Costco plays unauthorized hardball sales with industry goods

SNEWS® received word on Nov. 11 that Salomon was busy sending reps with wads of cash into Costco stores across the country to buy back the company's Verse 7 ski package that had begun appearing unauthorized in the mass merchants' stores. If the story of products appearing for unauthorized sale at Costco sounds familiar, it is: Just two weeks ago, SNEWS reported on The North Face products appearing in Costco stores in mountain towns across the west.
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SNEWS® received word on Nov. 11 that Salomon was busy sending reps with wads of cash into Costco stores across the country to buy back the company's Verse 7 ski package that had begun appearing unauthorized in the mass merchants' stores.

If the story of products appearing for unauthorized sale at Costco sounds familiar, it is: Just two weeks ago, SNEWS® reported on The North Face products appearing in Costco stores in mountain towns across the west.

With history of other TNF products as well as that from companies such as Teva appearing without approval at Costco, SNEWS® decided it was time to dig deeper. Costco, it appears, has regularly engaged in the practice of acquiring unauthorized products for sale in its stores via any means possible, sometimes utilizing an underground network of third-party buyers, overseas distributors and shell companies.

But that doesn't keep companies like The North Face and Salomon from leaping into action to stop the flow as quickly as they can. Tom Berry, director of sales for Salomon, told us that like TNF, Salomon has a zero tolerance policy for gray market goods such as the ski packages in Costco. Berry also said the company was in the process of shutting down the source.

"As of today (Nov. 11), we believe we have managed to purchase back 90 percent of the inventory, and we are in the process of chasing down the remainder to get it out of the Costco distribution channel," Berry told us.

"We love our retailers and want to keep them in business, so to us, buying back the product to protect them was the right thing to do," he added.

According to Berry, Salomon managed to catch the product before much of it had actually gone on sale, so there was little retail impact. The ski packages, which carry a suggested retail of $379, were priced to sell at Costco for $329.

Last month's unauthorized sales of TNF apparel was at least the second round for that company. Not long after current TNF President Mike Egeck took the reins of the company, he was faced with large quantities of TNF sleeping bags for sale at Costco. The source was a company TNF learned later was affiliated with Costco that purchased sleeping bags in Europe from TNF that were supposed to supply an Eastern European country's military – more than 30,000 bags by some estimates. When the bags began appearing in Costco stores in the United States, the source was uncovered and shut down. TNF spent nearly $3 million to keep the bags out of the supply chain.

Teva also has similar tales, all ending with the company sending its company representatives into Costco stores to buy the product back and remove it from Costco.

Costco's official position? "We are trying to do the right thing for our members and our vendors," Costco President Jim Sinegal told SNEWS®. "We would be more than happy to buy the product directly if they (the vendor) will sell to us. If a company won't sell to us, we do take that as a slap in the face, but we can understand."

How does Costco get product into its stores when the company is not an authorized dealer? It's actually quite simple. The Costco buyers work directly with individuals called "jobbers" who are third-party purchasers that seek to acquire hot products, be it hubcaps, fruit baskets, Salmon skis or TNF jackets, and then sell them to whoever is willing to buy them, from overseas distributors to Costco.

Bill Brown, owner of the Full Circle Group, a New York-based sales agency representing TNF, told SNEWS® that a number of his retailers have told him they've been contacted by jobbers with specific lists, right down to the styles and size runs they are looking for, offering to pay between 15 percent to 30 percent over wholesale for the buy. These jobbers are quite candid that they are buying the product for Costco.

Steve Rendle, vice president of sales for TNF, told us that when he first joined the company in 2000, he was contacted by a buyer for Costco, Kelley Christiansen, who told him that she'd bought product from TNF before and would like to do so again.

Rendle told us he made it quite clear to her that selling to Costco was not in the TNF distribution model. Christiansen then made it quite clear to him that Costco wanted to sell TNF product since it sold well in their stores, and if he didn't sell to her through regular distribution channels, she'd get it into her stores via other means.

We contacted Christiansen who declined to comment on the record and was without regret or apology. Her one comment on the record to SNEWS® was, "Tell them to give me a call if they want to start selling to me."

Sinegal told SNEWS® that his buyers are charged with the task of acquiring quality products for its members through any legal means.

"Our intention is to find products through any legal means that we can sell that our members want," Sinegal said. "The North Face products are very desirable, and I just bought one myself for my daughter. We are very cautious to ensure the product is legitimate and not counterfeit, and we certainly don't misrepresent the products we sell in any way."

He also makes it quite clear Costco believes it is doing the right thing by its members simply because it is finding a way for them to save money.

"It says something about the pricing structure of these products if we can buy them from a third party, price them so we can make sufficient profit, and still save our members money," Sinegal told us.

"Typically, the reason people don't want to sell to us is because of our pricing structure," added Sinegal. "Over the years, you could fill Lake Tahoe with all of the people who would not sell us."

When asked if he thought there was anything unethical about the way Costco was going about acquiring products that companies did not want to sell to them, he said, "I don't agree with that reasoning at all. The reason we can get these goods so easily and sell them cheaper than other stores is the markup structure is obscene. Wouldn't you call overpricing unethical?"

Sinegal does acknowledge that there is a belief that if a product sells in Costco, it will lose favor in specialty stores. But he said he has no idea why that is.

"Costco is known for carrying quality products, so it would seem to me if a product is in Costco, it would expose the brand to people who might not otherwise see it as a quality product worth buying," Sinegal said. "I can also point out hundreds of specialty retailers around the country that exist in the same neighborhood as a Costco, selling brands we sell and doing very well as a result. It is certainly not our desire to hurt the market or put anyone out of business."

SNEWS View: It is important to realize that what Costco is doing is not against any laws. When a company such as TNF, Teva or Salomon finds its product for sale in Costco, all it can do is go after or shut down the stores or distributors that sold goods in violation of a signed dealer agreement. True, the companies can go into Costco and buy the goods back, as Salomon did. In reality, however, all that's doing is putting money in Costco's pockets just to protect distribution of a product line. As for whether this method of acquiring product is unethical, that can certainly be debated. Costco's position is that it should be able to buy any goods it wants. Period. Costco representatives said they believe as long as its membership is served, Costco buyers are buying non-counterfeit product, buying it from legal vendors and paying them a fair price, there is nothing unethical at all to the practice. Costco's distribution logic appears built on the assumption that price should control distribution, not a vendor distribution agreement. We do find it interesting that Costco conveniently overlooks the fact that many of the sources from which it is buying are not actually acquiring the product through legitimate distribution channels. Retailers selling to jobbers who then sell to Costco are selling products illegally. There is no gray area there. Trouble is, there is no law protecting distribution channels from third-party sales either. So Costco is free to buy product from retailers or any other third parties who will sell to it. Shut down the market you say? That's easier said than done. As long as there are overstocked retailers or ones with creditors knocking at their doors, there will be retailers willing to risk selling goods to Costco in violation of a distribution agreement. In reality, if Costco's mode of doing business is allowed to continue, the message becomes clear that a manufacturer really cannot control its distribution channels anymore.

Our position on this acquisition model is that Costco is wrong. It seems to be taking advantage of laws that are actually intended to allow consumers the protection to resell a product once they have purchased it from an authorized vendor. We believe the laws need to change to protect any manufacturers who seek to control how their products are distributed. But how that gets accomplished is anyone's guess. Think eBay, and you can see how sticky the subject is likely to get. While Costco says the company doesn't want to put anyone out of business, the company has to realize that if it acquires specialty products for sale in its stores outside of the authorized distribution channel, and sells them at prices up to 40 percent less than they are available at a specialty retailer, it will kill the market for that product at specialty. That could essentially destroy the image of specialty retail that the manufacturer of that product was likely working so hard to develop. Solutions? Perhaps businesses should start filing complaints with the FTC alleging unfair business practices when it discovers these practices. Or perhaps retailers should realize that selling to Costco offers them only short-term gain while they and the industry as a whole eventually suffer long-term pain.

The irony here is that we're talking about a love-hate relationship. We'll lay even money that a vast majority of our readers shop at Costco at least on occasion. We do, too. Why? It has quality products at excellent prices. For all we know, some of the products we may be buying, such as toys or clothing or tools are acquired by the company in the same manner we, as an industry, find so distasteful. Perhaps speaking up as members will garner the attention of a buying beast that thus far has seemed so indifferent to industry complaints?

>> Speak up and sound off on this subject by going to the SNEWS Community Forum. Click here to post your views and to read what others have said.

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