July 28, 2009

(BN) LVMH, Chanel Defeat EBay, Force EU to Modify Draft Law on Internet Sales

July 27 (Bloomberg) -- Luxury goods makers LVMH Moet Hennessy Louis Vuitton SA and Chanel SA may win more control over how Web-based retailers sell their products after a last- minute lobbying campaign over a draft European Union regulation.

Makers of watches, handbags and perfumes argued early proposals would allow EBay Inc. traders to sell unlimited amounts of their goods on the Internet, undermining investments in stores in expensive areas. The latest version, obtained by Bloomberg News and scheduled for release as soon as tomorrow, gives brand owners the right to dictate the ratio of products sold online compared with "bricks-and-mortar" shops.

"EBay has done a huge lobby campaign and it doesn't look like they have been successful," said Denis Waelbroeck, a partner at Ashurst LLP who represents the European Cosmetics Association, a perfume makers' lobby group in Brussels. "I'm pleased with the text, though there are still issues."

Brand owners such as Chanel, known for $2,000 quilted handbags and No. 5 perfume, and Cie. Financiere Richemont SA, the world's largest jewelry maker, argue that removing restrictions on Internet sales will damage an industry with annual sales of 65 billion euros ($92 billion). Cosmetics and perfume makers contend consumers need to touch, smell and experience products at stores and claim that online retailers degrade product image.

'Print Money'

Those arguments, presented by Chanel designer Karl Lagerfeld when he met European Competition Commissioner Neelie Kroes in Brussels on Feb. 11, helped persuade regulators to change an initial draft. Under that text, Internet resellers would have had the right to sell unlimited quantities of luxury goods as long as they were authorized distributors through bricks and mortar stores.

After the draft was circulated in April, luxury goods companies' lobbying campaigns switched into high gear. Lawyers for the companies, as well as company executives, urged Kroes to change the wording. The final version adds a footnote that gives the goods makers more control over sales.

"Selective distribution, whether real or virtual, has always been fundamental for luxury brands," Andrea Ciccoli, a fashion industry analyst for Bain & Co. in Milan, said in an interview about an earlier version of the law. "Not just anyone can sell products by Chanel and Prada in stores and there's no reason why they should be able to on the Web. It would be like giving people a license to print money."

The European Commission, the 27-nation EU's antitrust regulator, will distribute the new guidelines on the extent to which companies can restrict trade through authorized dealers this week, said Jonathan Todd, a spokesman for the commission.

'Consumer Interests'

The plans explain how the regulator will apply competition rules to agreements between producers and sellers. The regulations needed to be updated to take into account the growth of e-commerce and potential barriers to online sales.

EBay, owner of the most visited U.S. e-commerce Web site, said that the commission needs to be sensitive to any restraint of online sales.

"The priority has to be consumer interests," San Jose, California-based EBay said in an e-mailed statement.

Paris-based LVMH spokeswoman Sonia Fellmann declined to comment. Cathy Daumerie, a spokeswoman for Chanel in Brussels, also declined to comment.

The guidelines aren't a complete victory for luxury goods companies. A section on "hardcore restrictions" -- specific rules that prevent distributors from restricting retailers' sales -- may put luxury goods makers' distribution systems at risk of being undermined by Web resellers, said Jacques Lafitte, founder of antitrust consulting firm Avisa Partners in Brussels.

According to the plan, companies will no longer be able to stop an Internet retailer from selling their goods in countries where there isn't a distribution system.

"The commission has made up its mind on 99 percent of the issues, and most of it makes perfect sense," said Lafitte, who has lobbied for luxury goods makers. "If they were consistent with what they now seem to want, they should ensure that there isn't a backdoor that undermines selective distribution systems, but this extra bit can't be taken for granted."

To contact the reporter on this story: Matthew Newman in Brussels at Mnewman6@bloomberg.net .

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