Why the supermarket's attempts to bring designer clothing to the masses could land it in court
TALL, slender, with expensively frosted hair and the down-to-earth poise you come across at parties of self-made, self-confident fortysomethings outside London, Professor Christine Cross makes an unlikely heroine. But in a matter of weeks she could find herself in Chancery Court facing the kind of decision you associate with the Trapped Woman in tense thrillers. Either she gives up her sources or she goes to jail.

Prof Cross is neither a government agent nor a journalist. She is the director in charge of clothes-buying for Tesco. Nevertheless, she finds herself on the receiving end of a legal complaint from Tommy Hilfiger, the designer clothes label.

Hilfiger started out selling preppy clothes to style-conscious black kids in the US which in turn have become cool in white America on the strength of their being fly in the ghettos. It arrived in Europe last July and has since opened 65 authorised outlets.

To judge by its ads for Tommy perfume, it is going after the Sloane Ranger/Hooray Henry market here. The company therefore found it unhelpful when Tesco put Hilfiger denim shirts, T-shirts, sweatshirts and jackets on sale at 50 of its 550 supermarkets during its Easter sale.

On 28 May, Hilfiger hit Tesco with a legal complaint alleging the Hilfiger clothes in question were counterfeit. It demanded that Tesco stop selling these clothes, pay damages, swear not to do it again and hand over the names of the relevant suppliers.

Hilfiger says it knows the clothes are counterfeit because over Easter it dispatched an undercover Swat team to buy samples from 25 stores. It says its study of the details of these samples - stitching, thread colour, care labels and the like - turned up giveaway deviations from the genuine articles.

PROF Cross replies that the Hilfiger items in question were not counterfeit. She says her team bought them on the grey market only after satisfying itself that the chain of middlemen involved led back to authorised factories. She has Hilfiger denim shirts purchased from the designer company's Sloane Street London outlet and its in-store boutique in Selfridges on Oxford Street. One of these has royal blue button thread, the other air-force blue. One has a care label sewn in straight, the other sideways. One says Tommy Jeans on the back, the other Tommy Hilfiger. "There is enough difference in authorised Hilfiger clothes to make it very difficult to say what's real and what's counterfeit," Prof Cross insists.

Last Tuesday Tesco went to court asking to see Hilfiger's evidence. But Prof Cross has a problem. The burden of proof falls on Tesco. The supermarket chain must convince the court the Hilfiger clothes it sold are authentic. This means that even if Tesco wins the court case, there is a chance that, in the course of the proceedings, Prof Cross may be forced to reveal the identities of her suppliers.

"This is the reason we sued in the first place," concedes Stephen Lock, the Ludgate PR man assigned to the Hilfiger account. "We want to know who their suppliers were."

"Maybe we're old-fashioned," Prof Cross says, "but we've told our grey market suppliers we will not reveal their identities. I would hate to break my word."

The volume of clothes at issue is piffling, measurable in hundreds of thousands of pounds. But the implications of the case are far-reaching. At issue is the way in which brand-name goods - a significant and growing segment of the pounds 180bn a year UK retail market - are sold.

"Tesco vs Tommy Hilfiger is a battle of titans," says marketing guru Peter York. Hilfiger's market capitalisation in New York is $2bn. Tesco's in London is pounds 11bn.

"You have two very powerful retailing cultures clashing," York says, tracing the root of the battle to contradictory impulses in many consumers. On the one hand, most people want the aura conferred by expensive designer clothes. On the other, we would prefer to buy the aura at a discount.

The designer labels themselves say the magic of brand names comes from the millions invested in advertising and creating the right ambience, or "shopping experience", in the stores distributing their lines. They contend they should be protected under law not only through trademarks, but also through legislation, allowing them to restrict distribution of their goods.

Non-authorised retailers - from street vendors right up to Tesco - counter that consumers should be free to balance brand magic against price. They argue that consumers should be able to buy designer goods from wherever they choose - be it authorised outlets or yobbos on the pavement. They say the law should be framed to promote free competition, curtailing excessive mark-ups.

Early this year, Prof Cross sent Tommy Hilfiger's European headquarters in Amsterdam a series of letters and faxes asking for a meeting to discuss Tesco's qualifications to become an authorised distributor. At first, the designer did not respond. Then, shortly before the Easter sale, a date for a meeting was offered - after Easter.

Tesco went ahead with its sale anyway. Prof Cross explains the economics of discounting designer labels as follows. Customers assume that the average retail price of a pair of Levi's in the UK is pounds 39.83, while it is pounds 27.86 in the US, because the US market is bigger. But designer companies are global. Tommy Hilfiger designs in New York, manufactures in Greece, Turkey and the Philippines, and ships round the world. Licence fees and wholesale prices are global.

Tesco can sell Hilfiger clothes cheaper than on Sloane Street or in Selfridges because its basic retailing costs - rent, utilities, and the like - are lower than for high street department stores or boutiques, and also because it is willing to take a lower profit.

Prof Cross is proud of the mini clothing boutiques in Tesco supermarkets. But she is aware that a designer label might balk at selling its clothes under the same roof as baked beans and kitchen cleaners.

"We did not rush into this," she says. The grey market on which she relied is misunderstood, she adds. "When I first started out, I knew very little about it. Grey market, I thought. Oooh, bad. What I discovered was that there is a whole universe out there trading in parallel with authorised distribution chains. The designer labels are happy to supply this parallel network. They know what their sales are. They know what their factory output is. They know their factory output exceeds their sales. But they want to keep control. What they hate is when someone in the parallel universe comes along and publicises what it is doing."

In advertising campaigns offering discounts on Tommy Hilfiger clothes over Easter, Tesco did just that. Tesco is the largest supermarket chain in the country. It reported pre-tax profits last year of pounds 832m. At its annual general meeting at London's Royal Lancaster Hotel last Thursday, chief executive Terry Leahy won praise from shareholders.

But the country is saturated with supermarkets. Like its competitors, Tesco is diversifying overseas. It just bought a chain of stores in Thailand at a knockdown price due to the Asian financial crisis. It is expanding into non-food items like loans, pensions, discount TVs - and clothes.

PROF Cross - an academic by training who began working at Tesco as a food scientist 10 years ago - was put in charge of clothes-buying in 1994. Her first foray into designer labels came when she put Levi's on sale during the supermarket chain's Easter 1997 sale. She has since branched out into Nike and Adidas sportswear.

Tesco has also reached a tentative accord with Calvin Klein over the unauthorised sale of CK perfumes. Rather than sue, Calvin Klein agreed to reconsider Tesco's request to become an authorised dealer, in return for which Tesco has stopped selling CK perfumes for now. "CK perfumes are made under licence by Unilever," Prof Cross says. "They were very helpful in acting as an intermediary."

Prof Cross is more doubtful, however, about coming to such an understanding with Hilfiger. There is, she admits, a chance that some counterfeit items could have crept into her supply chain. The upshot could be drama in court. She will not say what she will do if a judge orders her to give up the identities of her grey market suppliers. But her strength of character is as unmistakable as the northern accent in which she speaks. Besides, there might be a bonanza in jail.

Discounters like Tesco pose a deadly threat to designer labels like Tommy Hilfiger. To enhance its own brand the supermarket chain could be accused of devaluing the designer brands it is discounting. In the short run, however, if Prof Cross goes to jail, it could, as they say in the business world, be win-win. Tesco and Tommy Hilfiger would both get acres of publicity.

Free the Tesco One.