no third solution

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MSRP and Dealer Agreements: Burton vs. Sierra Snowboard

March 12th, 2010

Note: A slightly modified version of this post first appeared on aGNARchy.

This past week there’s been a big shakeup in the snowsports industry. An online retailer (sierrasnowboard.com) deeply discounted Burton merchandise, apparently breaking some retail agreement. As a result, Burton is pulling the plug on Sierra who will no longer be allowed to sell Burton snowboards and softgoods. Sierra says,

Last week after our two day hardgood sale, Burton decided to pull the plug on our dealer agreement with them. This means that at this time we no longer have the opportunity or ability to buy or sell any additional product of theirs. Yes, we do have dealer agreements about when we can discount and how much, but we’re not the only ones who play with fire like last week.

No More Burton Discounts on Sierra

This has prompted a firestorm among snowboard bloggers and folks who follow the industry news. There’s hate on both sides, because Sierra is like the “Wal-Mart” of snowsports (except they sell name brands) and Burton dominates market share for hard- and soft-goods. I blogged about this briefly yesterday morning trying to keep it as unbiased as possible; keeping with that spirit I wanted to get my economics on.  Let’s get some details out of the way, first.

  1. People get bent out of shape because Sierra is allegedly using discounts trying to superwin, but Burton at one time tried to claim intellectual property on the entire idea of “snowboarding”, essentially trying to take royalties on every snowboard ever made by anyone, anywhere, ever. They’re just looking out for their own bottom-line, too.
  2. Burton is flexing their muscles more because they recently entered the retail game, with their own direct-to-consumer sales on the interhighway and flagship stores. But you know what? They’re only doing this to make more money and take more market share. Double-standard, anyone?
  3. The fact of the matter is that even with the discounts, the internet only accounts for ~18% of snowboards and ~25% of softgoods sales, so they’re hardly “ruining” the industry (via Transworld Business).
  4. Industry sales are down like 9%, but Burton sales are down close to 15%. Ouch!

Consider the Spin

If the retailers were banding together to keep prices high, people would raise hell over price-gouging, collusion, and cartelization. This is not different, it’s just being spun differently. When some retailers break stride with the industry and buck trends, (of course they’re just trying to make money, but that’s not a freaking crime, yet), the competition’s spin-factories start working over time, pumping out the “RUINZ TEH INDUSTRY” arguments, and you take it hook, line, and sinker. Unbelievable.

Plus, I kinda thought everyone liked low prices? Remember when CD players cost like $700? Or when a 128kb mp3 player cost like $150? They give those things away now for about $20. The companies are still making money, and we’re all happier for it.

Do Discounts Ruin the Industry?

One popular argument is based on the “war chest” myth, really an economic fallacy. It goes like this: the big corporation has a”war chest” of monopoly profits which it uses to sustain itself while taking price and driving its competition out of business, after which point it will raise prices again and thus be bad for everyone in the long run. The “war chest” argument is total B.S. for at least two obvious reasons:

  1. They don’t have a war chest of monopoly profits.
  2. Taking price on large market share means taking astronomical losses, it’s the equivalent of doubling your losing bets while playing blackjack.

It’s simply not a sustainable business model to sell product below cost, and nobody who uses this tactic remains in business for long. What I said before is important, and true:

[O]nline and discount sales hasn’t killed any industry yet. But we constantly hear about how it’s going to destroy snowboarding or the music industry or whatever. What it does do is to force change in the way things are done. … It’s the organizations which are most able to adapt to changing pressures that succeed in the long run.

The “online” is changing the way product is pushed to consumers, and in many ways this game is still evolving. This is the nature of our dynamic environment, there is no stasis. People are always going to try and find a better, faster, cheaper way to do things. Thirty years ago the airline industry told the FAA that Southwest Airlines was going to destroy the airline industry. Didn’t happen (what did happen was air-travel became more accessible and affordable to more people). In the long run, competition benefits all of us.

It’s Not Fair to Small Retailers and “Core” Shops!

An important lesson in economics and law is that most legislation aimed at fostering “competition” in order to “save the industry” usually ends up protecting certain competitors at the expense of the consumers.

The correct response to “it’s not fair to the small retailers” is that what’s “not fair” is the MSRP agreement in the first place. Of course there is inequity because Sierra has the clout to reneg on this agreement, but the root of the problem is ultimately market-power gained in an unfree market. Keep this in mind at all times.

If the manufacturer wants to prop up the small retailers, then charge a higher price and don’t give bulk discounts to the online megastores; build their “minimum acceptable price” in to the wholesale price and discriminate against different retailers. Certainly a brand like Burton (Anon, AK, Foursquare, Forum, etc.) has the market power to do this. Unfortunately, you could probably dig up a dozen precedents in anti-trust case law which would explicitly preclude the manufacturer from offering favorable pricing terms to certain retailers and “unfavorable” terms to others.

The fact of the matter is that “core” shops are going to survive. They’ll go online if they haven’t already, and market nationally as well. This flattens prices and margins everywhere. And they’ll still thrive on foot-traffic and personal service.

H.R. 3190 – A Legislative Solution?

Enter government… H.R. 3190 recently passed the House judiciary committee, it would “effectively ban manufacturers from dictating minimum prices to dealers.” But MSRP agreements are always forward looking and so Resolution 3190 ultimately isn’t going to solve the problem.

My take is that this is typical reactionary legislation that we should expect from government which is constantly trying to fix problems of its own creation. Otherwise, if a manufacturer wants to “dictate” the price, they can ask (i.e., require) their retailers to adhere to certain terms, and if the manufacturer disapproves of the retailers marketing/sales tactics, pull the plug like Burton is doing to Sierra.

Summing it Up

The idea that people would still be buying all this equipment at full MSRP if it wasn’t discounted is in direct contradiction to everything we know about price theory. All else being equal, for normal goods, people will buy a larger quantity of a product when it is offered at a lower price. If there is excess supply in the market, prices need to drop to reach equilibrium and clear out inventory.

Someone once told me that every year Ferrari takes orders for its new model. Maybe they get 1,000 people who put down a deposit to reserve a brand new Ferrari. So Ferrari goes ahead and manufactures exactly 999 new cars, thus ensuring that they’re not overproducing, in order to maintain command over a super-premium price.

Now, obviously I’m not proposing anything that extreme. It couldn’t be done with the snowsports goods, anyways, but you get the picture. There are brands out there that don’t over-saturate the market. Never Summer comes to mind, but they only make like 13,000 boards every season. The Lib Tech T-Rice is pretty hard to find these days, too. No idea how many of those they made, but what matters is they made approximately the right amount to command full MSRP on all of them.

The bottom line is that when you overproduce, there is going to be a loss on unsold merchandise, or a loss on discounted merchandise. Seems to me like Burton wants their retailers to absorb the lion’s share of these losses, and that’s not “good for the industry”, either.

Full Disclosure: I’ve bought merchandise from Sierra in the past. I’ve owned a Burton board (which I coincidentally bought from Sierra at a super-steep discount!), I love my Burton Cartel bindings, and some of my softgoods are Burton, too. I don’t have a vested interest in either side of the argument.

no third solution

Blogging about liberty, anarchy, economics and politics