Paul Kelly of Brown Thomas: 'Luxury brands built their prestige on a selective distribution policy,' he told the European Commission in August

The war of words between online retailers and traditional department stores over luxury brands is heating up.

Paul Kelly, deputy chairman of upmarket department store Brown Thomas, wrote to the European Commission in August stating that unrestricted online retailing would lead "to a trivialisation of luxury brands, which built their prestige on a selective distribution policy".

Kelly, who is also chief executive of Selfridges department store in London, said the absence of restrictions could also lead to "free riding, as retailers selling only on the web could profit from investments carried out by traditional distributors".

As a result, he defends the idea that a supplier might require its distributor to have so-called bricks-and-mortar shops before engaging in online distribution. This would ensure compliance with the brand codes and ensure a level of customer quality and service such as "a high level of technical assistance" and ease of securing an exchange or refund.

Kelly's submission came in response to the European Commission (EC) review of so-called vertical agreements, whereby an agreement is made between buyers and sellers operating at different levels of the supply and distribution chain. That agreement is due to expire in 2010 and the EC is reviewing it to take account of the rise of internet sales and the increased buying power of big retailers.

The success of the European luxury goods "industry relies on stable partnerships established with the distributors through selective distribution agreements", Kelly wrote. "These agreements allow investments in stores and a quality of service which contributes to the success of the brands distributed," he said, adding that selective distribution agreements "create economic values and have a positive impact on the European economy".

Kelly's submission closely resembles one made by European department stores to the commission a month later. Brown Thomas and Selfridges were joined by the likes of Groupe Galeries Lafayette, Harvey Nichols and Printemps in signing up to the document.

Chanel, meanwhile, said its selective distribution networks are "crucial for the luxury industry's ability to develop and maintain brand images and provide consumers with quality point-of-sale services, and it also importantly promotes legal certainty and reduces transaction costs in the market".

It also said it was "particularly satisfied" that the draft guidelines recognise the brands' right to "defend themselves against the risk of free-riding resulting from internet distribution".

However, it said the limits on "hardcore restrictions" on internet retailing "would leave the brands exposed to insidious forms of free-riding".

The industry, according to Chanel, believes online sales pose two major concerns in that they might devalue the brand and can "facilitate certain forms of free-riding".

LVMH, whose brands include Louis Vuitton, Christian Dior, Fendi, Donna Karan and Tag Heuer, told the commission that "the unregulated expansion of e-commerce would definitely weaken the viability of the physical network to the detriment of the consumer".

Online website Net-a-porter, meanwhile, supported the luxury brand owners, encouraging the commission to ensure the final guidelines allow the owners of luxury brands "the flexibility to develop distribution systems appropriate to the circumstances of their various different luxury products and the various luxury markets in which they operate".

However eBay, which has a significant presence in Ireland, said it "regrets the commission's choice of several proposals that are inconsistent with competition and consumer choice". It said allowing a supplier to require a retailer to have a bricks-and-mortar presence before they can sell online would "increase costs to consumers without any qualitative benefits and protect inefficient incumbent retailers".

It also said that direct comparisons between "online and offline shopping experiences, which often give rise to elements of the 'free-riding' arguments, are misplaced. The available evidence suggests consumers will continue to avail themselves of both online and offline opportunities".

eBay also believes "decision-makers must demand more evidence before accepting theoretical free-riding arguments as either reliable or credible".

The consultation period on the issue has now closed but it will be interesting to see if the commission sticks with a plan to remove the block exemption on certain types of supply and distribution agreements if a supplier or buyer's market share exceeds 30%. The shake-out from such a move could be substantial.