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Playing by the rules

07 May 2008

Retailers want and need customers to survive. To attract more customers, retailers go beyond mere advertising and use sales promotions like games and competitions as well.

As a form of sales promotion, games and competitions are regulated by laws, and need to comply with the Gambling Act 2003 (the Act).  If you are going to offer sales promotions, you need to be aware of what you can and cannot do.

What is a sales promotion?
Sales promotions are often confused with advertising but they are different. ‘Sales promotions’ describes promotional methods using special short-term ways to persuade customers to respond or undertake certain activity.  As a reward, retailers offer something of value. Sales promotions schemes are different from advertising where:

• the promotion involves a short-term value proposition (for example the contest is only offered for a limited period of time)
• the customer must perform some activity to be eligible to receive the value proposition (for example, the customer must enter the competition).

Timing constraints and an activity requirement are hallmarks of a sales promotion. Both advertising and sales promotions can be useful tools to bring in customers and generate sales.

Instant win, prize competitions, sweepstakes and lotteries are common sales promotion schemes in the fast moving consumer goods sector.  There are many others.

Retailers see value in using these sales promotion schemes because they create continuing benefits including:

• increasing sales
• creating interest and stimulating demand
• capturing customer information that can be reused, or in some instances, sold
• getting authorisation to send customers further promotional material
• building product awareness
• reinforcing the retailer’s brand.

Why do you need to be careful? 
Sales promotion schemes are considered gambling under the Act.  But if your promotion qualifies as a ‘sales promotion scheme’ under the Act, then it is allowed.  Care is required because if it does not qualify, it may be illegal. 

The penalties for operating illegal gambling include:

• up to one year imprisonment
• up to $20,000  fines for individuals
• up to $50,000 fine for a company.

Also, operating illegal gambling could create negative publicity for your business.

What qualifies as a sales promotion?
To qualify as a sales promotion scheme under the Act your promotion needs to meet certain criteria.

Use this checklist as a starting point to ensure your sales promotion is not inadvertently illegal. The Act sets out the following criteria for sales promotions: 

• it must be offered by a creator, distributor or vendor of the goods being promoted
• to join in,  people must not be required to pay more than the usual retail price for the goods or services
• to enter people must not have to pay any direct or indirect consideration other than buying the goods or services being promoted
• the date winners will be decided must be clear at the time and point of sale
• it must not involve a gambling machine
• if it is not a lottery, entry cannot be by ‘remote interactive’ (for example phone or internet)
• you must not offer weapons, explosives, liquor or tobacco products or commercial sexual activities or vouchers for any of those goods and services as a prize
• the outcome of the promotion must be determined randomly or wholly by chance, or partially by chance and partially by knowledge and skill.

You do not need a licence to run a sales promotion.

It is worth considering some of the criteria in a little more detail.

If you offer vouchers for banned prizes, your sales promotion will not qualify as a sales promotion under the Act
This includes vouchers that can be redeemed for a range of products, including banned products.

An example of this is a liquor store that offers a weekly draw to its loyalty scheme members in which members can double their loyalty points.  Because those loyalty points are redeemable for a range of products, including alcohol, the draw is a promotion scheme with a banned product as a potential ultimate prize.  The draw therefore no longer qualifies as a sales promotion scheme under the Act and may be illegal.

If customers have to pay any direct or indirect consideration to enter, it’s not a sales promotion
So you can’t charge your customers a fee to take part in your sales promotion. But be careful not to get caught out by indirect payments. “Indirect consideration” is payment to anyone (not just the promoter) over and above the retail price of the goods or services being promoted.
On the face of it, this means that if a person has to buy a 50 cent stamp to post their entry to you, your promotion will not qualify as a sales promotion scheme under the Act and may be illegal.

Fortunately, the Department of Internal Affairs (DIA), who has responsibility for administering the Act, takes the practical view that if entrants have to incur only standard communication costs, your promotion will still qualify as a sales promotion scheme. 

The risk of prosecution seems low if entry merely involves paying for a stamp or paying ordinary text message charges.  Despite this, the safest approach would be to use point of sale entry boxes, prepaid envelopes or postcards and an 0800 number.

If entry is by cell phone or the internet, then your sales promotion has to be a lottery
Except for sales promotion schemes in the form of a lottery, “remote interactive” gambling is illegal in New Zealand.  You should not run “instant win” and prize competitions where entry is by cell phone or the internet. 

The rationale behind this control is that some people, particularly young people, are likely to over-commit themselves financially in promotions that involve multiple chances to win, rather than one draw promotions where the prize draw takes place after all participants have entered.

Other laws to consider
As well as the Act you need to consider the provisions of the Fair Trading Act 1986, the Advertising Codes of Practice and possibly the Codes of Broadcasting practice if you intend to run a sales promotion.  It would be prudent to seek legal advice early when thinking about running any type of sales promotion.

Make sure you get it right
Many retailers feel that advertising alone is not enough to drive sales.  To meet their goals they look for other promotional methods to complement advertising.

Sales promotion schemes are an excellent way to promote your products and gather information on your customers. With the challenge of finding creative ways to separate your promotion from your competitors’ promotions, the potential to test boundaries is real.  But you still need to ensure that what you are doing is legal.  The ramifications of running an illegal gambling operation, even inadvertently, are significant. 

Corinne Blumsky
Partner, A J Park Wellington
corinne.blumsky@ajpark.com
DDI +64 4 498 3445

An edited version of this article was published in NZ Retail May 2008