
I also heard a similar dilemma. A high school student felt peer pressure to wear a certain brand and model of jeans that were sold quite expensively in Korean department stores. His father felt the jeans were too expensive, but during a business trip to the U.S., he bought his son the desired jeans.
The son wore the pants to school, admitting his father had bought the jeans at lower U.S. prices. When the father returned home that evening, he learned that his son refused to wear the pants again, since he felt ashamed wearing “cheap pants.”
One could argue the jeans manufacturer and North Face are not responsible. Since I’m unfamiliar with their South Korean promotion strategies, I really don’t know. There is, however, a general assumption that you get what you pay for and that means superior products command higher prices.
Apparently price/value is not the issue. The Korean Fair Trade Commission noted that North Face was monitoring retail pricing via real time data sharing. What the FTC must be referring to is part of a computerized supply chain management system – something common with most major global apparel companies.
What may be less defensible is the charge that North Face Korea may be charging substantially more in Korea than in other parts of the world. But local logistic costs vary greatly around the world. I’ve yet to hear anyone praise Korea for having highly efficient, cost-effective distribution networks. In any case, distribution costs, too, must be factored into pricing for a retailer to be profitable.
What makes this case remarkable is that a foreign company was assessed the largest penalty of its kind. Yet, North Face does not have a monopoly on its type of products. There are worthy apparel competitors that offer similar substitutes. So if there is a problem, it is the high school students who have decided to wear this brand of expensive mountaineering gear to school – and to use the same for status ranking and even bullying. That is why the YMCA got involved with this issue.
With the Korea FTC taking this American company down a peg, local companies are now likely to benefit in ways their possibly inferior marketing and conceivably lesser product designs would have hurt them in a freer market.
In other words, if a small- or medium-sized company becomes too successful in Korea, local forces – be they the government, NGOs or direct competitors – will try to bring it down one way or another. Consequently, should an SME rise too high above its competition, it may be wise to preemptively engage in public relations activities or corporate social responsibility actions aimed at likely sources of social and political opposition.
In any case, it is too easy for the people to blame the temptations rather than seriously address the base causes in this competitive society. The YMCA was right to get involved with this issue. But they may have gone after the wrong culprit. Rather than looking into the shops, well-meaning Koreans need to better address what is happening in their homes.
*The author is president of Soft Landing Korea, a business development firm, and an alliance partner of Odgers Berndtson Japan, a global Big Six executive recruitment consulting company.