Chains can't avoid need for diverters - gray market distributors who do not deal directly with manufacturers

Discount Store News, Jan 4, 1993 by Jill Lettich

Discount stores and deep discount drug retailers who saw dollar signs because of potential designer fragrance sales have been thrown a not so sweet-smelling curve ball.

A judge in Los Angeles recently ruled that Drug Emporium, the discount drug chain, violated copyright laws when it sold Amariage perfume - which comes in a brightly colored copyrighted package - without the permission of Parfums Givenchy, the fragrance's manufacturer. Drug Emporium got the fragrance through a distributor/diverter.

Distributors and diverters have always been a prime source for H&BC products at all levels of retailing. And some distributors have always been a sore spot for designer brands when they sell to volume retainers. Many manufacturers claim this jeopardizes their brand's trademark.

Few discounters would comment on the impact this or other similar cases could have on their business. And even fewer wanted to be named. This points to the perilous relationship between diverters, manufacturers and retailers. Deep discount drug chains are competing for product, but would prefer to be seen as viable outlets that manufacturers want to deal with directly; distributors are looking for sales, but do not want to alienate the manufacturers that supply them with product; and designer fragrance manufacturers are looking for sales, but do not want to jeopardize their upscale store franchises.

Though this one ruling does not seem to be specifically affecting discounters and discount drug chains yet (the precedent on which the claim is based deals with imports only), it has the potential to fuel further problems even as many retailers are trying to expand and revitalize their designer fragrance areas.

Just this fall, Kmart expanded its designer fragrance area starting with its Auburn Hills, Mich., prototype. And Wal-Mart introduced some department store brands at its Rogers, Ark., prototype last year.

Deep discount drug chains have long been considered prime shopping for savvy consumers who want expensive brand names at volume brand prices. Apparel off-pricers have also been in the designer fragrance business for the last three or four years.

While the ruling may give some manufacturers ammunition against companies distributing products, most industry observers believe that neither diverters nor fragrance retailers are in any danger. The continuing prevalence of designer brands at these various outlets proves that both large demand and large supply exist.

Larry Bonner, a spokesperson for Drug Emporium, and an attorney with Greer, Homer & Bonner, noted that "Drug Emporium has done nothing wrong. There is no law against buying on the gray market." The 129-unit retailer is appealing the Los Angeles decision.

Kmart is also using distributors to supply it with some expensive department store brands. The Auburn Hills prototype featured a glass counter display that included high-end frangrance names such as Chanel and Fendi.

"We are very careful about who we deal with and I personally met with all the distributors," said Kevin Browett, senior director, pharmacy operations, Kmart. We have also been in a number of meetings with manufacturers, because eventually we want to be working directly with them."

Browett, admitted, however that "there were some mixed emotions, obviously, from manufacturers."

One way Kmart is trying to overcome the resistance of manufacturers is by offering a real showcase for displaying the high-end goods. "One of the purposes of Auburn Hills was to show that there was a way we could display those brands effectively," Browett noted.

Kmart will roll out the designer fragrance program to new stores modeling after the Auburn Hills prototype, provided that "the demographics make sense."

F&M Distributors, Warren, Mich., also uses distributors to supply some products to its 112 stores. However, the Drug Emporium decision has not affected the way the company does business. "The ruling has not changed our supply of product," reported Frank Newman, president. Newman would not reveal how much the company buys through diverters, but said its business dealings were "primarily direct."

Newman admitted, however, that the question of trademark protection was hardly new. "Over the years - though not recently - we've had threatening letters, but nothing actually ever went to court," he said. "In most of those cases it was not a matter of a company protecting its trademark, but of a company trying to restrict trade."

In fact, many executives concede that trademark violations are difficult to prove in relation to retail distribution. Copyright violations, the complaint cited by Parfums Givenchy, is a new approach to the problem. But it is an approach that few retailers seem to fear.

"The lawsuit is unfortunate, but I am not hesitant to continue with our plans," said Browett.