DRUGSTORES SEE RULING AS BIG WIN

Byline: Vicki M. Young / Andrea M. Grossman

NEW YORK — Drug Emporium’s recent court victory against Sebastian International did more than catapult drugstores’ confidence in selling “salon-only” products. It helped them win a battle in their own war, one that pits them against mass outlets such as Wal-Mart, Kmart and Target, which have stolen hair care category sales and market share from drugstores in recent years.
As reported, a California trial court in Los Angeles has ruled that Drug Emporium can continue to sell Sebastian’s salon-only hair care products, based in part on the so-called “first sale” doctrine. The ruling, which William C. Conkle of Conkle & Olesten, an attorney for Sebastian, said was appealed last month, represented a victory for drugstores, even to those which have never been involved in any legal action with salon-only suppliers.
Angela Aguiar, category manager of Brooks Pharmacy, said while the Drug Emporium ruling “does not affect” her chain since Brooks has never been taken to court or even been asked to remove salon-only products from shelves, the hair care category is one that has become very competitive. “The hair care category overall for drugstores has been losing share to mass [channels of distribution] over the past several years,” Aguiar said. “Salon-only brands contribute to higher dollar sale rings and help maintain gross margin. The key is keeping them in stock.”
Indeed, sales of hair care products have funneled from small and large drugstore chains to stores such as Kmart, Target and Wal-Mart in recent years. More competitive prices and a wider range of categories, some believe, make shopping at mass stores more appealing. According to data from Information Resources Inc., drugstores’ share of the hair-care dollars dipped to 22 percent for the 52-week period ended Dec. 24, a four-year low. Mass channels, however, commanded 43 percent of the dollar share, a four-year high.
Whether procured through diversion or other means, the channels where consumers can buy “salon-only” products continue to widen. As evidenced by other pending Sebastian-related lawsuits, even food chains such as grocery stores and supermarkets have been brought into the fray.
Several retailers on the supermarket and drugstore fronts — such as Randalls Food Markets Inc., Phar-Mor Inc., Rite Aid Corp. and CVS Corp. — were named as defendants in a Los Angeles federal court lawsuit filed by Sebastian last year, charging the retailers and at least 20 other entities with racketeering, unfair competition, trademark infringement and counterfeiting. The other named defendants include U.S.-based salons and individuals, as well as entities from Italy. The lawsuit concerns the sale and distribution of allegedly counterfeit cans of the Sebastian Shaper hair spray.
According to the lawsuit, “over 750,000 Italian-produced counterfeit cans of Sebastian hair spray have been detected and the scope of the undetected counterfeiting may be enormous.” The complaint further said that the aerosol cans were identical to Sebastian’s cans and were decorated with Sebastian’s artwork, making detection virtually impossible.
Sebastian also charged that the Italian-made cans are filled with cheap imitation hair spray that has a formula different from the one Sebastian uses, and that the “propellants used in the counterfeit hair spray violate state and federal air-quality laws.” The counterfeits, Sebastian alleged, even have fake codes applied to deceive consumers and regulators. The manufacturer added that the retailers continued to market Sebastian products without its holographic labels even after being notified that product without the holographic labels could be counterfeit.
The California state and federal court actions aren’t the hair care manufacturer’s only legal battles. Sebastian, as a defendant, is embroiled in a dispute with Albertson’s Inc., a food chain, also over allegedly counterfeit cans of hair spray. Albertson’s sued Sebastian in a Phoenix federal court on Feb. 5, 1999, charging Sebastian with unfair competition, unlawful restraint of trade and unlawful resale price maintenance.
A year later, Sebastian filed a countersuit against Albertson’s charging the retailer with selling counterfeit goods. For its part, Albertson’s issued a recall of the Sebastian product in April 2000 to investigate whether any of the cans of hair spray came from Italy, even though it stood by its claim that it has always sold genuine Sebastian hair care products.
A spokeswoman for Albertson’s said, “Many courts including the U.S. Supreme Court have concluded that it is legal to buy and resell genuine salon products+.Sebastian’s attempt to restrict sales to salons only reduces competition so that the consumer pays a higher price.”
To be sure, public demand for the products appears to be insatiable, according to the increasing sales at drugstores and other retail channels.
Other drugstores, in fact, depend on salon-only products to make up for sales that are lost to mass stores.
Jon Rudden, vice president of merchandising for Happy Harry’s, said his salon-only business is “reasonably significant,” about 5 percent of the Newark, Del.-based company’s overall hair care business. Greg Heller, senior health and beauty aids buyer for Tulsa, Okla.-based May’s Drug Stores, is also pleased that salon products are on May’s shelves.
May’s distributor, which Heller declined to name, offered the retailer indemnity as an incentive to get the products onto its shelves. “If something happens, they’ll pay the legal penalties, but it also eliminates us buying from another source. This is a big business for them, too,” Heller explained.
According to Heller, many salon-only suppliers buy back their products from May’s — at the chain’s retail price — just to get their brands off the drugstore’s shelves. Sebastian, however, “never bought their product back,” he said.
Of course, keeping salon-only product in drugstores could become more difficult, Heller acknowledged, if Sebastian prevails on its appeal or other manufacturers start taking legal action against drugstores.
Michael Malkin, assistant general counsel for Phar-Mor, believes that Sebastian’s legal maneuvers don’t pack much punch. “Phar-Mor does carry Sebastian products, but we buy them from legitimate, normal channels of commerce,” Malkin said. He added that Phar-Mor “never received any counterfeit goods” and that Phar-Mor conducted store-by-store searches to uncover any Sebastian products carrying certain lot numbers that had been tied to counterfeit Sebastian units, specifically their Shaper and Shaper Plus hair sprays. Tours of Phar-Mor stores “did not uncover any Sebastian product with suspect lot numbers,” Malkin said.
“The whole point of bringing in retailers is because if [Sebastian] is menacing enough, the boatloads of money this costs to defend” may not be worth spending, Malkin said. “They are bullying us not to go through with all of these motions.”
Salon retailers, on the other hand, have quite a different story.
“It’s fairly clear there is a thin line between the ownership of product and to what point the retailer has the responsibility of contractual relationship with manufacturers and distributors, who have specific territories,” said Robert Hobe, vice president of product services for Ratner company, parent of the Hair Cuttery chain of salons, based in Falls Church, Va. “That is part of the problem with [the Drug Emporium California state-court] ruling, combined with not looking at the best interests of the supplier.”
Certain Hair Cuttery salons, which are primarily in strip malls, have suffered from the sale of salon-only products in drugstores, according to Hobe. The vice president also doesn’t believe that drugstores make margins on salon-only products.
“The margins the drugstores are working on are so low. They are really working it as a convenience, hoping customers will come in and buy Paul Mitchell and then buy something else,” Hobe said.
Lyn Kirby, president and chief executive officer of Romeoville, Ill.-based Ulta stores, said drugstores selling salon-only product affect her business, but not as much as they might affect others. “We are such a destination for our breadth of products that it doesn’t hurt us greatly,” she said, “but we are always watching mass merchants.”
For now, salons and other retail chains might also want to keep an eye on potential legislative action that could impact on what non-salon retailers may be able to sell on their store shelves.
John Hiler, executive vice president and chief executive officer at Beauty & Barber Supply Institute, an international association for those in the professional salon industry, told WWD, “We are still pursuing the adoption of legislation that deals with consumer safety issues. We ran out of time during the Congressional session last fall, and we are now in the process of redrafting the bill.”
BBSI’s focus is on anti-tampering, Hiler said, whether on the chemical formulation front or the obliteration of batch and bar codes. He pointed out that obliterated codes prevent manufacturers from being able to recall products, and that improper chemical mixes pose risks to the consumer.
According to Hiler, “Diversion has been going on forever. There is no silver bullet.” He explained, “What we need is an industry-wide effort to seek out and monitor the distribution of product at all levels from manufacturers to distributors to salons. We don’t know [exactly] where the diversion comes in from. We know it’s from salons, collectors, distributors and manufacturers’ warehouses, but with the obliteration of codes, you can’t track which party is responsible.”