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Fair Trading Act assault on retailer pricing claims

14 April 2008

One of the most important phrases in a marketer’s lexicon¹ is that a product is “on sale”, or its variants “special” or “20% off”. The reason is simple: pricing and the notion of a discount or bargain is the most powerful – and sometimes the only – factor in consumers’ purchasing process.

The Commerce Commission is also aware of the power of marketing statements and representations as to price, and is vigilant and vigorous in its enforcement of the Fair Trading Act in this area.  This note examines themes emerging from several recent cases brought by the Commission on behalf of complainants over breaches of section 13(g) of the Fair Trading Act which prohibits false and misleading representations about the price of goods and services.

The cases broadly illustrate some of the many ways retailers can get into difficulty if they advertise savings or discounts that do not relate to an actual, quantifiable saving or sales prices that are no cheaper than everyday or previous prices.

Carrerabenz Diamond Industries Limited (2007)

Carrerabenz, a retailer of diamonds and jewellery, was convicted of 19 charges in relation to an extensive promotion on television and in print where it claimed to be selling at:

“up to 80% cheaper than registered independent valuer prices”.

In making this representation Carrerabenz was relying on valuations that were conducted in Australia for insurance purposes.  The court found that the Australian market was quite different to the New Zealand market so far as value was concerned.  For local consumers, the purported valuations were in fact significantly above the true valuation of the items in the market in which they were being offered.

In one instance the original price of a diamond ring was marked with a valued price of $7600.  That was marked down to the discounted price of $4600, showing an apparent bargain approaching half price.  A complainant purchased the ring for $3500 and then presented it to a qualified New Zealand jewellery valuer who gave it an undiscounted value of $3300.

Hill & Stewart Appliances Limited (2007)

Hill & Stewart, a retailer of electronic consumer goods, was convicted of 14 charges relating to:

  • advertising "interest-free" terms on goods purchased on credit when staff were willing to accept a cheaper price in store if the customer offered to pay in cash. The cheaper cash price was not available with the interest-free terms
  • distributing mailers advertising a washing machine for $20 less than the price listed on the in-store ticket price of the goods, and
  • advertising a "free" 6kg packet of washing powder with every washing machine or dryer purchased when staff were willing to deduct $20 from the price of the product if the free gift was not wanted.

The court emphasised that when goods are advertised as "interest-free" it conveys the impression to consumers that the interest-free price is the same as the cash price.  If the cash price is lower than the interest-free price then it is not truly interest-free and the obvious implication is that the price has been bumped up to recoup the supposed "interest-free" component. The Commerce Commission noted in a recent press release (30.11.2007):

“The offer of interest free and easy payment terms may often be the deciding factor in a consumer’s decision to purchase goods.  Misleading claims that products are 'interest free' may induce consumers to buy without first shopping around to find the best deal.  Because of that, traders making such claims may also gain an unfair advantage over other traders.”

The court felt that Hill & Stewart’s actions were “careless rather than reckless”.  Due to the largely commission basis of remuneration, staff were only too happy to reduce the cash price without realising the significance of the advertised interest-free terms, thus inadvertently creating a two-tier pricing structure.

In relation to the seemingly "free" washing powder, this conviction provided yet another opportunity for the Commission to repeat its mantra, “free means free”, and that the price of products must not be increased to cover the cost of something described as a free offer.

Naresh Skukla (2007)

Naresh Skukla was the sole director and shareholder of a company which imported and sold leather furniture.  The company was convicted of six charges concerning the promotion on television, print, in-store signage and the company’s website of leather lounge suites as:

“$3000 - elsewhere $6000, save $3000”

The court found that this method of advertising by indicating the selling price, an "elsewhere" price, and suggesting that a saving could be made on the price was misleading.  This was because the price comparison being made was not against a “like for like” leather lounge suite but one of better quality.

The company also ran a separate print advertisement providing:

“Expo Leather Sale – these are unbeatable deals, Limited Time Only”.

The company also represented a separate “Summer Savings” promotion on television where it advertised the special price of certain leather lounge suites as $2,000, $3,000 and $4,000. 

The reality was that prices advertised during the “Expo Leather Sale” and the “Summer Savings” promotion were the same as prices prior to and after promotional periods.  These were the regular, customary prices of the leather lounge suites and were not subject to any "special" or additional saving.

Penalties and costs – what’s the real cost?

The penalties imposed in these cases ranged from $28,000 to $75,000 (in some instances the retailer’s prompt corrective action to its sales practices helped minimise the total fine imposed). As well as a significant financial penalty, a number of other time-consuming and difficult issues may have to be faced if the Commerce Commission takes an interest in a retailer’s marketing initiatives:

  • the publicity associated with a Commission investigation or prosecution can be very damaging, even if it is hard to quantify
  • potentially multiple charges for every repetition of the offending advertising (sometimes negotiated down to just a representative set)
  • an increasing trend for the Commission to seek to bring home prosecutions against individual executives as well as the company concerned
  •  pressure applied to arrange refunds and compensation to affected customers or contracting parties, if they can be identified. 

Seven lessons for retailers

Emerging from these recent cases we suggest seven simple lessons for retailers:

  1. Only make "valued at"-type comparisons if the "valued at" price is the price commonly charged in the local market (depending on the product, this is either the New Zealand-wide or city/regional price).
  2. When running an "interest-free" promotion, do not offer "cash deals" at a cheaper price.
  3. Advertised prices and the in-store ticket prices must match up.
  4.  Do not discount the price on an item that comes with a "free" gift, if it turns out that the free gift is not wanted by the customer.
  5. Only make "elsewhere" type comparisons against ‘like-for-like’ products sold in the local market.
  6.  Representations as to "savings" must relate to actual, quantifiable savings.
  7. Differentiate goods discounted for a "sale period" from those that have been discounted for other reasons or have subsequently moved into "final clearance" mode.  Using different signs, tickets, racks and display areas is a good way to minimise potential confusion.

Footnotes  

  1. Ranked only behind the use (and misuse) of the word “free”.