Sales & Marketing

14 Apr 2009

The Warehouse Decision: A Bargain?

The Warehouse Limited recently gained unwanted attention when the Commerce Commission issued proceedings, resulting in The Warehouse pleading guilty to numerous breaches of The Fair Trading Act (Act) and total fines of $209,600. This FYI describes what was wrong with the advertising, takes lessons from the decision and considers whether or not the Court went far enough.

The Law

In short, the Act prohibits behaviour that is either misleading or deceptive, likely to mislead or deceive, and/or makes a false or misleading representation. Whether consumers were actually misled or whether there was an intent to mislead is irrelevant.

Previous Commission action

The Warehouse had previous convictions under the Act and has previously provided undertakings acknowledging that there were systemic compliance problems.

The 'problem' advertisements

The problem advertisements were variously included in catalogues, flyers, in-store advertising and product labelling. They ranged from specific in-store advertisements to nationwide mailers.

The representations made in the advertisements can be divided into four basic categories: pricing, exclusivity, bait advertising and labelling.

• Pricing: A "Madagascar" DVD was advertised for $10 and distributed in 1.3 million mailers nationwide. While The Warehouse intended the $10 to be a deposit only, many consumers thought that the total price of the DVD was $10. Other goods were labelled with pink stickers as an "Advertised Special" or on sale "for a limited time" when they were available at the same price prior to the 'sale'. 
• Exclusivity: Certain products were claimed as being "exclusive to The Warehouse" when they were available at various other stores nationwide. This form of advertising has the capacity to harm rival traders. Thinking that the product is not available elsewhere, consumers often don't bother comparing prices and don't get the opportunity to support their retailer of choice.
• Bait advertising: Various products ranging from scooters to "My Little Pony Twin Gift Packs" were advertised for sale at a specific price, but there was not a reasonable quantity of stock to support the advertisements. This is called 'bait' advertising because customers are attracted to cheap prices and, once it is discovered the goods are not available, the customer will often switch to buying something more expensive. 
• Labelling: The contents of three types of duvet inners manufactured in China were incorrectly labelled as containing certain percentages of goose down and duck down clusters when the real content was significantly less. These false representations were contained on outer packing for the duvets and on printed labels attached to the inners. The Warehouse was advised of this and commissioned its own testing which showed that the content of all three deviated significantly from that claimed on the labels. Not only did The Warehouse continue advertising and selling the product, but it also reduced the price in what the Commission alleged (and the Court agreed) was a "deliberate" bid to sell them quickly whilst increasing sales.  In purchasing items such as these, consumers are wholly reliant on content labelling. The average consumer does not have access to a testing laboratory to check the true composition of product.

Lessons to be learnt 

This case highlights some basic principles that advertisers need to be reminded of and also offers the opportunity to consider some simple steps to either prevent or mitigate breaches of the Act.

• Staff training: Adequate staff training on employee responsibilities under the Act is an imperative. If you have already had brushes with the Commission, you must modify your business practices to not only ensure compliance with the Act, but also to comply with any undertakings you may have given to the Commission. 
• Legal advice: Prevention is better than cure - ensure all your advertising and promotional material complies with the Act. If you are unsure, seek legal advice BEFORE you advertise. The wider the distribution of your advertising, the higher the burden of mitigating your errors.
• Accurate labels: Ensure the content of what you sell is accurately reflected on the label and if you discover a problem don't be an ostrich and bury your head in the sand. Instead, consider options such as recalling the product or re-labelling it. Product recalls are not always easy - especially in over the counter sales. Don't continue to sell the mislabelled product - no matter how much you may have reduced the price. Immediately re-label the product with the correct information. 
• Clarification notice: If a product is incorrectly advertised at the wrong price, consider placing clarification notices next to the product, honouring the price, or offering the consumer a pacifier such as gift vouchers. 
• Sufficient stock: Have sufficient stock to meet consumer demand. To avoid being accused of bait advertising, consider offering a "raincheck" on those items. That way you'll please the consumer and the Commission.
• "Sale": If an item is on "sale" make sure it is: don't place stickers such as "SALE", "Advertised Special", "Special" or "Reduced" on products when they are the same price as before.
• Supply Chain: As more and more products are manufactured outside of New Zealand, it is increasingly important to ensure that those in your supply chain are able to offer you the assurances you need to substantiate the claims you make about them. Ask yourself whether you have made reasonable enquiry of your supplier and what assurances are in your supply agreement.

Who really got the bargain?

Arguably, the Court gave lip service to the need for penalties to act as deterrents when profits on the duvet inners alone amounted to $433,763.10, compared with a total fine of $209,600. This begs the question - who really got the bargain? What can't be easily quantified, of course, is consumer backlash and the tarnishing of a brand.

In light of the current economic climate, the Commission has suggested there will be a rise in misleading advertising and recently urged consumers to be aware of their rights under the Act. Don't allow yourself to appear on the Commission's radar - learn from the mistakes of one of New Zealander's largest retailers. You know we are only a phone call away if you have any doubts.

Authors

Peter Stubbs

Partner - Corporate & Commercial

DDI: +64 9 977 5010

Mobile: +64 21 955 230

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Gwendoline Keel

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5201

Mobile: +64 21 242 6639

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Craig Nelson

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5185

Mobile: +64 21 918 309

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