Retail sales promotion is generally regulated at the state and local level. Regulation is focused on consumer protection and truth in advertising. Regulations governing retail sales promotion vary by state, county and city. All of these venues across the United States have their own laws, regulations and ordinances. Retailers must understand the various regulations that apply in their jurisdiction. The following is intended as a guideline. It does not attempt to detail all of the laws, regulations and ordinances that might apply in any specific venue. It is recommended that retailers wanting to promote their businesses check with an attorney concerning applicable law.
It is worth noting that a major high impact sale that results in a big increase in traffic and sales volume will hurt competitive businesses. These are likely sources of complaints to regulatory authorities. If other retailers are losing sales they become very interested in finding out if the successful promoter is doing something illegal. So, it is reasonable to assume an increased level of scrutiny will take place.
There are two general types of sales promotion events. These include sales for ongoing businesses and sales for retailers wishing to close their businesses.
A very good guideline for advertising all types of sales promotion is The Better Bureau Code of Advertising. Retailers who comply with these guidelines will be safe in most cases.
When a retailer advertises a sale using media, signs and tags, or just word of mouth the communication of a sale implies that merchandise is discounted from a regular price. The concept of regular price is therefore very important to the advertised message. Most of us can probably think of a retailer we suspect of raising regular retail prices for the purpose of subsequent markdowns. This practice will invite customer complaints and legal scrutiny.
Retailers must be prepared to justify the “regular retail price” of any item they mark down. If an item is normally sold at a given marked price this will certainly establish that price as “regular retail.” If the item has never been sold at the marked price but has been offered for sale at that price for a substantial period, usually at least 30 days, then there is a good argument that it is the “regular price.” If it hasn’t been sold at the marked price or been offered for sale for a substantial period, the retail price can be justified by a consistent and verifiable pricing policy. If, for example, every category of merchandise in a store is marked at keystone, yielding a 50% gross margin at retail, then it is reasonable that this price can be justified as “regular retail.” Having said the above, every jurisdiction is different, and these rules may not always apply.
Bait and Switch
Bait and switch is another area of concern. When a popular item is advertised at a discount, customer traffic will pick up. If consumers come to the store, find the advertised item sold out and are then offered a similar item, usually of lesser quality or higher price, the retailer may be accused of a bait and switch scam. The best way to avoid this is having enough of the advertised item in stock to satisfy anticipated demand.
Contents and Sweepstakes
Contests and sweepstakes are often used by retailers to attract traffic to a store. Regulators will often look at these promotions to see if gambling laws have been violated. Gambling involves three elements. The first is consideration or a payment. Second is an element of chance. Third is a prize. So, if a customer pays some amount to take a chance in hopes of winning a price that is gambling and most states have laws that prohibit or regulate these games. If any one of these three elements is eliminated then the game is not gambling. If a retailer has a drawing for a prize but does not charge for the drawing it’s not gambling. If there is a charge to play a game of skill to win a prize that also is not gambling.
There is great room for interpretation of the elements of gambling. In some jurisdictions, if a retailer advertises a free drawing but the consumer must expend energy/gasoline getting to the store, that expenditure is consideration and the drawing is considered gambling. Games of skill can also look as if some chance is involved. Retailers must look carefully at any contest or sweepstakes they employ to be sure it doesn’t violate gaming laws.
There are some states where trading stamps are not legal. The transfer of any piece of paper that confers a benefit or can be exchanged for something of value may be considered a trading stamp and therefore is not legal in these states.
The type of retail sales promotion that attracts the most attention and the greatest degree of regulation is the store closing sale. In many, but no all areas, there is a licensing requirement to conduct a store closing sale. This is a result of some retailers conducting perpetual store closing sales and never going out of business.
When there is a license required it is usually accompanied by the requirement to go out of business within a specified period. This is usually 60 days, but it can often be extended. Inventory can usually not be added during the sale and sometimes it can’t be added in anticipation of a sale. There is often a requirement to provide an inventory prior to the sale beginning and auditors will check to ensure no inventory is added during the sale.
The licensing requirement also typically mandates that the license number be published in all advertising.
Words in the title of a sale will trigger the requirement for a license. Store closing, quitting business or going out of business are obvious. However, in some areas other words might trigger a license requirement like fire sale, or overstock liquidation sale.
In some areas a chain store that has multiple locations must also close any stores in an adjoining county if they wish to run a store closing sale.
Landlords don’t like store closing sales in their shopping centers because potential renters may see it as a failure of the center. Lease restrictions often include a prohibition against store closing sales or any signage that can be interpreted as indicating the store is closing.
Sign restrictions can cause problems and may be covered by local ordinance or be restricted by a lease agreement. Advertising distribution methods are also frequently regulated.
Because of the magnitude of a store closing sale there is an increase level of scrutiny by regulators, competitors, landlords, media and consumers. It is therefore especially important to know all regulations, laws and ordinances that may apply.