How May Unfair Competition in the Retail Market Affect the Company’s Reputation?

The retail market both in Ukraine and worldwide is highly competitive, despite the sizable investments needed to enter it. Meanwhile, due to a long optimization of logistic processes and traditional migration of human resources from one group of companies to another, the leading marketing policies of players in the market are, if not the same, then at least very similar.

Indeed, each player aims to stand out among others by unique market positioning. For instance, these are such shops with the lowest prices, shops that offer high-quality products and suchlike. In such circumstances, the company’s reputation plays a significant role. After all, it significantly and directly affects the perception of the company’s products by consumers, and the retail market is characterized by high consumer mobility. Today, there is no problem for the average consumer to “dash over” to another supermarket in case he is no longer okay with his “traditional choice”.

When talking about unfair competition, The Law of Ukraine On the Protection Against Unfair Competition consists of quite a wide range of possible violations.

At the same time, when evaluating the violations that occur on the retail market and can create reputation risks, they can be divided into three categories:

– unlawful use of another’s trademarks;

– copying of outward appearance of products belonging to other manufacturers;

– misleading of consumers.

Regarding the first two types of violations, here we can talk primarily about counterfeit products. It is unlikely that consumers will be happy to learn that they have acquired a fake. And when it comes to food, hygiene products, etc., the question of possible harm to life and health is very acute.

In this case, two separate aspects of reputation risks should be distinguished:

– committing of a violation itself by the company, that is, when the company consciously sells counterfeit products;

– committing a violation by the suppliers of the company, when the company did not know that the supplier had shipped it a fake.

For the consumer, it does not matter who exactly is the source of counterfeit products. In his eyes, the “bad” in any case will be the store selling counterfeit goods. However, within the company itself, these two violations require entirely different mechanisms to prevent them.

The first one is, first of all, internal mechanisms for preventing violations of the law by company officials and managers, effective compliance within the company.

A common mistake of many companies regarding the creation of internal compliance practices is the “transfer” of these tasks to the legal department. Why is this a mistake? Practice shows that in companies where the legal department manages this matter, the compliance policies are rarely followed despite the formal presence of them as an internal rule in the company. This is primarily because employees involved in compliance should be as independent as possible and removed from the direct management vertical within the company. I.e., if the compliance department is subordinate to someone, then this should be either a supervisory board and similar body, or direct accountability to the head office of the parent company. Even subordination to the highest management of the company (directors) can negatively affect the efficiency of this department. Another critical factor — the legal department of a large company has a number of other important tasks, and therefore it performs the compliance function on a residual basis — which certainly cannot but affect its effectiveness.

The second mechanism is to control the activities of suppliers, an effective policy for their selection, and potentially to analyze the entire supply chain to ensure the originality of the goods supplied.

And in the case of the second mechanism, the legal department and, to a lesser extent, the department on working with suppliers plays a significant role. The role of the first is the development of effective legal practices to prevent such violations by counterparties. This can be done by well-developed terms of contracts, control and verification of counterparties before concluding contracts, etc. The task of the department for working with suppliers is to physically check the incoming goods for their originality. But here, again the legal department should develop simple and understandable for local managers instructions for the acceptance of goods, which will include the necessary checks.

These two mechanisms are equally important for effective operations within the market.

The third type of violation is dissemination of misleading information.

On the one hand, this type, as a rule, does not significantly affect the company’s reputation, and on the other hand, in some cases, one such violation can lead to a complete failure of the business.

First of all, such duality is associated with the very composition of the violation and its most common actual manifestations in the market.

What does to Mislead Consumers Mean?

The Article 15-1 of the Law of Ukraine On the Protection Against Unfair Competition defines the following “the misleading information is, in particular, information that:

– contains incomplete, inaccurate or false data on the origin of the goods, manufacturer, seller, manufacturing method, sources and methods of acquisition, sale, quantity, consumer properties, quality, completeness, suitability for use, standards, characteristics, features of the sale of goods, works, services, price and discounts on them, as well as information on the essential terms of the agreement;

– contain incomplete, inaccurate or false data on the financial condition or economic activity of a business entity (entrepreneur);

– attribute powers and rights that they do not have, or relations in which they are not involved in;

– contain references to the quantity of production, acquisition, sale or delivery of goods, the performance of work, the provision of services that were not actually available on the day the information was disseminated.”

What does within the framework of the retail market’s reality mean?

It means the use of false advertising, various frauds with price tags, conducting opaque promotions and marketing policies, and similar activities.

A characteristic feature of this violation is that, according to practice, it practically does not affect the business reputation of the company. Such a rather strange at first glance conclusion (after all, how can a consumer continue to buy goods where he was deceived?) becomes obvious after a more in-depth analysis of the issue. Today, potential consumers are surrounded by such advertising volume and information that a particular case is forgotten very quickly. Moreover, today the consumer subconsciously expects “pitfalls” in advertising, and therefore, when his expectations are fulfilled, he is not very surprised.

Is the misleading of consumers such a severe problem and should a company spend its resources on building effective compliance that will prevent this kind of violation from happening? Yes! And it’s not just about a high level of fines for violations. Another distinguishing feature of this type of violation is that it is rather difficult to predict the consequences and assess potential risks. You can never reliably state that a single false advertisement will not be “overblown” by a competitor or unexpectedly spread by social media and, thus, will not create a negative reputation for the company.

However, are there significant risks to business reputation in the event that a company commits a violation in the field of unfair competition?

The experience of more than 20 years of the existence of the Law of Ukraine On the Protection Against Unfair Competition suggests not.

The responsibility itself for violations in the form of unlawful use of another’s trademarks, copying of products or misleading consumers is very significant. The law establishes the amount of liability of up to 5% of annual revenue from the sale of goods, works, and services of the company. Moreover, in practice, the amount of fines imposed by the Antimonopoly Committee of Ukraine, especially in recent years, reaches tens of millions of hryvnias. That is, it is impossible to ignore the possibility of being brought to account.

At the same time, from the point of view of reputation risks, the consideration of a case by the Committee and bringing the company to liability, as a rule, does not affect the reputation in any way. First of all, this is due to insignificant media coverage of the facts of bringing to liability. Even though that information about the punishment of an unfair market player is published on the AMCU website (even with the text of the decision), it often does not go beyond it. Only in certain cases is the appearance of short news or notes in specialized publications possible.

The broader aspect is the ability to disseminate information about unfair advertising by the company on social media. However, in most cases, this has not been connected with the fact of being the company brought to account by the Antimonopoly Committee of Ukraine. In fact, such information is the consumer’s stories about their own experience of “deception” or the acquisition of fake products.

At the same time, for example, news about the case of food poisoning from the supermarket’s cooking is more likely to become more widespread. It will affect the company’s reputation to a greater extent than the news about deception during a campaign or false advertising.

Thus, possible reputational risks arise not from the fact of fining the company for violation of the law in the field of protection against unfair competition, but from the very fact of consumer fraud. Such situation which is uncharacteristic for developed countries has arisen due to the absence in Ukraine of any practice of compensation claims from consumers against violators. In both America and Europe, precisely due to such lawsuits, because of their number, can mean much greater financial losses for a company than a multimillion-dollar fine imposed by a state body.

In addition, you should not forget about ano­ther potential consequence of the decision of the Antimonopoly Committee of Ukraine. The presence of such a decision will surely be reflected in the annual audit reports of the company and, if the company places its securities/shares on the stock market, it will negatively affect their price.