By Jamie Robertson Business reporter, BBC News

When Lego originally decided not to sell the Chinese artist Ai Weiwei bricks with which to make a political statement, it really thought it was doing the right thing.

Its ethical policy states that any artwork using Lego products should not “contain any political, religious, racist, obscene or defaming statements”.

However, the Danish company was widely attacked by commentators and accused of not wishing to annoy the Chinese government, which Ai regularly criticises.

Lego has now relented and on Wednesday announced that it had changed its policy.

It will no longer ask customers what they want to use the bricks for, but requests that they make clear that the company does not support or endorse their projects, if exhibited in public.

But should a business be picky about whom it sells to?

‘Strict restrictions’

The problem is that selling as much as you can to anyone and everyone can have unintended consequences.

Some customers can turn into your competitors.

LVMH, which owns luxury brands from Christian Dior clothing to Dom Perignon champagne, has had its Chinese business undermined by bulk sales ferried into the country by so-called “daigou” agents.

Taxes and currency differences make luxury goods far more expensive in China. Some analysts estimated that by mid-2015, Chinese prices were 60% higher than those in Europe.

The daigou agents, many of them students making extra cash to finance their overseas studies, buy up luxury products in bulk in Europe and Hong Kong and sell them on at home. It is sometimes known as parallel trading.

So LVMH started to watch its customers more closely.

Speaking on a conference call earlier last year, Jean-Jacques Guiony, chief financial officer at LVMH, said: “We’ve placed strict retail restrictions for the amount of products that people can buy.

“But, when you see someone in a store, you don’t know whether they are buying handbags for themselves or to sell them on to the market in China. We are trying to make sure we are not competing with our own products in the China market, but our actions are not entirely bullet-proof.”

Grey market

Other companies have found it easier to try to equalise prices. The fashion house Chanel raised its European prices by 20% and cut them in China, directly competing with the daigou agents and successfully eroding their profit margins.

This kind of grey market happens everywhere.

A supermarket might halve the price of a box of chocolates in a sale and sell them all to a single customer, only to see them turn up in the corner store down the road, undercutting their recommended retail price, a fortnight later.

That’s not illegal, but there are ways to stop it – by restricting sales.

The British Retail Consortium’s external affairs adviser, Bryan Johnston, says: “In the end, it is up to the individual store. It is in the gift of the retailer to decide on how much they want to sell to any one customer.”

Many supermarkets imposed restrictions two years ago when the scandal over contaminated baby milk in China prompted overseas Chinese to buy up formula and import it into China.

However, these were more to do with trying to stop a run on the product at home than trying to stop any kind of parallel trading abroad.

More can be more, or less

But for some retailers more is, well, more.

Marks and Spencer spokeswoman Clare Wilkes says: “A few years ago, a woman came into one of our stores and bought up the every piece of cashmere we had. We had no objection to that – at all.”

But the luxury goods industry on the whole is very choosey about whom it sells to.

The most famous example is Burberry, which by 2006, when Angela Ahrendts became chief executive, was growing just 2% a year in a booming luxury market.

It was selling everything from kilts to dog cover-ups and leashes – to everyone.

Ms Ahrendts wrote later in the Harvard Business Review: “In luxury, ubiquity will kill you – it means you’re not really luxury anymore. And we were becoming ubiquitous.”

Ms Ahrendts completely restructured the company, drastically reducing its product range, centralising production and design, making it more expensive and then, restricting the customer base.

She added: “We began to shift our marketing efforts from targeting everyone, everywhere, to focusing on the luxury customers of the future – millennials. We believed that these customers were being ignored by our competitors.”

The restrictions it imposed were financial. The kilt and dog-leash buyers were simply priced out of the market. Many of the core Burberry products, such as the signature trench coat, now cost more than $1,000 (£700).

Brand consultant Rebecca Battman says: “There are unintended consequences of your brand becoming popular – the more widely seen it becomes, the more it will diminish the power of the brand among the people you really want to appeal to.”

Ms Ahrendts’ strategy worked. Within five years, Burberry’s revenues and operating income had doubled and 2014-15 revenues rose 11%. Less had become more.

IMAGES:

Did Lego dig a hole for itself? Getty Images

LVMH: watching its customers more closely Getty Images

Chinese artist Ai Weiwei can now buy as much Lego as he wants – Frank Augstein

M&S is happy to sell shoppers as much of a product as they want Getty Images

Angela Ahrendts of Burberry: “In luxury, ubiquity will kill you” Getty Images

For more on this story go to: http://www.bbc.com/news/business-35303799