Online retailer sees red over minimum pricing

Last March, the US importer for Japanese manufacturer Hoya Corp.'s line of camera filters presented reseller John Opacki with an offer he couldn't refuse. The new reseller marketing agreement, from THK Photo Products Inc. in Huntington Beach, Calif., required that Opacki's company, The Filter Connection, sell Hoya filters at a minimum price of 150% of dealer cost.

Opacki, owner of the small online business based in the tiny village of Gilsum, NH, was taken aback. To be competitive online, Opacki was marking up product by just 10%. In his 20 years in business, he says, no manufacturer had ever told him how to set his prices.

An argument ensued, Opacki refused to sign without preconditions, and THK dropped The Filter Connection as an authorized dealer. The decision cost the business hundreds of thousands of dollars in lost sales. "It was a big hit for me," he says.

Opacki, who provided copies of internal e-mail messages and contract documents to back up his story, says he's still angry about the manufacturer practice of fixing minimum prices, which he sees as stifling competition and enforcing fat profit margins at the expense of his customers.

He says it also puts online retailers at a competitive disadvantage in what is a highly competitive global market where not all vendors are restricted by U.S. -authorized reseller agreements. "In this economy, I don't think this is the time manufacturers should be inflating retail," he says. (THK did not respond to requests to comment for this story).

The Filter Connection isn't the only retail business to face with fixed minimum price agreements these days. The practice is legal, common with electronics, and is on the increase as manufacturers feel competitive pressures that are often driven by intense global price competition online. More than 5,000 manufacturers have pursued minimum pricing agreements in the two years following a 2007 Supreme Court decision (Leegin v. PSKS) that reversed a previous precedent by stating that price fixing isn't always illegal (see the Wall Street Journal story. Subscription required). But the use of minimum pricing agreements, which pit retailers and consumers against manufacturers, may be short lived.

Reversal of fortune: Maryland steps in

Today, Maryland become the first state to enact a law banning minimum pricing agreements, and federal legislation may be on the way. Maryland Senator Brian Frosh, who introduced the bill in March as Opacki was fighting such an agreement, says the Supreme Court decision overruled nearly a century of antitrust legislation when it said manufacturers could set minimum retail prices in the market. "Numerous studies have shown that consumers get whacked when manufacturers can set a minimum price," he says. The new law remedies that. "We'll continue to protect consumers by allowing competition at the retail level," he says.

"If you have a manufacturer who says you can't go below "x" it's a violation of state law," says Jeff Zellman, legislative director for the Maryland Retailer's Association, which supported the law. The new law is also supported by consumer groups as well as retailers ranging from eBay to Wal-Mart, which don't like being told what to charge for the products they sell. But manufacturers claim that cutthroat competition is killing their margins and therefore making it impossible for dealers to develop good marketing, customer service and product support.

Hoya's 2009 annual report says its business was strongly affected by competition and falling market prices last year. In response, the March 2009 report states, Hoya is "concentrating on establishing a stable supply organization capable of meeting customers' quality and cost requirements." Minimum price agreements are one way to try to achieve that.

Agreements such as the one Opacki was asked to sign take aim at stemming the price erosion that's largely driven by competition among online resellers. Stephen Baker, an analyst at NPD Group, which tracks retail trends, has no sympathy for online retailers who sell at razor-thin margins. "They want to discount the hell out of everything and turn everything into a commodity. They are wrecking the marketplace," he says.

"It is funny to hear businesses argue against the capitalist system. They don't like competition when it drives prices down." He thinks everyone benefits in the long run when competition is open. "It's better for consumers and for retailers to set the price that they think is the best one for them."

Baker contends that the downward price pressure not only hurts profits but makes it harder for resellers to provide good customer service. "Manufacturers want to have some price discipline so that retailers make some money and can offer service and support to their customers," he says.

"That's sort of a protectionist argument," says Senator Frosh. "We can't prop up every business that we might like to survive, and even if we could [minimum pricing agreements] wouldn't be a very effective tool to do it."

Opacki operates on thin margins, but says for 20 years he's distinguished his business by always providing top-notch customer service. He admits, however, that price competition has been fierce and says some manufacturers, including Hoya, may have lost control of global marketing.

"The erosion of the street price has been happening for several years," he says. Initially retailers took 10% off list prices, but competition on the Web has driven prices down to the point where it's difficult for filer to get even a 10% markup. He says the instances of people selling filters on eBay has jumped from 1,000 five years ago to more than 23,000 today. And filer must compete against resellers in Europe and China who are somehow able to obtain and sell Hoya products to U.S. customers for as much as half of his prices using venues such as e-Bay., which "has given these foreign resellers legitimacy," he says. In addition, he says, pricing from authorized resellers is inconsistent across markets such as Europe and Asia, and he describes the grey market for filter products as "out of control."

Manufacturers can reassert control by enforcing discipline on the channel, says Baker. That means requiring vendors not to ship to markets where they're not an authorized reseller. "You may see the product with a different price in France, but they're not authorized to ship it to you in Texas," he says.

Enforcement: Casting a wide net

Increasingly, however, minimum pricing agreements are viewed as anticompetitive by the public and by retailers, and both current and pending legislation threatens to make them a thing of the past. Manufacturers who create such agreements and do business in Maryland can be sued by retailers or consumers with a presence in the state, and it is likely that those manufacturers will face legal action from the Maryland Attorney Generals Office. Ellen Cooper, assistant attorney general and chief of the anti-trust division, wouldn't comment on specific plans. But she did say that her office won't hesitate to pursue violators. "We are very interested in enforcing our new law," she says.

There is some question as to how far Maryland's law can reach, but Cooper intends to cast a wide net. "If there is an agreement between manufacturers and retailers and some of them are within Maryland, then we believe we can reach the entire group," she says.

Although he says it wasn't his idea when introducing the legislation, Senator Frosh says "There may be a spin off benefit for citizens of other states. If a manufacturer doesn't want to run afoul of the Maryland law, they may not set a minimum price in New Jersey either.

Federal laws proposed

Manufacturers also face a challenge to those price agreements from two bills on Capitol Hill. A U.S. House bill, The Discount Pricing Consumer Protection Act of 2009 (H.R. 3190), introduced on July 30th by Rep. Henry Johnson (D-GA), would make minimum pricing agreements a violation of the Sherman Act. A similar bill (S.148) is working its way through the Senate after being introduced in January by Sen. Herb Kohl (D-WI), whose family started the eponymously named department store chain. Both bills are still in committee.

But that legislation, if and when it comes to pass, will be too late for Opacki, who has moved on. The Filter Connection now sells filters from a competing brand, which he says offers the same quality, if not the brand name recognition, and Opacki can sell it as less than half the price of the Hoya product. With those kinds of price differentials, he questions whether Hoya can make those higher prices stick without losing market share. At the end of the day, he says, "These things are just large pieces of glass in a metal ring."