Scathing Sports Direct investigation shows how discounters can destroy brand value
A Dispatches programme this week attempted to lift the lid on the business dealings of Mike Ashley and Sports Direct. As well as giving an insight into the working conditions at the discount retailer’s warehouse and back office, the programme also unveiled the dubious pricing strategies employed.
Secret footage in the Midlands warehouse showed how staff were encouraged to cover up RRP stickers with a higher price, and then cross them out to give the impression that buyers were receiving a higher discount and bigger bargain than what was really on offer. A consumer law expert suggested that this was a direct contravention of pricing guidelines, which may well lead to an investigation by the Office of Fair Trading.
But with these questionable tactics under scrutiny, Sports Direct could face a bigger fallout from the documentary if big brands turn their back on the value retailer as a result of the brand damage caused by this discount pricing strategy.
While Sports Direct is known for providing deep discounts on sportswear for those seeking affordable everyday clothing, big brands like Nike and Adidas often target serious sports enthusiasts, those willing to shell out between £50 and £150 on running kit and the latest sports gadgets and gizmos.
These more premium brands are carefully crafted and augmented through promotional activity such as event sponsorship and fitness apps to create a brand reputation centred on a healthy lifestyle rather than simply sportswear. The consumer confidence and brand reputation built up through these channels could well be undermined by Sports Direct’s pricing strategy and deep discounting – ultimately having a negative impact on their brand value.
This is of course an issue that goes beyond Sports Direct and sportswear brands, and for every popular brand there will be a toss-up between how retailer discounting can help boost sales and the extent that discounting may hinder or derail the brand proposition. In response to this dilemma, brand owners may choose one of two routes: mass distribution so as to drive short-term sales, or focusing on selective distribution in a bid to maintain and protect the brand value. By creating an air of exclusivity for high-end products, companies are able to protect the long-term revenue potential of their brands.
It is rare for brands to take legal action against retailers due to the commercial implications, incurring the wrath of the retailer and being delisted from their distribution channels – something some brands cannot afford to do. If legal action is pursued, it is most likely to be focussed around own brand products passing off as premium brands through their branding and overall appearance.
The courts have addressed the issue of brands suffering an economic loss as a result of retailer discounting in the past – most notably in a 2009 European Court of Justice case where the court ruled that luxury brand owners like Christian Dior can in some circumstances assert specific trademark rights in order to oppose resale of its items by discount retailers under the terms of its license agreement. At the time, it was argued that this judgment widened the scope of how and when discount retailers are exposed to trademark infringement claims when they sell so-called ‘luxury goods’.
In the case of Sports Direct, it would be interesting to see if some of the higher end brands would look to the courts to apply a similar approach in light of the Dispatches programme highlighting the misleading pricing strategies of the retailer.
John Illsley is a valuation director at brand valuation consultancy Intangible Business