Funny Business with Jane Wells

LAX becomes a battleground between two retailers—over bottled water

Los Angeles International Airport (LAX) has become the center in a battle between two retailers over a scarce California commodity: water.

It's the bottled variety that has touched off a legal war between Kitson Stores, an LA-based retailer of trendy high-end fashion, and the Hudson Group, which owns and operates several stores at airports around the country.

More than a year ago, Kitson licensed its name to two Hudson stores inside LAX. Under the agreement, Kitson provides Hudson with the items it wants sold, and Hudson in return gives Kitson six percent of gross sales.

Enter the bottled beverage at the heart of the dispute. Recently, Kitson sent Hudson liter bottles of Smartwater it was already selling at its own stores around Los Angeles for $2.55, but wanted Hudson to sell them inside the airport for the same price.

Hudson, however, refused to accept the shipment. The reason? Inside LAX, a bottle of Smartwater sells for $4.68—a whopping 200 percent mark-up from its retail price outside the terminal (at one Ralph's store, a Smartwater liter sells for a mere $1.49).

Getting 'gouged' over Smartwater

Jane Wells | CNBC

With that price tag, getting a drink almost requires taking out a second mortgage. Kitson agrees, and it's one of the reasons the company is suing Hudson for breach of contract.

"Hudson Group is price gouging customers here at LAX as well as all across the nation," said Kitson spokesman Brad Chase. "They make millions and millions of dollars off the backs of air travelers. To lower the price to a fair rate of $2.55 will hit them hard on their bottom line."

Hudson, however, sees it differently.

"They're desperate," said Hudson Group attorney Brian Timmons. He said the water lawsuit is a PR splash which dilutes the real issue: The Kitson-Hudson marriage has been a bad relationship from the beginning.

Last month, Hudson filed suit to end its agreement with Kitson early, claiming breach of contract.

Among other issues, Hudson alleges Kitson founder Fraser Ross violated the terms of their contract by personally appearing at the LAX shops and berating employees. Hudson is seeking over $1 million in penalties and damages, and wants to remove Kitson by the end of March.

Timmons said Kitson didn't even start selling water until after it was threatened with eviction, and did so with the sole purpose of putting pressure on Hudson—something Kitson denies.

"Hudson Group is retaliating against Kitson using petty smears against the founder, specifically because they know that they've been caught price gouging," said Chase, the Kitson spokesman.

Bottled water soon US's #1 drink
Bottled water soon US's #1 drink

According to airport authority rules, a product sold inside terminals cannot be priced more than 18 percent above its "street value," or what it would sell for at the same store outside the airport.

Timmons points out that his client has no outside-the-airport stores to provide a comparison, said Hudson's prices are similar to other vendors inside LAX. For the sake of comparison, CNBC verified that liter bottles of water selling at Starbucks inside the airport went for $4.95, priced above what Hudson charged for Smartwater.

So why not sell water at Kitson-branded stores? "It's not about the price, it's about the product," said Timmons. He said water is sold in plenty of stores already. "Hudson entered into the brand partnership with Kitson to sell the iconic novelty items at LAX for which Kitson has become known—not to sell water."

When asked by CNBC if perhaps Hudson doesn't want to sell discounted water at Kitson and undercut profits at its other stores, Timmons replied: "Kitson is not after bargain-minded shoppers. And people don't go to Kitson to buy water. So anyone who thinks Kitson is really motivated here by an altruistic concern over how much travelers at LAX are paying for water has either never shopped at Kitson, or is really naïve."

Hudson has claimed both sides have agreed that Kitson will vacate on March 31st, but Kitson's Brad Chase says not quite. "Kitson has no intention of leaving LAX," he said.

The retailer could try to operate its own stores outright at the airport, but that requires an application process with the airport authority to meet the necessary requirements to operate in a high-security environment.

"Fundamentally the way it works at the airport is with a contract," said Chase. "We're being held captive."