International -- European Business
Commentary: Old Retail Laws+New Economy=Big Mess (int'l edition)
Executives at the German subsidiary of Letsbuyit.com, the European online retailer, didn't think they were breaking the law. After all, they were only doing in Germany what they had long done in 13 other countries: combining the purchasing power of their customers to buy goods in bulk from suppliers, getting a nice discount. What on earth could be wrong with that?
Plenty, according to a district court in Hamburg. It ruled on Oct. 13 that the London-headquartered company had broken two of the many stringent laws that govern German retailers. First it had violated the 1933 discount act, which restricts the extent to which shops can cut prices. Then it had broken the 1909 unfair competition law by undercutting competitors. To add insult to injury, the judge complained that Letsbuyit had "exploited the thrill of gambling" because customers couldn't be certain just how cheaply they would get the goods when they ordered them (as with other "co-shopping" models, the price of Letsbuyit goods falls as more people order them).
Such rules may have made sense early in the last century, when choice was more limited and consumers less sophisticated. But in the age of e-commerce, online retailers argue, the laws are a bizarre anachronism that harm rather than help consumers. What's more, they could do untold damage to Germany's fledgling New Economy.PARTY POOPERS. Germany's outdated retailing regulations are hardly limited to e-commerce. In the town of Suhl in September, the police arrested hairdresser Ilka Bruckner for refusing to pay a fine imposed after she was found guilty of cutting hair when her shop should have been closed. Then there was the latest Harry Potter launch. To hold midnight parties to kick off the German edition of the book, shops had to send personal invitations to likely customers: God forbid proprietors should stay open for business at that hour. So the launch parties weren't nearly as successful as similar fetes in Britain.
But Letsbuyit raises new questions for Germany. Even before the guilty verdict came down, PrimusPowerShopping, an online co-shopping company controlled by the Metro supermarket giant, had suffered similar treatment. A Cologne court ruled that its discounts broke the 1909 act because they were "excessively appealing." In Germany, it is against the law to use sales methods that encourage customers to make "unplanned" purchases. Keep control at all times, ladies and gentlemen!
Help may be on the way. By the end of next year, a new European Union directive will allow e-commerce companies to operate anywhere in the EU according to the laws of the country where they are headquartered. German e-tailers that aren't allowed to sell discounted goods to Germans at home can simply relocate abroad and sell to Germans from there. "We could just move somewhere else in Europe and carry on as before," explains Romy Hochwold, Letsbuyit's in-house counsel in Germany. "Germany would lose jobs and taxes. But the customer wouldn't notice a thing."
Some companies--including Primus--say they won't pull up stakes. But they also say the restrictive laws are bound to slow development. Either way, the government could lose billions. Germans are expected to buy more than $60 billion in goods per year online by 2003, up from $4 billion in 1999. Killing this market, or sending those revenues to e-tailers across the border, would cost more than $9 billion in value-added taxes. Then there is the question of jobs: German e-tailers are expected to employ 10,000 people by 2003.
Economics Minister Werner Muller vows to get rid of the discount act. And the Justice Ministry says it will revise the unfair competition law if e-tailers come up with "sensible proposals." But changing the law will take time. And it will certainly meet stiff opposition. The Association for Combatting Unfair Competition, a lawyers' group that represents retailers and trade associations, says customers need certainty and prices they can be sure of. The campaign has broad support among small store owners, unions, and legislators.
Chancellor Gerhard Schroder says he wants to hasten the growth of the New Economy. But in the face of strong opposition, Schroder shows little enthusiasm for far-reaching changes to any of the shopping laws, whether for e-tailers or brick-and-mortar sites. The most that can be expected this year is a modest liberalization of the law, allowing shops to stay open until 10 p.m. on weekdays and 8 p.m. on Saturdays. (Most would remain firmly shuttered on Sundays.) But if he's serious about the New Economy and the jobs that Germany needs, Schroder should make shopping-law reform a priority. Rules from the Kaiser's age don't apply.By David Fairlamb; Fairlamb Covers German Finance and Economics from Frankfurt.