Wednesday, October 25, 2006

The conclusion of the hypothetical and alleged saga

Let’s start with a brief overview of antitrust law. (Yeah, I know, I thought it was boring in law school, too. I'll be quick.)

Antitrust law is designed to protect competition and the free market by outlawing agreements and other activities that are bad for competition and the free market. Sounds simple enough. But antitrust is one of those areas that’s very intricate and specialized; it’s also one of those areas where theory doesn’t always mesh with reality.

One of the ways that antitrust law tries to protect the free market is by outlawing price restraints, or practices and agreements that artificially set or preserve prices. The idea is that the free market should determine price. Normally there’s a bit of up and down in pricing: this store sells milk for $5 a gallon, then the store across the street charges $4.75 and makes up the difference by attracting more customers, then the guy across town charges $4.50 but marks up the price of his bread, while the guy who has the only store for fifty miles around can get away with charging $5.50. That’s competition and the market at work. Imagine what would happen if all the supermarkets of the world agreed to sell milk for exactly $5 a gallon, instead of the market determining what people are willing to pay. Once the supermarkets agree to set an artificial price, nobody can get the milk for less than $5, no matter where they are or where they shop. Competition over the price of milk has been eliminated.

Price-fixing is good for the seller: the seller gets a higher price for the goods than the free market necessarily would produce, and the seller knows that the buyer can’t shop around for a better deal elsewhere. Some sellers may not like price-fixing, however; if they are able to offer a product for less, they want to be able to price it lower and recoup the difference in volume.

Price-fixing is primarily bad for the consumer, and you can see why: the consumer is paying more. Depending on circumstances, maybe a lot more.

This kind of agreement among sellers is called horizontal price-fixing, because it involves an agreement to fix prices among people at the same level of the market.






In this diagram, the “horizontal” agreement is between the sellers -- the red line. All the people participating in the agreement – the stores -- are at the same level of the selling chain. Horizontal price-fixing might involve all the makers of a product colluding to agree on price, or all the distributors agreeing on price, and so on. It’s well-established that horizontal price-fixing is bad for competition and therefore illegal under antitrust law.

There’s another kind of price fixing: vertical price-fixing. Vertical price-fixing involves actors who are at different levels of the selling chain colluding to determine price. The Milli Morris example (allegedly! allegedly!) would be analyzed under the law concerning vertical price-fixing: Milli Morris is the maker, and Yolanda's Yarns is the store in my diagram (here, there isn't a distributor; the maker sells directly to shops). Milli and Yolanda are at different levels of the retail food chain, so the alleged price-fixing is vertical.

At first blush, you might think that vertical price-fixing is illegal too, and that it’s all bad for the customer. Not so fast.

Have you ever noticed that no matter where you go to buy a Ralph Lauren Polo shirt (what can I say? my husband is a Skippy with expensive taste), the price is the same everywhere? Exactly the same? You may hit a once-yearly sale, or see remainders from last season marked down a bit, but otherwise Ralph Lauren Polo shirts are always exactly the same price. Coincidence?

You’ve probably seen tons of other products that have a manufacturer’s suggested retail price, or MSRP, on them. Cars, magazines, Tastykakes, whatever. These prices are even printed onto the product or its packaging by the maker. How can that be? Isn’t that vertical price-fixing, an agreement between the maker and the shop to set a price? Here’s where it gets bizarre. It is generally true that vertical price restraints – the maker and the seller agree to charge X amount for the item – are illegal, just like horizontal price restraints are.

But my brief foray into antitrust research suggests that MSRPs are not, by themselves, illegal. The Federal Trade Commission says:

The antitrust laws, however, give a manufacturer latitude to adopt a policy regarding a desired level of resale prices and to deal only with retailers who independently decide to follow that policy. A manufacturer also is permitted to stop dealing with a retailer who breaches the manufacturer’s resale price maintenance policy. That is, the manufacturer can adopt the policy on a "take it or leave it" basis.

So a manufacturer, including a yarn company, can decide it has a "policy" of only selling to shops that abide by the MSRP. It can decide that it won't sell to such shops if they don't consistently charge the MSRP. The legal distinction that's being made, I suppose, is that the maker has the right to decide who it will do business with, and as long as the maker and the seller aren't meeting in a smoke-filled room to come to an express agreement, this is considered lawful. I can't speak to whether this makes sense or not; this concept of permitting MSRPs has been subject to criticism but like it or not, agree with it or not, the FTC says it's okay.

As someone who loves to score yarn cheaply, this grieves me. Everyone feels pinched with their money and everyone would like to get the maximum yarnage for their knitting buck. And the less you pay per skein, the more skeins you can buy with your knitting budget. Required minimum prices, whether they are considered MSRPs or vertical price restraints, tend to raise the cost of yarn by prohibiting discounters. There are other rationales for why we shouldn't permit vertical price restraints: for example, one might argue that by lowering prices, the knitting purchaser gets to try yarns she might otherwise not be able to buy, thereby getting hooked on them and becoming willing to buy them again, even if not discounted. Or that the more knitting people do, and the more they enjoy the process and the finished result (presumably the knitter would enjoy working with nicer yarn more than with lower quality yarn, assuming higher price means better quality), the more they’ll want to continue knitting and the greater the likelihood they’ll turn into hard-core, long-term knitters, thus buying more over the long haul.

But it’s never that simple, is it? While vertical price restraints may seem like a no-brainer, if you look a little deeper, you may see waters that are murkier than you thought.

Imagine a high-end, high quality yarn; I’ll call it Yummy Yarn. Suppose that Yummy Yarn costs $5 a skein wholesale and sells for $10 a skein retail (under a keystone pricing model). Then one day, YarnzRUs.com bursts onto the scene. The dot-com sells Yummy Yarn for $6 per skein, undercutting all the other retailers who sell it for $10 a skein.

How can this be bad, you say? Isn’t cheaper yarn an unqualified good?Well, maybe not if you’re Yummy Yarns. If one internet retailer starts offering Yummy Yarn for only a smidgen above wholesale, a lot of other retailers are going to be unable to sell Yummy Yarn, whether at their shop or on-line. They may have an occasional customer who doesn’t shop on-line, and therefore doesn't have access to the discounted price, but overall, sales of Yummy Yarn everywhere but the dot-com discounter are going to dry up as consumers purchase there. When a great many retailers can’t sell their Yummy Yarn inventory, or their costs are such that they just can’t charge only $6 and still make a profit, they won’t order it anymore. Yummy Yarns is going to lose business. Yummy Yarns might even go out of business. No more Yummy Yarns.

Let’s consider another, similar hypothetical. Selling yarn isn’t the same as selling, say, socks. Everyone in the world knows how to use socks. Everyone in the world knows how socks work and people don’t walk around with serious questions about their socks. But yarn is different. Yarn is used for knitting and crocheting, and learning how to knit and crochet are skills that often require a lot of technical assistance. A large part of my job at my LYS is helping customers with questions and problems about their projects. Easy questions, like what’s a yarn over, and harder questions, like what went wrong with my cable pattern? And selecting the right yarn for the right project can also require assistance from a knowledgeable salesperson: is the gauge right? will it drape? does it have good stitch definition? will the mohair's halo obscure your lace pattern? will it sag? and so on.

Joe’s Sock Emporium doesn’t need to hire salespeople with a whole body of knowledge about how to put on socks. Jane’s Knitting Palace, on the other hand, needs to hire knowledgeable, experienced sales clerks who not only can sell yarn, but can sell the right yarn, and help customers with their technical questions.

And there’s the rub. A good, service-oriented bricks-and-mortar yarn shop needs to pay those knowledgeable and experienced salesclerks. They also need to pay rent, electricity, keep their shop clean and painted and the rugs shampooed, and a myriad of other expenses to keep their physical plant up and running. An internet discounter doesn’t. An internet-only seller can fill orders out of her basement, or out of some cruddy cheap-ass warehouse in a bad part of town, and no one will know the difference. And if you have a question about your project, it's highly unlikely that you could, um, email the shop and expect a prompt and correct answer. (Can you see the email correspondence? “Attached is a JPEG showing my lace scarf. Please tell me what I did wrong.”) Even if the internet seller is tops in service and responsiveness, the costs are not the same as the yarn shop's.

This is what is sometimes known as a “free rider” problem. The reputable bricks and mortar shops provide the free one-on-one assistance, they allow you to sit in their comfy chairs and yak while knitting, they give you a place to feel and touch the yarns, to see what colors it comes in, maybe to handle a swatch. They may give you free patterns or freely give of their experience and advice. And then you go and order the product from an internet discounter, who provides none of these things (and therefore doesn't have to pay the costs associated with them). The internet discounter is free-riding off the services and amenities that the LYS provides. If retailers want to prevent free riders, then, one way to do it is to set a minimum price for all retailers to follow.

Finally, there’s the prestige factor. Those of you who are, ahem, my contemporaries may remember when expensive perfumes like Giorgio and Obsession were only available at high-end department stores. The fragrances were distinctive and if you knew someone who reeked smelled of Obsession, you knew they’d paid a pretty penny for it at Bloomingdale's or Nordstrom's. Nowadays, you can find the same perfumes at CVS, or at Marshall’s or other places, being discounted. The snob appeal is gone. The products, though cheaper, are, in a weird way, less desirable.

Some people -- even yarn manufacturers -- believe it’s important to maintain this exclusivity, this high price, the prestige as part of their market niche. They don’t want to see their yarns sold at a deep discount on Ebay, or available at a big box craft store; they want to maintain a high-end cachet. I'm not saying whether this is wrong or right: it just is. And some yarn manufacturers don't give a rat's ass about the prestige, but they know that people who buy their yarn will benefit from the skills and services that the full-service yarn shop can offer. If Patsy Purl makes a project out of an unsuitable yarn and hates the finished garment, she may blame it on the yarn manufacturer. ("I'm never making a sweater out of Yummy Yarn again!") If, on the other hand, a knowledgeable salesperson deters her from an unsuitable choice and helps her pick a better one, Patsy Purl may be hooked on Yummy Yarn for life.

I point all this out so you can appreciate the complexity of some of these issues. You don’t want your favorite yarn shop to go out of business or stop carrying your favorite yarns, and you don’t want your favorite yarn manufacturer to stop making yarn either. Cheap yarn is nice, but it’s also good to take a broader view. Internet sellers who don't have a bricks-and-mortar presence don't always think about the broader effect they are having on the market.

Now regardless of all of these rationales, the fact remains that vertical price restraints, actual agreements between the distributor, say, and the LYS about price, are illegal. There are other ways that makers address some of these problems:

  • Adopt a MSRP policy as described above.
  • Require that sellers have a traditional physical yarn shop -- not just an internet site -- as a prerequisite to sales. That way the maker knows that all sellers are all on a level playing field when it comes to overhead, free riders, providing technical assistance and such.
  • Some yarn companies have geographic limitations or territories, and they only permit one authorized retailer within a certain number of miles.
  • Maintain the traditional distinction between sales to yarn shops and sales to large national craft chains, selling to the former and not the latter. (Large chains buy in quantity, they can use items as loss leaders in a way that small shops can’t, they run discounts and offer coupons, all leading to the undercutting of price. Craft stores tend not to have salespeople with the same level of expertise in knitting. There’s also an exclusivity element: if you go into a yarn shop, you expect to see things that the craft stores don’t carry, and seeing the same yarns available at both places devalues those yarns, at least in some folks' eyes.)
  • Have a minimum advertised price: the seller agrees to advertise a price no less than a specific minimum, so that the impact on other sellers is reduced.
  • Other secret arrangements, that may or may not be illegal, like selling at a lower wholesale price to sellers who abide by the MSRP policy, or rewarding sellers who stick to the MSRP by giving them "bonuses" of cash or merchandise or other freebies, or taking your own sweet time to fill the orders of the discounters while promptly shipping product to the MSRP-honoring sellers.

I don't know what the ultimate answer is. Maybe there isn't one. But I urge you to think about some of the issues I've raised and at least appreciate that things aren't always as cut-and-dried as they first seem.

Okay, go on, have at it. Just remember to play nice.


40 comments:

Joe said...

Wow. Did you ever teach law? You have a way of making these issues clear and you do it in a very concise way (or at least as concise as a complex issue like this will allow).

I struggle with this issue often, whether it comes with deciding whether KnitPicks is a place I want to shop (I've decided it isn't) or how I should have priced my DoublePointed needles when I was selling them.

Having also worked in a yarn store, I would always help anyone, even if they hadn't bought the yarn at the store. I do think enthusiastic customer service can create loyal customers, even if they do have an occasional foray into discount-internet-purchasing.

One solution that both the Tomato Factory and Simply Knit both used successfully, was designing successful garments, and then only selling them as kits. That way they could assure getting their price for yarns, even if they only charged the retail equivalent.

Thanks for such an interesting, in-depth analysis of this topic.

Melissa said...

Joe,

How is buying yarn from Knit Picks akin to buying Brand X yarn online after fondling Brand X in a local yarn store? After all, Knit Picks does not sell to retail shops, so it's not a competition issue. When I have a project that requires a very special kind of yarn, or when I need to be inspired by new fibers, I shop at my LYS. However, I can't afford to buy a sweater's worth of yarn there, so when it comes to no-frills utility yarn, I shop at Knit Picks. I know that with Knit Picks yarn, I won't get extra help or get to fondle the yarn ahead of time, but that's what I'm giving up for the lower price. It's just how I manage to pack as much knitting as I can into my budget.

I'm not attacking you personally, I'm just curious why you brought up Knit Picks in response to this issue.

Gail said...

We talked a lot about this 'hypothetical' situation in the LJ knitting community. I'm not a lawyer, but reading online, it seemed like a wholesaler is allowed to say upfront that they don't sell to discounters. And they are allowed to stop filling orders if they notice their yarn is being discounted.

What isn't allowed is for a wholesaler to say "You are discounting our yarn. We won't sell to you unless you increase the price of our yarn." That becomes verticle price fixing. This link has all the various sources I found at the time.

Valerie said...

Thanks for the brilliant analysis! Like Joe said, you really do have a talent for this.

I think it's also important to note that stores generally have the ability to put these yarns on sale temporarily, even if they can't sell it at a discounted price all the time.

It is a rather arbitrary line, though, isn't it? You can't really collude, but the seller/manufacturer can set an absolute price that really leaves no room for free market competition on the product.

Carol said...

Knitpicks sells directly to the consumer, bypassing the distributor end of the chain. By doing so, they are able to undercut the prices for items that are sold in retail yarn shops because individual LYS owners can't afford to work with manufacturers directly. You buy a pair of needles from Knitpicks, then you aren't buying a pair of Clover that are sold at a LYS. You may decide you don't care but if your LYS goes under and you don't have anyplace to fondle or picking on Knitpicks in particular; there are other, necessarily large on-line retailers who do the same thing: Elann.com has house yarns, now Patternworks does, and so on.

Carol said...

Eeesh. a line got cut out: "you don't have any place to fondle yarns before buying or to go to ask for help, then you oughtn't complain. I'm not picking on..."
Just put that where it needs to go.

jillian said...

Great summary! You really cleared up where "MSRP" fits into the law. It seems that Milli and Yolanda was a piece of unfortunate timing, as Milli does have a contract that sets "keystone/MSRP" policy, but Yolanda' appears not to have been informed of this prior to the fact.

Very few people who knit in fair quantities can afford to buy all their yarns at an LYS, as good as that would be for their business and the happy fuzzy feelings that would ensue. I think maybe there's a balance between shopping at LYS's and places like WEBS, Elann and KnitPicks (whether for house yarns or discounted retail brands) that each individual must strike and feel comfortable with.

Melissa said...

Hmm...like Jillian said, for me it's the striking a balance between local and online.

This all makes me think about the sense of entitlement that consumers (and online consumers particularly) seem to get. When I mean is, that attitude of "I'm the customer, I should get what I want at the lowest price possible and if I don't I'm being ripped off." I don't think this attitude is new, but it does become more apparent with the advent of online retail where price research is easier.

Personally, I don't drive across town to save 20 cents, nor do I shop for a yarn in a LYS, then order it online. I also don't bring my Knit Picks yarn into my LYS and expect them to wind it for me or help me with my project. I certainly don't expect my LYS owner to be nice and accomodating to customers like that. Sadly, some consumers do.

Cortster said...

This is such a tough subject but my financial reality figures heavily in my decisions. Frankly, my most local LYS is lousy. The yarn selection is small, the service ranges from poor to mediocre. I don't need knitting advice. I have a limited budget and high demand for knitted objects. My two most-frequented yarn sources are KnitPicks and Elann.com. Webs also figures into the equation.

I read a lot of catalogs and am often puzzled how one 50gr, 100-150 yard yarn can cost $25.00 per skein for roughly the same wool/synthetic/dye content and another can cost $4.00-$8.00. Is five to six times more value really being added by the tiers between manufacturer and the LYS?

Conversely, I do pay for the "I want it now" factor. I'm perfectly willing to pay more to a LYS for having what I need when I need it. One of my favorite things to do is take my daughter and her lady love to the local yarn shop(s) in Brooklyn, set them loose to choose their own yarn for a desired knitted object, and pay out the nose for yarn I probably could have purchased online for 50%-60%less. I'm paying for the joy of watching them enjoy themselves so it's worth it. This is also a good practice for me to try novelty yarns that I might not (no, almost certainly would NOT) go near.

I'm starting to see this issue come up more often with fiber. I like going to the Wool and Sheep festivals/fairs because I get exposure to my local fiber sources and wool that simply is not available on the internet. On the other hand, Pacific Wool and Fiber seems to have better prices for same/similar fiber so I purchase from them as well.

As someone who has wanted to open her own yarn/fiber shop, I really appreciate that you take the time to share your knowledge. I feel like I should be paying *you* for advice. I'm still doing a lot of research before I make the first move and this topic is definitely one of the more (painful) useful considerations.

Long story short (too late!): thanks, Carol!

Sherry W said...

If I buy custom needles or custom yarn from a big online retailer, it's because I like the product, not just because it's cheap. I love my Knitpicks Options needles because they are just the right product for me. I wouldn't buy Addis at my LYS instead just to support them- I don't like Addis! I also really like Andean Silk yarn from Knitpicks. Why buy a more expensive product I don't like as well?

If I buy hand-dyed yarn at an Etsy shop does it stop me from running over other customers at my LYS for Anne? No. It's a different product.

I usually don't buy yarns my LYS sells other places. Unless it a rare occassion too crazy to pass up (like clearance sales or mill ends). I don't walk down the street and shop at that 'other store' either, unless it's something totally radical (I've been to that 'other store' maybe 4 times).

I really don't want to feel guilty shopping online. I don't think I'm going to put my LYS out of business if I buy Knitpicks Options needles and then go dump a ton of cash on yarn for a sweater at my LYS. For years LYS's didn't have a lot of competitors, and now they do. I know it's a hard business, but a LYS can't expect your customers to close thier eyes and not to shop around or explore new products. They should develop value in classes,community and unique yarns that keep us coming back.

(Sorry about the giant post, I've thought a lot about this!)

Carol said...

Well, of course you shouldn't feel guilty about the choices you make. As a prior commenter said, everyone has to figure this one out for themselves and decide what balance works best for them. There are a lot of people, however, who don't think about it at all, and who do not understand, for example, why expecting extensive technical help from a place where they didn't buy the yarn is not entirely reasonable. Note, though, that developing classes and community at a LYS are exactly the kinds of costs (and there are costs associated with them, don't kid yourself) that internet discounters don't have.

TheAmpuT said...

All I really want to say, once again, is thank you Carol. I love that you make all of these issues not only easy to digest, but also something enjoyable to read.
Goes well with the morning coffee ;-)

Ginny said...

Wow. Much less complicated in the UK for most of us - no lYS nearby at all! I live in the 2nd biggest city and we really have no decent yarn store at all - a few market stalls selling mostly acrylic, and a big departments staore with Rowan/Debbie Bliss/Jaeger and Sirdar. And they knw less than I do. So it's online for me (including BBF!) - or on holiday any time I see a good yarn store.

Carol said...

You know, Ginny, you're right. We have an embarrassment of riches these days in the US, at least in the bigger metro areas. Thanks for adding some perspective.

Norskybear said...

Nice to know that it isn't just me who appreciates these long digressions. Tie me down and read to me from a law textbook, baby!

Franklin said...

My head hurts a little, but this was fascinating and I love you.

aija said...

Thanks for this writeup. I've seen the issue (yolanda versus the giant!) bantered around quite a bit and always have the echo of supporting and wanting to support local, *brick and mortar* yarn stores in my head while I do. I think that if a retailer *truly* wanted to support local retailers (and keep their "cachet"), they would only sell to stores with a physical storefront (some yarn retailers DO have this requirement). I understand and agree with the 50% markup... a physical store has electricity, rent, experienced employees, etc to pay with their profit margin and the standard-50 is a toe in the door to do that. I cringed reading on "yolanda's blog" some of Yolanda's reponses to commenters, taking swipes at other retailers of Milli's yarns...

"...We were still making a profit – that’s how overpriced the “other retailers” are. Believe me, they can get off their butts and do the same thing we do. It seems to me that it is really uncomfortable for some people to have to actually WORK for a living. To be rather blunt, it seems that the word WORK is like one of those four-letter-words for some of the other “retailers.” " (9/18)

The problem to me is one of the demands of physical store ownership v. web, and only the retailer has the power to help stem the tide against LYS attrition (if they truly care to do so) by selling only to b&m stores-- who will set the prices accordingly to meet the rigor of maintaining a physical space. Do I want to only buy from retailers who have physical stores? Not really. However, I have had 2 local stores go out of business within the past 6 months, and to be honest I'd much rather have a local, physical store presence (and my ability to support, for the most part, independent and locally owned) businesses than those half a country away working out of their basements and offering no support or community for knitters. I shop all over (online & off), but to hear a web-only retailer rant that physical store owners are lazy (!!) and the hoardes of Yolanda supporters who rally cries of illegality/pricing out knitters turns my stomach and makes me fear for my lone-standing LYS. I obscenely love my LYS (and maybe that's why the issue bothers me so much), but I also love all of the online retailers I support as well.

All of this, and I have bought some of Milli's yarns from Yolanda before her stock ran dry (right at the beginning of the drama)-- fast shipping and an all-around excellent WEB experience.

Faith said...

I have to say, this is the most comprehensive argument for both sides that I've seen so far.

I used to work in clothing retail, at a tiny, high priced botique. I had access to the "back rooms" of the computer system, so I would sometimes ammuse myself by compairing wholesale value with retail. We also sold jewlery, and I remember finding out that one particular necklace had been purchased for $0.25 each, and was being given away as a "FREE gift valuing $35 with purchase of $20 or more!" It was interesting to see how the percieved value of the necklace affected the customers purchases, and the way they "ohhed" and "ahhed" over the sparkly thing. I wonder what they would have said if they'd found something similar at Claire's (cheap jewlery mall shop) for $3? Honestly, I'd rather buy the necklace for more (or in the case of the free gift, think that it costs more), making it more special.

Another thing to consider in this whole yarn debate is the sheep farmers. They get the worst end of the deal. I don't think that they're ever paid very much, but if they're selling quality wool to make a high priced yarn, then I feel they should be rewarded for their efforts, if in no other way than that they know they have a renewed contract each year with said company. (If yarn was undersold to the point where it couldn't be made anymore, the farmers would have to look elsewhere for companies to supply -- farmers have it hard enough as it is!)

Mary K. in Rockport said...

Thanks for this, it was very interesting and educative. My LYS just went out of business after many years. The owner finally got tired of being on call 8 hours/day, 6 days/week (the store was in the front room of her house.) She continued to sell a lot of yarn and to dispense advice, but I could see that her pattern sales fell off as knitters, including me, found tasty, single, free patterns online.

Mary W. said...

Thanks for the write-up. Since the subject of stores closing has come up, I think one thing we need to keep in mind is that the market is getting saturated and there's going to be some attrition--both with the b&m and on-line stores. Whoever can find the right balance between service, cost, and distribution is going to survive. Or just get tired and give up. (I've been following the microbrewing industry for the last decade. This discussion sounds pretty familiar.)

Knittah said...

Thanks for the great post Carol! I hope you are feeling well.

Deborah C. said...

This is fascinating. I see the problems and yes, it is really a matter of balancing supporting a LYS vs. paying less online. I don't like my LYS (poor customer service, nasty attitude and lousy stock) and have high hopes of a new store that's opening next month. I will probably try to buy what I can at the new store to support them and shop online for things they don't carry.

Anonymous said...

As a lawyer, and one who has particularly enjoyed antitrust law, I salute you for taking the time to explain and for explaining so well.

sarahsiegel said...

Great article, just wanted to add my comments, for whatever they are worth.

We believe in free-market policies, and in the fact that the forces of Supply and Demand ultimately help any market reach a healthy equilibrium.

In your hypothetical “Yummy Yarn” case, you seem to assume that Internet/Online retailers have the ability to sell for much less than brick-and-mortar stores right-off-the-bat. This is simply not true.

As an online and Direct Sales retailer, I can tell you that the costs of running a brick-and-mortar store are just about the same as running an Internet/Online business – assuming the Internet/Online business decides to keep their inventory in-house, instead of relying on pipe-dreams like drop-shipping and other similar gimmicks.

When you say that a “A good, service-oriented bricks-and-mortar yarn shop needs to pay those knowledgeable and experienced salesclerks. They also need to pay rent, electricity, keep their shop clean and painted and the rugs shampooed, and a myriad of other expenses to keep their physical plant up and running.” Well, guess what: we do too. Because we are currently not set up to have an open-type brick-and-mortar store (although we do take people by appointment) we send all of our first-time customers’ complementary color cards of all of our current offerings. In our database we keep track of what color card version each customer received, so a repeat customer will get the new ones since the last time he/she bought from us. We also have to have people who understand yarns – from places like FIT and Pratt Institute – put together our color cards so that the right color periodicity will show so that a fiber artist who buys from us can gauge accurately their results. We need to make sure we have careful people help out with our shipping so that each customer gets exactly what they ordered, plus their color cards – we have to have an entire process-flow for this function. We need to spend money on making sure that our inventory is stored in sealed, dark containers so that it is not exposed to direct sunlight or any type of bugs. To that effect, we need to make sure that our environment is not exposed to flooding and/or vermin, so we pay a lot of money in regular exterminations, etc. And we are prepared to answer the same questions that you mentioned in your post that any person can ask in a brick-and-mortar yarn shop – we do it all day long over the phone or via e-mail. This is a great convenience to a lot of people who have day-jobs and very little time to drive out to their nearest “bricks-and-mortar-yarn shop,” which may in fact not be so near.

We cannot run out of a basement or “cruddy cheap-ass warehouse” in a bad part of town, because we need to minimize the exposure of all the factors that I mentioned above, in addition to theft. Instead, we operate out of the two lower floors of a brownstown building, in case elderly people or somebody who is handicapped wants to come visit us, and in an up-and-coming neighborhood in Brooklyn, close to Pratt Institute. The basement is not to be touched other than for the storage of construction-type materials.

Since we don’t have the same access to customers that brick-and-mortar stores have, we have to work harder and do more than they do. And we have to lower our costs of doing business, without sacrificing on customer service.

The bottom line is that price fixing not only hurts the consumer, it enables ineptitude and laziness, it hurts anybody who has the desire to enter any market, and it can surely hurt people like us in terms of our ability to provide jobs.

On a final note: if price fixing happened in the Securities Industry, a lot of people would end up in jail and/or companies would cease to exist. This has certainly been uncovered and has happened before, I’m sure I don’t need to provide you with a case list.

--Sarah Siegel
Sarah’s Yarns

monael said...

Interesting read from the lys perspective. My 2 cents: I shop both lys and web outlets. It depends on my needs. The only problem I have is that if one of the rationales for a higher cost at a lys is the service and help one gets, perhaps instead of making me pay more for the yarn so that others can get free advice/patterns, they could charge for the services and offer lower prices. The reason I say this is that I am an avid crocheter and do not knit. 95% of the time I have visited a lys I have received very poor treatment when they discovered this, as well as the fact that they couldn't help me even if I did have a question. So why should I pay extra for this? The only lys exception I have encountered has received my repeat business because if I see something I want at a price I am willing to pay I will buy it, and if I am treated with respect then I am willing to shop in your store. But for the lys that have treated me poorly, I don't mind getting a "free ride" at all.

Carol said...

Thanks for your comments, Sarah. I am not meaning to suggest you aren't a great on-line vendor -- I don't know anything about that -- but there are many cost differences between what an on-line only vendor provides and what a bricks-and-mortar shop provides: e.g. sales associates (more than 1) on the floor to give technical advice to people, any time the shop is open; providing classes for knitters; events like knitting circle where you have to be open and actually have customers enter your shop, greet them and so on, are a few examples. Providing some on-line or telephone assistance -- which bricks and mortar stores also do, by the way -- isn't comparable to staffing a shop with several good staffmembers who know knitting, who actually sit down with customers and show them skills or pick out their mistakes and show them how to do it right. No matter how nice your business's space, it is not the same cost as selecting and maintaining a retail location. I am not denigrating on-line retailers, believe me, but I simply do not agree that you have the same costs as a bricks-and-mortar shop.

Anonymous said...

As a knitter,reader, and gardener who has worked in retail for over 40 years--in independent yarn, book,and garden stores--I have really appreciated your posts and the comments.

I don't have much to add now--I just blog on it from time to time. I am glat to see so many people read and learn from your posts. It is important that consumers are aware of the consequences of their choices. For those of us who insanely persist in (mostly) low-paying jobs in the retail world, yet want to support independent brick-and-mortar stores, these issues confront us every day.

Jude in obscureknitty

Carol said...

Yes, Jude, to me, that is one of the most difficult conundrums: if you have a tight budget, or if you knit faster than you can afford to buy yarn for projects, how do you balance the desire to save money/get the most for your money with a desire to support a bricks-and-mortar shop?

Barb Brown said...

Faith mentioned the sheep farmers. I don't know about the States, but people I deal with who raise sheep typically get well under a dollar a pound for raw fleece from the large wool buyers, who then sell to producers (often in China)
The one thing that bugs me (I think it is on topic) is how Knitpicks and Elann get all the free advertising on the Knitlist and other places. You are forever seeing it in posts. This would be fine if other web stores, B&M stores etc could be mentioned in the same way. When I have posted almost identical posts "I love the selection at Wool Revival" etc I get the message back, and a slap on the wrist. Strange.
Thanks for the explanation on so many of the issues. Gives us lots to think about.
Barb B.

Laura B said...

That was so informative! Thank you so much!

ted said...

Your husband is a "Skippy"?

What's a "Skippy"?

Elspeth said...

Interesting topic, and you have explained it well. Personally, I have all but stopped going to the multitudes of LYS that keep cropping up. (Although there is a new one with a great knitting night, and I'll probably be there and buy stuff.) I actually haven't been in the market for yarn much recently, but when I am, I buy from etsy or people's online shops. Oh, and I really love the Knit Picks needles and have never understood the excitement of Addis.

I totally understand the issues that you are discussing, but in my view, the LYS are expensive, and don't necessarily have anything I need. I don't really need knitting help and it's fun to fondle the yarn sometimes (and I always feel guilted into at least buying soemthing) but it's not something that I need to do.

I'm really glad that we have options, and hope that people will take into consideration what their choice to buying locally, online, full price or discounted does to the store they are frequenting.

Beth said...

To me this comes down to the iggest gripe I've had for years. Maybe slightly skewing the topic though. They wanted to build a Walmart in my town and there was this huge outcry against the whole thing. Protesting, newspaper ads, screaming and yelling that Walmart was going to put all of the little guys out of business. The city went through with it anyway and on the day they opened the parking lot was packed.
I try not to shop at walmart. I'm there maybe once per month. The little down town guys are suffering. The little bookstore couldn't compete with their Harry Potter price when it came out so everybody went there. If we continue to shop only for the lowest prices we will eventually all be shopping at Walmart or online because the little locally owned stores with 2 or 3 employees will be gone and that's where the service is.

Kathy Merrick said...

I think that the real potential for having Walmart the only retail choice we have outside of large cities and for McDonald's (or whoever makes their crap food cheapest and biggest) to be our only "dining" outside the home choice is one of the scariest prospects of the future.

That and the real horror of having only Lion Brand extruded plastic to knit with.

Barb Brown said...

I totally agree with you Beth. Been there, seen it happen. And then listened to everyone complain that the little stores were gone.
Barb B.

Lady Wyvern said...

Ok.
1- I had a bricks and mortar, it was overrun by bats. So it closed when the landlord refused to fix the issue.
2- I have moved to an online presence only, maintaining my same price structure
3- My ability to move to another location that was as successful is hampered by lack of available spaces
4- By distributors demanding I have a bricks and mortar, my devout customers, who order via net or contact me to make an appointment to buy yarn are out of luck on buying yarn now
5- MSRP according to the car dealer I talked with is a guideline, not cast in stone. MSRP would drive me out of business on yarns that are not my private line
6- Its becoming an "us or them" mentality with yarn retailers. Both are feeling put off by the other
7- I don't have a solution, I don't know that I will stay in this business I love much longer, not because of lack of suppliers, but for the constant drama, and BS and pervasive mentality that is happening about online retailers
8- I do offer support online, in person, on the phone, via webcam on instant messenger programs. It isn't that difficult.
No point, merely observation

sarahsiegel said...

I strongly believe that consumers not only have the right to choose where and how they shop, and how they spend their money; ultimately, they have the power. Yarn retailers need to learn to respect their customers.

Consumers should not be coerced into having to travel to an LYS, or for that matter, any other retail outfit, in order to obtain the goods that they want simply as a matter of principle. And what about handicapped, disabled and/or elderly people who simply can't get around as easily as others?

Putting aside the issues of the legality of price-fixing, and the "cartelization" that yarn retailers want to coerce other players into operating under, the bottom line is that because of the Internet and Globalization times have indeed changed and will ultimately beat manufacturers in many sectors into playing fairly.

--Sarah Siegel

Alison said...

Sarah has a good point about not everyone being able to access shops. A number of yarn stores in Manhattan are on the second floor of buildings without elevators. I can't do those stairs. There are some very interesting stores in Manhattan with no parking. Subways/buses are hard for me too. There's one store I go to in Brooklyn that's consistently more expensive (for very standard yarns) than at my sister's LYS, and that bothers me. I wish I lived closer to a really good LYS (like The Mannings) but unfortunately I don't. Online keeps me knitting. I do buy from a lot of vendors who have both a physical and online shop...

Anonymous said...

Carol -- to quote you (quoting the FTC above), "The antitrust laws, however, give a manufacturer latitude to adopt a policy regarding a desired level of resale prices....", meaning that in SOME cases vertical price-fixing is allowed. Not all cases, and likely not MOST cases.

Like Lady Wyvern above, I too have run both a brick & mortar yarn shop as well as a web-only yarn shop and I can say that the business expenses are extremely comparable. For our online yarn shop, we pay rent for office space, electricity, phone, internet, etc. We have 4 employees who must be knowledgeable not only about yarn, but about computers as well. We field all sorts of customer service questions via phone and email. Since we're not visible "on the street" like a brick & mortar yarn shop, we pay thousands of dollars every month in search engine advertising to drive traffic to our site. We have office equipment, computers (5 of them!), computer programs, and programming services to pay for as well. You get the point. The costs are more comparable than you might realize.

Another thing to keep in mind is (as a previous commenter mentioned) the "convenience" of getting to take the product home with you immediately (by shopping at your LYS) as opposed to having to wait for it to be delivered (when ordering online). Not to mention shipping charges. If you REALLY want to level the playing field here, then let's also make all customers who shop at LYS's pay shipping charges and wait a week for their yarn! It's apples and oranges here -- LYS's and online yarn shops offer different things and BOTH should be "assessed" by the quality of what they offer, NOT by what a yarn manufacturer deems is necessary to stay in business.

I also would like to address the quote from Carol's original post stating, "When a great many retailers can’t sell their Yummy Yarn inventory, or their costs are such that they just can’t charge only $6 and still make a profit, they won’t order it anymore. Yummy Yarns is going to lose business. Yummy Yarns might even go out of business. No more Yummy Yarns." This statement is (in my opinion) incorrect. If retailer X sells Yummy Yarns for $6.00 per skein and retailer Z can't compete, how does Yummy Yarns go out of business? They're still selling Yummy Yarns (and plenty of it) via retailer X aren't they? Not only that, but Yummy Yarns just may be selling MORE of their yarns via retailer X (because the customers can actually afford it at $6.00 per skein) than if retailer Z tries to sell it at $10.00 per skein. Chances are that skein will sit on the shelf a lot longer at $10.00 per skein than it would at $6.00 per skein, don't you think?

Once a wholesaler sells a product to a retailer, it no longer belongs to the wholesaler and the retailer should be free to do with the product as they wish. They should be able to give the product away as a gift if they so choose. If a wholesaler requires a certain retail price for their product, then they should retail it themselves (as Knitpicks does) and not wholesale it. If we allow wholesalers the ability to dictate what retailers do with their products after they sell it to them, what's next? Will wholesalers then start putting restrictions on WHO is worthy of knitting with their products? Sounds ridiculous but if they're so concerned about protecting their image then it makes sense. Heaven forbid an inexperienced knitter should knit with Milli's yarns and make Milli's yarns look bad!

It doesn't make sense for wholesalers to dictate retail price unless their product is shoddy to begin with. If a manufacturer produces quality products, people will pay for it. America was founded on a free market economy, and competition in the market-place is as American as apple pie. If you brick & mortar yarn shops can't compete price-wise with the online yarn shops then you need to do a little introspection to see how you CAN compete. You have MANY advantages that online-only yarn shops do not have. Use them! But don't cheat the system (and your customers) by calling the manufacturer's and "tattling" on your competitor for being able to sell their products for less, and keeping yarn prices artificially inflated. As Sarah said, once businesses no longer need to compete with eachother, quality will go down while the retail prices remain high, and the ONLY ones who benefit from this type of business practice are the greedy retailers who believe that price-fixing and keystone pricing keeps them in business.

If you haven't already done so, check out Consumer Friendly Yarns. Consumers, educate yourselves and then contact the yarn manufacturers and tell them how you feel about keystone pricing. Knit with "consumer friendly yarns" (yarn manufacturers who don't require keystone pricing) whenever you get a chance -- eventually the manufacturers will realize that they have nothing to lose and everything to gain by abandoning their keystone pricing policies and playing "fair" once and for all.

Anonymous said...

Sorry, that URL for Consumer Friendly Yarns is http://www.consumerfriendlyyarns.blogspot.com.