Friday, 28 November 2008

With the rise of company failures will pre-packs become the norm?

A pre-pack is a sale of a company's business and assets (often to existing management) that is negotiated prior to the formal appointment of an administrator with the intention that completion of the sale take place immediately following such appointment. Recent examples of pre-packs include Faith Shoes.

Creditors often feel hard done by in pre-packs as they feel they have been kept in the dark with the sale having taken place before they have even learnt of the company's insolvency or had the chance to exercise their contractual rights and that a better price could have been achieved by putting the business out to tender. Others would argue that pre-packs are a legitimate tool to preserve value in a company's business for the benefit of stakeholders generally leading to the preservation of jobs and a greater realisation of value than might otherwise be achieved. They point to the fact that they enable a company that would otherwise not have sufficient funds to be traded by an insolvency practitioner in administration, to effect a sale that would not otherwise be achieved and to the fact that it prevents the company's customers, third party suppliers, landlords and intellectual property licensors exercising any automatic termination rights on the commencement of an insolvency process, realising the value of assets that might otherwise be lost.

Fashionista thinks that there are circumstances where pre-packs may be appropriate but it is clearly not a one-size-fits-all approach. Finally, a word of warning if you are thinking of doing a pre-pack and you have leasehold properties, watch out for the landlords. They often don't take kindly to finding that they have a proposed new tenant for their shop or business premises with little or no notice. The potential purchaser would be wise to sound out a landlord immediately before the sale to avoid the risk that he withholds his consent to any assignment thereafter.

"The bag doesn't know it's a bag ..."

Canada's Eye Weekly carries a punchy piece, "The Louis Vuitton Con", by Rea McNamara, which discusses the ideas of Marcus Boon, an academic whose forthcoming book In Praise of Copying seems guaranteed to raise a storm. McNamara writes:
"Western society inherited from Plato the most popular concept of copying, that "everything is a copy" (also known as mimesis). Heidegger would later say that mimesis equals copying a presentation — “all copies are made and produced” quoted Boon — and the parodying of something in a manner. How’s a bag then the imitation of an idea?

Perhaps it has something to do with our concept of luxury. Boon showed an original 1927 Louis Vuitton ad with this delicious sales pitch: “The trunks that last a lifetime… is French but LOOKS French… not only IS the finest but APPEARS the finest.” The idea of an "essential" LV outward appearance is complicated, a sameness not easily differentiated between a real Canal Street stall with fake product and the faux Louis Vuitton stall (with real product) installed outside the Brooklyn Museum for their Takashi Murakami retrospective (the Japanese artist famously re-made the LV monogram in "super-flat" technicolour). Outsourced manufacturing muddies it further — is the Louis Vuitton bag really French? LV artistic director Marc Jacobs is American, after all".
The article continues in much the same vein, with lots of philosophical points to ponder. For example,
"Louis Vuitton would like you to believe in their version of a "projected" fixed original essence. But a bag isn’t really a living entity is it? It can’t do transcendence. The bag doesn’t know it’s a bag, and while Vuitton would lead you to believe that designation is key (neat seams, hologram authenticity cards, serial codes), it’s obviously unstable".
Fashionista awaits the publication of Professor Boon's book with interest and trusts that, in view of its title and its author's thesis, it will not be burdened by the presence of a copyright notice.

Thursday, 27 November 2008

VAT down to 15%, but do retailers have to pass it on?

In the wake of the Government's pre-budget report announcing a reduction in the rate of VAT from 17.5 % down to 15%, Fashionista sets out below a practical guide for retailers about the impact of the VAT reduction, which will apply from 1 December 2008:

1) Is there any obligation to pass on the reduction to customers?

The short answer is NO. HMRC has issued guidance explicitly stating that, whilst businesses are strongly encouraged to pass on the reduction, there is no obligation to do so. This is consistent with raft of consumer law in this area.

2) What if the retailer DOESN'T pass on the reduction?

Retailers may not want to pass on the reduction (at least not immediately) for a number of reasons, including the logistical nightmare (and cost) of repricing goods and services, amending billing systems and changing advertising and marketing materials, particularly at such short notice.

Perhaps the main issue is one of potential negative publicity, and its impact on brand value and sales. However, retailers (particularly those who operate exclusively online) should also consider what their consumer terms & conditions say. Normally, where terms & conditions change (including prices), customers must be given notice of the change and, if the change disadvantages them, given a right to terminate. Depending on how a retailer's Ts&Cs are drafted, failure to pass on the VAT reduction could constitute a change in price which disadvantages customers, even though the headline figure doesn't change, because the amount of revenue retained by the client will increase. Under the Distance Selling Regs (which apply to any etailer or retailer selling through a catalogue), businesses must set out the price of goods or services including taxes. However, except in specific industries (such as insurance), there is no obligation to set out how much the tax element of the price is. Therefore, if the reduction is not passed on, clients are unlikely to have to reprint their price lists and other marketing material.

3) What if the retailer DOES pass on the reduction?

While this is the most desirable option from a PR perspective, it does pose significant practical problems. For most of the high street retailers, the task of re-pricing all stock is a logistical nightmare. As Drapers reported yesterday, while most of the UK's major retailers are intending to pass on the 2.5% reduction, many are planning to take off the discount at the till point rather than by re-ticketing stock.

From a legal perspective, this raises an interesting question about the application of the recent Consumer Protection from Unfair Trading Regulations 2008, which make it a criminal offence to give a misleading price indication. The Regulations provide that retailers are exposed to potential criminal liability if they mislead consumers as to price. When these Regulations came into force earlier in the year, BERR issued guidance which stated that, in the event of a change in the rate of VAT, businesses would have 14 days from the date of the change (i.e. from 1 December) in which they could merely use "a general notice or notices" to avoid giving misleading price indications to consumers. This could imply that all materials displaying incorrect prices should be replaced by 15 December to avoid the risk of prosecution.

Fashionista has learnt that one high street retailer intends to place signage at the till point informing consumers that the VAT reduction will be discounted at the till, so that the price as shown on the ticket includes VAT at the old 17.5% rate. On the basis that other retailers intending to take off the discount at the till will use similar signage, they should be able to escape criminal liability under the Regulations. This is because, to attract criminal liability, a retailer must:

(a) knowingly or recklessly engage in a commercial practice which contravenes the requirements of professional diligence, AND
(b) the practice materially distorts or is likely to materially distort the economic behaviour of the average consumer with regard to the product.

In this scenario outlined above, Fashionista doesn't think either limb is fulfilled. "Professional diligence" is a defined term which refers to the special skill and care reasonably expected of a trader, commensurate with honest market practice and the general principle of good faith. A retailer who is seeking to pass on the VAT saving and using signage at the point of sale to inform is customer is not acting in bad faith. Further, the second limb, would be fulfilled only if the consumer would not acted differently had he known the correct price. Fashionista can't imagine too many shoppers complaining that they have paid less than the ticketed price.

Tuesday, 25 November 2008

'Primark effect' raises parliamentary hackles

Today's Telegraph reports that British MPs are blaming throwaway fashion from shops such as Primark for an increase in the amount of clothes being dumped in landfill sites. The so-called 'Primark effect' arises when cheap garments, often made from manmade materials that cannot be recycled easily, are worn just a few times and then binned, according to Parliament's Environment, Food and Rural Affairs Committee.

Above left: whatever you think of Primark's fashions, the chain has proved more popular than most UK parliamentarians -- and now it seems its clothes are likely to outlast them too.

Fashionista says MPs may be wasting their wrath on the wrong target. If clothes are made of substances that can't be recycled, they're going to cause environmental problems however many times they're worn. And not all clothing is binned because it's cheap: some is jettisoned because it doesn't fit any more, or murdered by owners who can't follow the cleaning instructions.