Internet's Global Economy Impacting U.S. Specialty Market

Take the Internet and its international scope, add discrepancies in the value of foreign currency one country to the next, stir in a few other ingredients, and you've got a meal that leaves many U.S. companies choking, while consumers ask for seconds.
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Take the Internet and its international scope, add discrepancies in the value of foreign currency one country to the next, stir in a few other ingredients, and you've got a meal that leaves many U.S. companies choking, while consumers ask for seconds.

Specialty retailers, distributors and manufacturers in the U.S. now find themselves trying to cope with European-based Internet retailers selling products to U.S. consumers at prices that even approach wholesale level in this country. SNEWS first reported on possible impacts of the European retailers on specialty retail in the U.S. in 1999, again in January 2001 and most recently in February 2001. No publication other than SNEWS has provided you with as much complete and in-depth information or reporting on this still-growing problem.

Although the issue at first appeared only to affect the telemark and backcountry skiing communities, it has become clear to us early this year that the global reach of the Internet and its economic impact has now engulfed the close-knit climbing community as well. And, as the Internet grows, it is possible the problem could reach into other communities and sports sectors, such as paddling, fitness, or electronic specialty items.

With that in mind, we embarked on a month-long in-depth investigation into retail, distributor and manufacturing processes here and in Europe. The goal was to provide a foundation for continued discussion that we hope could lead to a solution that benefits all businesses, no matter which country they call home. 

We interviewed by email and by telephone more than 50 manufacturers, distributors, and retailers in the U.S. and in Europe. All were asked essentially the same questions and then asked to provide additional insight and commentary if desired. We also researched numerous European web sites to compare for ourselves products and prices. What follows is a report that distills many of the comments and our research into a progressive commentary with historical perspective. 

At The Surface Of The Problem

All you have to do is mention www.sportextreme.com (Denmark), or www.barrabes.com (Spain), or even www.telemark-pyrenees.com (France), and an increasing number of U.S. retailers as well as distributors either let out a resigned sigh, or utter a stream of expletives. That said, keep in mind that none of them are really doing anything wrong although the impact these sites and others are having on the U.S. retail and distribution landscape is real and -- from the U.S. perspective -- quite negative. For the most part, they are simply selling product at the same prices that the European market bares, albeit to U.S. customers.

First, it is important to realize that cross-border trade is nothing new to European retailers or manufacturers. They have been dealing with that kind of retail climate for years, which is perhaps part of the reason European manufacturers have been so slow to act -- this is just another example of business as usual to them. The U.S. retail environment has been sheltered from cross-border trading in all instances save those from Canada. Retailers located near the Canadian border told SNEWS that they regularly lose sales to customers driving north to buy products at up to half the price from Mountain Equipment Coop (MEC). Still, MEC has what has been called an admirable policy of not selling via the Internet into the United States. 

Until recently, U.S. customers did not have access to European prices nearly as readily because of that rather foreboding and expansive physical barrier called the Atlantic Ocean. Of course, once the Web became fertile ground for retailers in Europe, all bets were off, and the U.S. essentially became simply another place to do business and make a Euro or two.

For the record, not one European retailer we spoke with -- as well as precious few manufacturers -- felt the U.S. had anything to complain about. It is currently their view that competitive pricing via the Web is simply normal business practice. We were somewhat incredulous to discover that quite a few European retailers, including those at Sport Extreme, Barrabes and TP appeared to feel that U.S. distributors and retailers were simply taking too much margin and that is why prices were so high. Every business, from the European manufacturers to the retailers we spoke with were quick to point out that U.S. distributors were, in fact, paying the same price as distributors in, for example, Germany, France or Spain.

While that may be true, pointing to the equality of distribution pricing from the point of origin as reason for not doing anything about a discrepancy in retail pricing practices is a bit like looking at an accident victim and commenting the cut on his face doesn't look so bad while he's bleeding to death from an amputated arm.

How On Earth?

So, assuming distribution prices are more or less equal (which we know for a fact that they are not in all cases) how does a product that carries the same price for a U.S. distributor as it does for a French or Spanish or German distributor come to cost so much more at U.S. retail?

Let's follow the bouncing Euro (though you'll please forgive us if we speak in dollars for this jaunty mental exercise).

Say, that a pair of shoes originating from a Spanish factory costs $10 FOB.

On a sale to a U.S. distributor, however, you must start adding a few costs: For establishing a line of credit, fluctuations in the exchange rate, and the purchase of a future currency contract (unless you are into gambling on exchange rates), the total will climb about another $1.30. Now, we're up to -- yahoo -- $11.30 and those shoes haven't even left Spain yet.

Since the U.S. is not exactly right next door to Europe and Spain, the U.S. distributor must carry an inventory in order to supply his accounts efficiently with ASAP orders and refills. Most distributors we spoke with carry approximately six months of inventory and that adds cost to the credit lines too -- say another 3.5 percent. Next comes duties, which can range from 8.5 percent to 10 percent, depending on the mixture of leather and fabric. Last stop: Freight and forwarder's fee, which total approximately 6 percent by air or 4 percent by sea. At the low end, that littl' ol' pair of Spanish shoes are now up to $13.20 in costs for a U.S. distributor, or nearly 30 percent more than the original factory cost.

Now the shoes are finally on U.S shores, where the distributor too has handling costs for inventory control, warehousing, computer systems, customer service staff, and the like. The distributor also must add in costs for a rep force, as well as the cost of attending multiple trade shows or expos, program sponsorships, advertising in key trade publications, promo give-aways, and travel to European factory sales meetings (typically twice a year). All of a sudden, the wholesale cost of that pair of shoes in the United States has now reached $18.86 (nearly 90 percent more than the original factory cost) at only a 30 percent margin for the distributor. Now, add in a markup for U.S. retailers who need to make a 42 percent margin to cover their costs, and -- voila, mon ami -- that $10 pair of shoes from Europe now costs $32.50 at U.S. retail, or a whopping 325 percent of the factory cost.

Now, follow that same pair of shoes to Europe: Most factories, it appears, are willing to sell to distributors on an open net 90 term account, which eliminates bankers, exchange rate issues, lines of credit, etc. Freight, for obvious reasons is less than half the cost. So, by the time the distributor gets the shoes, it costs maybe $10.20.

Most distributors we are aware of in Europe operate as a kind of super agent with no need to warehouse really, and very little staff to speak of, so their margins are typically lower as well -- in the range of 20 to 25 percent. Now the shoes cost $12.80 to the retailer. Retailers in Europe also work on a lower margin than is required in the U.S. and, as we have determined, there is really no enforcement of MSRP (manufacturer's suggested retail price) so there is no lack of loss leaders. Even assuming a 40-percent margin, those same shoes that sell for $32.50 in the U.S. cost only $21.30 in a European retail establishment, or more than a third less than on U.S. soil.

Keep in mind, too, that a European retailer does not have to collect VAT (Value Added Tax) for sales outside of Europe, nor does it have to collect duty. And while the U.S. consumer buying from the European retailer is technically liable for U.S. customs duty, it is rarely, if ever collected. Too, the European retailer does not have to collect state sales tax, furthering the savings for the U.S. consumer. Little wonder consumers here have taken notice.

Finally, anyone who feels that U.S. retailers or distributors are taking too much margin and continue to cling to the notion that they are the root of the problem needs to take a close look at reality. Not one retailer we know of, and certainly no distributor we know of, is getting rich -- far from it. Older cars, basic clothing, thin budgets and single homes in humble environs are the reality for most.

Further Complications

Lest you begin to believe the issue is simply one of adjusting pricing -- such as along the lines of a global pricing policy -- think again. While a number of manufacturers told SNEWS that a move to establish world-wide price uniformity is underway, the current differences in import duties, fluctuating exchange rates, VAT, retail markups, etc., make this a virtual impossibility at retail, even if it is achieved at the wholesale level.

European trade laws further complicate things for manufacturers seeking to control pricing and distribution. Heavy fines can and are levied on any company appearing to restrict the flow of goods or appearing to attempt to control retail prices within the European market.

David Joyce, CEO of Lowe Alpine told SNEWS, "European consumers and retailers are allowed to buy goods in whichever market they choose. The worldwide accessibility of the Web gives almost immediate International presence for any retailer going online and if a brand has a wide pricing differential between Europe and the USA they would be powerless to intervene if the retailer is based in Europe."

We have heard time and again from European-based and U.S.-based manufacturers that the only way they can control rogue retailers who insist on cutting prices and undermining a brand position is to play silly games: lost orders, delayed shipments, etc. Not legal, certainly, but impossible to prove and, it does get the point across. Unlike here in the U.S., a manufacturer cannot simply terminate or restrict a retailer's access to product.

A Few Tales From The Front Line

The impact to retailer bottom lines varies from region to region. As best as we can determine, the more close-knit the community (pros, students, clubs, etc.), the greater the impact is more likely to be since those are the consumers who shop price most often, frequent chat rooms, and talk up good deals with their friends. For the climbing or backcountry ski communities, that means the likes of Bozeman, Mont.; Boulder, Col.; anywhere in the Northeast; Seattle, Wash.; and Portland, Ore.; are hot zones. The following are a few of the dozens of tales of woe and wonder we have heard over the last month:

Climb High told us they knew of one retailer in the northeast that had five customers come into their store in a single day with ski packages that were all purchased from a European Internet retailers. In previous years, all five packages would likely have come from that U.S. retailer. The result? $125 in mounting income versus $4,000 in product sales -- huge difference.

Lock Miller, owner of Marmot Mountain in Seattle, Wash., told us that a customer was in recently shopping for a pair of skins for his new Tua Sumos. He told the employee that if the store could have come down $150 on the entire ski package he would have gladly purchased from it instead of Europe. Another customer that same day came in and had the store fit him for an AT boot. Once fit, this formally loyal customer told the store thanks, but he was buying from Europe since the price was so much cheaper -- he just needed to be sure of his size.

Northern Lights told us that they estimate they have lost between $20,000 and $30,000 in sales of backcountry and telemark ski gear in 2001 alone to European Internet retailers. One loyal customer from Bridger Ski Patrol purchased her gear from Europe because, even with a pro deal, the package price from Europe was cheaper.

On March 19, during an intro course for Washington Alpine Club's Basic climbing course in Seattle, several of the instructors working with a class of 35 people told everyone in attendance, "If there is anything they should get out of class today, it is that there is no need to pay full retail for any climbing gear whatsoever." They then proceeded to discuss the URL's of the European Internet sites with students during the breaks.

Cloudy Legality and Murky Waters

Certainly one can debate forever the business ethics of what Sport Extreme, Barrabes, TP, and even U.S.-based Internet sites buying from the gray market and directly from European dealers (yes, it does happen) are doing. It's a cloudy issue at best.

What is not cloudy, however, is what Sport Extreme did in the May 1 issue of Climbing magazine on page 117 (click here to view). The full-page ad did more to galvanize the rage and wrath of retailers and even manufacturers than any other single moment prior. That ad is potentially illegal and presents what appears to be classic bait-and-switch techniques that could land a U.S. company in very hot water indeed. The Sport Extreme ad even lists company names, such as Black Diamond, that it has not sold and do not have the authority to sell, according to BD president, Peter Metcalf.

As a result of that ad, the outcry to have Climbing magazine and Rock and Ice magazine stop accepting advertising from overseas companies has reached a crescendo, despite being a gray area. While editors typically do not like to control the content of advertising, magazines and newspapers do have a history of establishing policies covering which advertising will be accepted and which won't. Last year, Couloir magazine made the decision not to accept advertising from European Internet retailers in support of its dealers that carry the magazine and in support of Couloir's advertisers. "Climbing has now imposed an advertising moratorium on the deep discounting dot-coms from Europe to support U.S. businesses as they work through the challenging issues," Duane Raleigh, publisher of Climbing told SNEWS. Dougald MacDonald, publisher of Rock & Ice, told SNEWS that beginning with the June issue, "Rock & Ice will no longer accept any ads from Sport Extreme or any other Euro dot-coms -- unless and until the outdoor industry can wrestle this one to the ground."

To further muddy the waters, Malcom Daly, president of Great Trango Holdings, told us that Sport Extreme is in violation of copyright laws: "They (Sport Extreme) came onto my site and stole my descriptions and photos of items and are using them on their own site," says Daly. "That's stealing my copyright."

Daly also pointed out to us that Sport Extreme is not an authorized Trango dealer, and that the product they are selling online is carrying U.S. hangtags, indicating they are somehow gray-marketing the goods and certainly not making much money on them at all.

Sport Extreme did not return emails questioning them about the above issues.

Don't Have a Clue, But Thank You Just The Same

To underscore the misconceptions being fed to consumers in the U.S., and the misconceptions many, though not all, European business share about the way business is conducted in the U.S., all one has to do is take a gander at the climbing rec sites on the Web. One posting is especially tasty, and as equally disturbing:

"From: bara@barrabes.com (bara)

Newsgroups: rec.climbing

Subject: Why do you americans pay so much for stuff???

Date: 24 Jan 2002 09:18:31 -0800

Hi to everyone out there bitching about high prices of gear etc. I am

writing to you from sunny Spain to explain why you pay so much for

gear. Basically manufacturers want to make $$$ off of you, and they

know you have it. The US is a huge market and its demand for brand

names is very elastic, therefor manufacturers charge importers there

more in certain cases. We here in Europe also suffer from this in

other products but luckily not in climbing stuff. Right now there is a

wicked battle for the Spanish market going on in shoes so everybody

sells dirt cheap into Spain. We (at barrabes.com if you haven´t

figured it out by my email address) buy stuff ultra cheap and mark it

up less because we go direct to you the consumer, even though we are

having major supply problems with manufacturers because we sell cheap

into the US and cut out their abusive mark up. Its a bummer for local

stores in the US (we - online and offline - are no cheaper than any

bricks and morter store in Spain, and in some cases more expensive),

but then thats what open markets the Internet are all about. If

anybody wants to bitch about it remember the US is always defending

open markets and screaming at Japan for not allowing Kodak in etc. so

for your own good defend open markets and let the cheapest/best system

win. In the end the idea is for the consumers´ money to stretch as far

as possible be it in the US, Canada, Europe or Africa, that´s what

makes living standards go up everywhere. We here buy what the US makes

better and at a better price (software, planes, weapons, financial

services)and it kills local companies, but those that survive are

stronger and are better for the customer.

For those of you that complain that they we are fly by night etailers,

come and visit our shop, warehouses etc, we are not REI but we´re

pretty close and damn more specialized.

As for those who have had a bad shopping experience at barrabes.com,

my sincere appologies. I just got here and if you notice, stuff is now

in correct English or being changed to it, emails are being answered

more quickly due to newly hired staff, and old problems with out of

stock items on the web have been resolved (now only in stock items are

on the site)

We have had difficulties like any company but we are getting better in

giant strides. Sadly there are people who had bad experiences, mostly

with out of stock items and late emails because nobody spoke English

before. All that is history, so now you can decide if you want to

support high markups and controlled (fixed) markets or search the

globe for the cheapest stuff (maybe not always barrabes.com, that´s up

to you to find out, or for the market to decide, maybe tomorrow Egypt

will have cheaper brand name climbing gear For now we´re happy to take

advantage of our situation."

Testing the System

Feeling curious about the quality of service, Daly recently placed a test order from a blind email to Sport Extreme -- two cams, two nuts, and a carabiner. In USD, the order came to $100. In short order, Daly received a charge of $112 to his credit card. To date, he has received only the two cams and no response to inquiries regarding the whereabouts of the missing nuts and carabiner.

An Expanding Reach to Other Sports Arenas Possible

Although this issue is one being confronted now mostly by the outdoor trade, other industries such as fitness may not be far behind. Although many low-cost fitness accessories or large and heavy pieces of workout equipment wouldn't be worth either the bother or the shipping costs from Internet retailers in Europe, smaller items may be. SNEWS found Polar Heart Rate Monitors by Finland-based Polar Electro Oy, for example, on one European-based Internet retailer running about a third less than the cost of the same monitor at U.S. brick-and-mortar stores or etailers. And that included tax, with shipping being offered at 15-22 Euros (USD $13-19), depending on the method selected. In other words, a Polar M52 that retails in the U.S. for $180 before tax would cost about $125 plus shipping from a European etailer -- a total savings of about $35-45, or a not-too-insignificant 25 percent. The European Internet retailer seemed all too happy to sell to us, pointing out gleefully that the price included tax.

First Attempts At Solutions

From the retail front:

Rich Gottlieb, owner of Rock and Snow in New York near the famed "Gunks" climbing area told us that, "The U.S. distributors, manufacturers and retailers I have spoken to all acknowledge there is a problem. They have different opinions as to how big they think the problem is, who, if anyone is guilty, and what, if anything, can be done. The current international pricing policies used by some companies in our industry are not working.

"Allegiance from my consumers has its price. I have customers who say they will do business with me if we will match prices. We'll meet U.S. catalog prices, but what is coming from Europe is amazing and it is all the more perplexing trying to get to the bottom of the barrel and to find out what is real and what is not. I start to wonder -- am I working on a business model that does not exist in many other parts of the world? Do I need to change?"

Bottom line is, no one wants to make the customer feel as if they have done anything wrong -- they haven't. But when retailers choose to draw a line in the sand is up to them. SNEWS thinks the best approach is a finely balanced combination of education, support, and clearly informing the customer of store policy. 

Northern Lights, a Bozeman, Mont., retailer has the following policy posted at points around the store and the store also informs every customer of the policy verbally:

"To validate your warranty it is necessary that you keep your receipt. Your receipt is your record of purchase and your validation date for your warranty and amount of purchase. Without your receipt, we may not be able to process any warranty claims. A warranty is only valid for the original purchase and only on goods purchased in the United States. Thank you. NLTC"

Northern Lights has also taken the position of charging more for mounting skis that are not purchased from the store and they charge customers for replacement parts for Fritschi bindings when the bindings weren't purchased from the store.

From the manufacturers:

Mark (Roody) Rasmussen, president and CEO of Petzl America, told us that Petzl is finalizing an international web policy distribution agreement that is just being implemented. The challenge, he tells us, is that the company has 40 distributors worldwide, each with its own set of country-established trade laws to answer to.

"What we are asking is that the e-retailer can only use means of promotion that will allow him to sell or offer for sale products within the retailer's normal trade area -- and that trade area cannot exceed the country of the distributor. That does stop them from advertising in Climbing and it does potentially make it more difficult for a retailer to even place language on their site that is not typically spoken in that country or list currency on their site that is not legal tender in their distribution territory," says Rasmussen.

Malcolm Daly of Trango tells us that, "I think ultimately, the solution is to embrace this new business model and incorporate it into sales plans and distribution agreements and control it. Right now, the problem is, it is not controlled. We have to be very careful in all of our reactions to this not to do anything that will be perceived as screwing the consumer though. We should, through education and communication, encourage the consumer to pay a fair price, but we have to be very, very careful that we don't do anything to hurt our brands, our business, our integrity by appearing to stomp on anything that gives our consumers a good deal."

Mike Zinn, VP and general manager for Boreal, states, "What we are communicating to our parent company in Spain is that the current model hurts the image of Boreal, hurts our retailers in the U.S., hurts us as a U.S. distributor. When a consumer can simply go out and purchase one of our shoes on the Internet at the same price or less than the retailer over here can pay for it, it erodes our relationships with long-term retail partners and those relationships are hard to rebuild. What I think we need to do is to establish a power base in Europe among the manufacturers so no one is looking like they are going it alone -- Petzl, Boreal, La Sportiva, Ortovox, etc.

"We need and we must have a very strong game plan in place before we hit Outdoor Retailer or we will simply spend all of our time there talking about this instead of talking about new product and making sales. If this issue does not get solved in the next six months, it will absolutely affect our business negatively -- it will affect everyone."

SNEWS View: We hope Europe is paying attention. During our initial look into this issue last year we were told rather pointedly by another European manufacturer of climbing shoes that we simply did not understand global economics. We also hope this clueless international sales manager is reading this -- even if he is not a subscriber.

This issue is bigger than what TP or Barrabes or Sport Extreme is doing or not doing. This issue is about finding a means for U.S.-based business to continue to do business with European companies equitably.

This issue is about ensuring consumers know that when they spend money in Europe, they are doing nothing for their local economy and are actually undermining any efforts to provide funding for recreational access, product testing, product development, and any number of other services the U.S. consumer takes for granted.

This issue is about finding a solution that establishes controls on Internet sales across borders so that local retailers in one economy can't as easily take advantage of another retailer who must do business within a more expensive economic model.

This issue is about European manufacturers waking up and working with all of their distributors to establish global pricing policies. No, we don't mean same pricing for everyone, but pricing that is structured so that it becomes harder for products to be shifted from one country's economy into another's.

This issue is about reworking archaic business models that worked just fine before the Internet but are now decidedly outdated in our fast-pasted and global economic age.

The issue too is one of innovation and not protectionism. Consumers will always seek out the better deal if that is all that separates one retailer from another.

While we aren't looking at retail doomsday yet, we could be looking at a day, if this issue is not solved, where distributors decide to stop selling European products and instead turn to making their own gear -- made in Asia and sold only in the U.S. We could see a day where U.S. retailers stop carrying European products because the economic model won't support it. We could see a day where, because European manufacturers don't face the music, that they are no longer getting U.S. research and development support which could make their products unsuitable for sale in this market. No one wants to see any of that for sure.

The clock is ticking. It's time to collaborate. It is time for a solution. 

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