Markets & Finance

Wal-Mart's Luxury Problem


Wal-Mart Stores (WMT), the world's biggest retailer, has often been compared to a flea market because of the bargains that one finds there. The biggest difference for shoppers is that they know they're getting authentic goods at Wal-Mart or at its Sam's Club warehouse unit. Or at least that's what buyers believe.

Now, Fendi, a purse and handbag brand of French luxury goods company LVMH Moët Hennessy Louis Vuitton (LVMHF), is suing Wal-Mart Stores in federal court in New York, alleging that counterfeit versions of its Fendi brand bags and wallets are being sold in Sam's Club stores.

According to the complaint filed on June 9, Wal-Mart has never purchased Fendi products from Fendi or any entity or person affiliated or approved by Fendi. "Handbags, shoulder bags, purses and wallets, and keychains that imitate the designs of Fendi products and carry the Fendi trademark are sold at Sam' Club stores," it says. Some counterfeit Fendi handbags sell for as much as 68% less than the actual Fendi products, according to the lawsuit. One example cited in the suit is a handbag that goes for $295.03, vs. $925 for the original.

John Simley, spokesman from Wal-Mart counters: "Our policy is not to sell counterfeit goods." He says that Wal-Mart will be able to demonstrate that the Fendi items in the store are not counterfeit.

SIMILAR LAWSUITS. This isn't the first time Wal-Mart has been sued for selling counterfeit goods. And Wal-Mart has offered a similar defense in the past. In 1998, after many rounds in court over several years with Tommy Hilfiger it paid out $6.4 million to settle a lawsuit that it was selling fake Hilfiger brand T-shirts. And in 1999 it paid more than $1 million to Nike (NKE) after being sued on similar charges.

Wal-Mart has also settled lawsuits on similar claims with Nautica, Polo (RL), and the Fubu group at Inter Parfums (IPAR). "You'd think that these cases would stop with Wal-Mart being one of the largest and most sophisticated companies in the world," says Steven Gursky, partner at law firm Dreier LLP in New York, who represented Tommy Hilfiger, Polo, Nautica, and Fubu in their cases against Wal-Mart. "I suspect that there was a breakdown in communicating the simplest of instructions down the hierarchy to the actual people who purchase and sell goods," says Drier.

Still, such breakdowns could hurt Wal-Mart as it tries to attract more upscale consumers. After seeing that its stores were beginning to draw wealthier customers, Chief Executive Lee Scott laid out a strategy to get them to spend more time at the store. "We've got to make sure that those customers aren't bypassing [our] other departments," he said at the company's annual meeting last year. He plans to double the store's presence in organic foods, and introduce trendier brands like Metro 7 for young women and Exsto for young men (see BusinessWeek.com, 03/29/06, "Wal-mart's Organic Offensive").

IMAGE BRUISER. But the same upscale customer could bolt if they believe that the goods at Wal-Mart or Sam's Club are of an inferior quality or even fake. "Yes, luxury consumers from all rungs of the income spectrum want a bargain," says Pamela Danziger, president of luxury research and consulting firm Unity Marketing, and author of Why People Buy Things They Don't Need. "But when they walk into a Sam's Club, they expect the real deal, not what they'd get at street corners." (see BusinessWeek.com, 4/19/06, "Wal-mart Puts on a Happy Face")

Big-name luxury brands are determined to protect their reputations. Most counterfeiters make shoddy products and cannot emulate the quality of a legitimate brand owner. Not only does the brand stand to harm its reputation if a counterfeit product malfunctions or falls apart, but it also stands to lose substantial revenue. "After all, counterfeit products are just riding the tails of big advertising and promotional expenses spent over many years by big brands," says Nils Montan, president at International Anticounterfeiting Coalition, a group that combats trademark and product counterfeiting.

Fendi in its lawsuit claims that it distributes exclusively to retail outlets owned by the Fendi group and to a limited number of exclusive boutiques and department stores, such as Neiman-Marcus, Saks Fifth Avenue (SKS), and the Bloomingdale's division of Federated Department Stores (FD). As a result, there is prestige and quality associated with the Fendi trademark. Donald deKieffer, a principal with Washington (D.C.)-based DeKeiffer & Horgan, who is not involved in the current suit, says that companies like Fendi not only will not sell directly to Wal-Mart, but they don't even want to be associated with a discounter such as Wal-Mart.

DeKieffer says that it's possible that Wal-Mart was able to secure original Fendi goods by figuring out a leak in Fendi's supply chain. But he would be surprised if that was the case, given the high costs of such lawsuits. "Most companies are usually real sure before they pull the trigger (of filing a lawsuit)," sys deKeiffer.

MORE THAN AN ACCIDENT. If indeed Fendi can prove that the products were fake, Wal-Mart will have some explaining to do. After all, Wal-Mart is only too aware of such fake items in the market, as the lawsuits of the past decade have shown. In fact, in a statement after losing the case against Tommy Hilfiger, Wal-Mart said that it tracks invoices from the manufacturers to the sales floor.

In 1999, New York Judge John E. Sprizzo asked Wal-Mart to explain why it had violated a 1996 court injunction to stop selling Hilfiger knock-offs. A Wal-Mart executive tried to pass it off as an accident, but admitted that it hadn't told its clothing buyers about the injunction. At that moment, an exasperated Judge Sprizzo said: "That's chutzpah if I ever saw it."

Indeed, many experts believe that a similar corporate attitude could be behind the Fendi lawsuit. After all, Wal-Mart is so big, with annual revenues that top $320 billion, that paying $6 million to settle a lawsuit barely makes a dent in its financials. "You may be just seeing the symptoms of corporate hubris," says Robert Passikoff, president of Brand Keys, a brand consulting firm in New York.

Passikoff, who measures brand loyalty, says that the perception of Wal-Mart as a brand might erode over time if people read more about such cases where it improperly stocked products in its stores, but that ultimately Wal-Mart knows that many people walk into its stores because it offers the lowest price on many products. "Has it helped Wal-Mart's corporate reputation? No. Will you see a massive drop in sales? Absolutely not," says Passikoff.


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