Wednesday, October 25, 2006

More (alleged) dirt from the seamy underbelly of the (hypothetical) yarn world

Oh, my innocent little pretties, did you think we had exhausted the dirty laundry of the yarn industry? Not yet, my dears, not yet. Special thanks to Valerie and reader V. for tipping me off to the following hypothetical (of course) story. (And if I’d been keeping up with my blog reading, I’d have seen it on Jenna’s blog.)

Once upon a time, there was a manufacturer of fancy yarns who I’ll call Milli Morris. Milli sold high-end yarns, in luxury fibers, and wanted her yarns to be upscale, to have a certain cache. One day, Yolanda's Yarns decided that it wanted to carry Milli Morris yarns. Yolanda started an account with Milli Morris. She received Milli Morris yarns and sold them to her knitting and crocheting customers.

One day, however, Milli Morris contacted Yolanda's Yarns, stated that Milli Morris was implementing a keystone pricing policy and asked Yolanda to comply with it.

What's "keystone pricing," you ask?

Well, apparently "keystone pricing" is a standard term in the retail industry, and refers to a policy or practice whereby a retailer (here, the yarn seller) consistently sells a product for double the wholesale price (i.e., two times its actual cost). So if Milli Morris was selling a skein to Yolanda's Yarns for a wholesale price of $10, it was requiring henceforth that Yolanda sell that very same skein of yarn for $20 to the consumer. And not a penny less.

It sounds like an appalling markup from the consumer's standpoint, but it's pretty standard in many segments of the retail market. (Since my retail experience is limited, readers can chime in here to back me up or contradict me.)

Here’s the backstory: It had come to pass that Yolanda's Yarns thought it could sell Milli Morris yarn cheaper and still make enough profit. (One critical piece of the puzzle that I haven't figured out is whether Yolanda's Yarns is an internet-only business, a discounter that provides minimal customer service and technical assistance at an actual storefront, or whether it also has a full-service, bricks-and-mortar yarn shop.) In any event, Yolanda's Yarns had been selling Milli Morris yarns for an amount less than twice the wholesale price; using the example above, say $17 a skein instead of $20. The customer was happy: s/he could get Milli Morris yarns a few dollars cheaper from Yolanda's Yarns than anywhere else. Yolanda was happy: she was selling lots of Milli Morris yarn, and still making $7 per skein.

But guess who wasn't happy? Other yarn shops. They had been abiding by the $20 keystone price and now Yolanda's Yarns was undercutting them on price. Let's face it: if given a choice, why would a knitter pay $20 a skein if she could pay $17? And the beauty of the internet is that you can order without leaving your desk chair, and they'll ship your stuff to your house, even if you live at the other end of the country, sometimes for free.

So the other yarn shops notified Milli Morris that Yolanda's Yarns was selling her yarn for less than the $20 suggested retail price. Milli Morris subsequently contacted Yolanda's Yarns (in writing, no less! don’t these people have lawyers? or at least some common sense? Free legal tip of the day: If you must allegedly engage in conduct which looks like price-fixing, which I strongly advise against, please do not leave a paper trail.) and insisted that it comply with a keystone pricing policy.

The owner of Yolanda's Yarns was mad now. She worked hard to run her business in as cost-effective a way as possible, and she wanted the right to price her merchandise however she wanted. She didn’t want to raise the price of the Milli Morris yarn. It then came to pass that the next time Yolanda tried to place an order for Milli Morris yarns, Milli said no. Milli refused to sell Yolanda's Yarns any more Milli Morris yarns based on its failure to comply with the keystone pricing policy.

Now ordinarily, this might have just been an unfortunate footnote in Yolanda's Yarn's business. However, Yolanda herself happened to know a little bit about antitrust law. Some correspondence was exchanged, and the phrases "antitrust violation" and "price-fixing” were invoked. Ultimately, Milli Morris informed Yolanda that it was suspending the keystone pricing policy. Yolanda's Yarns would like to continue selling Milli Morris yarns, but it isn’t clear whether Milli will continue to sell to Yolanda or not – Milli Morris yarns are no longer on Yolanda's website.

What’s going on here? Who’s right and who’s wrong? I’m no antitrust expert – and I don’t even play one on TV – but I’m willing to tackle some of these issues. Tune in next time.

16 comments:

Norskybear said...

I heard about this on Brenda's podcast yesterday. I love Milli's yarns and can't remember/don't know what a good price for it is, so it doesn't really affect me. However, if the Sherman Act can apply to real estate commissions, I don't see why it can't apply to expensive novelty yarn as well.

I think yarn people have done what they wanted for so long, they really don't know that they are being unethical, if not outright breaking the law.

Dave Daniels said...

This seems to be the norm, even though illegal. For example, check the prices of spinning wheel s from various manufacturers. They are pretty much the same EXACT price. Am Ashford wheel is the same price at Vendor A, Vendor B and Vendor C. It's up to the retailer to get the sale. So, you'll notice some will offer free shipping, or they'll throw in a pound or two of roving, or a maintenance kit. Basically, some additional incentive to get the same cash from YOU.
The bottom line is, if the retailer doesn't want to mark up something 100% or more, which is the usual practice, that SHOULD be up to the individual retailer. It should be their decission on how much profit they want to make, and how much stock they want to turn over. The whole keystone thing should be abolished once and for all!

choomon said...

I believe the hypothetical yarn shop here is internet only (but not positive) and they have *excellent* customer service, and great communication.

rachelsent/DreamWoven said...

well hot damn!

So, why did Milli Morris Yarns feel the need to implement "keystone pricing"?

There is only ever one answer..... GREED.

Anonymous said...

It's not greed, it's business. If businesses didn't make a profit, they would close. Employees would lose their jobs and consumers couldn't buy products they want.

When department stores have 40, 50 or 60% off sales, do you really think they're losing money? No, the mark-up on clothing and on many items we buy everyday is much more than keystone. Yarn shops have a small mark-up and are not highly profitable businesses (Carol, please say if I'm wrong). Shop owners, and manufacturers, have to protect their mark-up so they can stay in business.

And I, for one, like to go to my LYS - I want them to stay in business. I like the owner, I like her staff and the help they give me, and I like to treat myself once in a while to an expensive luxury yarn. If these folks can't make a living, then I won't be able to do that. I might be able to get yarn cheaper from someone with yarn stacked up in their living room, or even a legitimate online retailer, but I want the experience of shopping at my friendly neighborhood yarn store.

I'm not a lawyer, so I can't speak to the legalities, but I support Milli's attempt to protect herself and her customers.

Valerie said...

I'm looking forward to your take on this, Carol. I also heard a nearly identical story from a yarn store owner in NYC regarding another brand of yarn. She elected to raise her prices after the manufacturer told her she should. Milli Morris isn't the only manufacturer at fault, which is why I found this story so compelling.

margaret in manhattan said...

I'm not a lawyer either, but, what I DON'T understand is: why would Milli Morris care what her yarn was sold for after she got her price?

This I'll have to chew on for a while ...

Knittah said...

Yes, Yolanda's business is internet only, which is why she can afford to sell the yarn for less - much lower overhead.

It is standard practice in retail (of any type) for the manufacturer to set a MSRP. The wholesaler's actual sell price is calculated from the MSRP. So for example, Martin Manufacturer wants to make a Widget with a MSRP of $25. Martin knows that Ruthie Retailer will not pay more than $15 for a Widget with a MSRP of $25. Ruthies will rely on that 40% off margin for profit and overhead. Martin also knows that Don Distributor will not pay more than $9 for a Widget that Don will sell to Ruthie for $15. Again, Don needs that 40% off margin for his profit and overhead. So Martin sells Widget to Don for $9. All the markups are assumed by the manufacturer in calculating the MSRP. So if Widget is made for $2, then the manufacturer's profit is $7 per Widget. But if the cost of making a Widget is $9, then you can bet the MSRP will be higher to take all the profit and assumed markups into account.

Ok, so back to keystone. The MSRP is just that: recommended. For example, Ruthie Retailer could sell Widget for $22 instead of $25. Of course, Ruthie still has to pay $15 for the Widget, so her markup will be only 28% instead of 40%. If she can afford to make that much less profit, that's her choice. The problem with Milli and others who require keystone is the REQUIRED part. Ruthie should have the right to decide what price to charge.

Now if Milli made keystone part of the contract with Yolanda to begin with, that's different. Milli has the right to negotiate the contractual conditions of her relationships with retailers, and if she is willing to risk selling to fewer retailers then she can set a minimum retail price in the original agreement, at least in theory.

Sherry W said...

IMO, Milli Morris wants to be seen as a luxury yarn. Therfore, it's an image thing. You don't want anyone discounting your fru-fru yarns.

I have heard that the pricing policy is a way to protect the LYS from low cost web sellers. I do have sympathy for the LYS being undercut by web-sales stores. However, in the end, it should be up to the consumer to decide who she wants to support, not a mandate handed down by a yarn company.

Dorothy said...

FYI: in books the margin varies but is less than the 100% mark-up (well, except for the big chains which do get books cheaper from the publishers). No keystoning that I ever heard of. I do not know what the industry was like before big-box stores and the internet. Perhaps there was keystoning but it got driven out by the big players?

having worked for an independent bookstore I am kinda sorta sympathetic to a system that helps independent brick and mortar stores stay in business, but not price fixing.

In yarn, it was perhaps simply the norm, and no one could effectively challenge it or would even think of challenging it in a bricks and mortar store, there simply isn't much of a profit as it is. Now things are more complicated and we have to adjust. Hopefully we can adjust to where it still is possible to walk into a yarn store And still be able to find good deals at the LYS or on-line.

We've all seen ads for stores (sporting goods, electronics) announcing 20% off everything, with an asterisk excluding one high-end brand of jacket, one fancy brand of sunglasses etc. I remember being told that was because those certain companies don't allow their products to go on sale ever. Always wondered about the legality of that.

Carol said...

It could be that the maker has a MSRP-only policy (though they often make allowances for temporary sales) or it could be that the seller has agreed not to advertise a lower price (as opposed to selling at a lower price).

Toni said...

I recall that in the fashion industry, esp. in specialty retailing, the 50% markup is normal, for example, you pay $2000 for a wedding dress at the bridal shop, who gets it from the designer for $1000, who gets it from their contracted manufacturer for $500, who probably gets it from their contracted overseas jobber for $250, and it costs that one about $100 to make -- generally speaking -- your $2000 wedding dress really costs a hundred to two hundred fifty dollars. No kidding.

CC said...

The Photographer and I had a conversation yesterday on this same topic as it applies to Apple Computers. Thanks for the enlightenment.

CC

Anonymous said...

If you don't already know about this, you should definitely check out (and support) Consumer Friendly Yarns!

Anonymous said...

"Toni said...

I recall that in the fashion industry, esp. in specialty retailing, the 50% markup is normal, for example, you pay $2000 for a wedding dress at the bridal shop, who gets it from the designer for $1000, who gets it from their contracted manufacturer for $500, who probably gets it from their contracted overseas jobber for $250, and it costs that one about $100 to make -- generally speaking -- your $2000 wedding dress really costs a hundred to two hundred fifty dollars. No kidding."

This isn't 50% markup, this is 100% markup.

glazedover said...

As an artisan who sells my work to shops and galleries, my standard procedure is to wholesale my rpoduct at 50% of what I would sell it for at retail (at a fair or in my own studio.) The shop or gallery is free to do whatever they like with it after that. If they want to mark it up 5% or 5000% I don't care. (at 5000% markup I supect their sales may be sluggish.) If a company is requiring a shop to mark their product up a certain amount I suspect it is to protect the small brick and mortar stores from being undercut out of business.