Gray Market Blues: How Companies Can Prevent Unauthorized Product Sales
Companies’ focus on basic order fulfillment during the COVID-19 pandemic has allowed a more insidious problem to come to a head: the influx of gray market products into the supply chain.
Gray markets, as the name suggests, do not consist of illegal items, such as contraband or counterfeits. What makes them problematic is the way the items are obtained and sold, namely without the authorization of the brand owner who produces and markets them. But don’t let the term “grey” fool you that gray markets are harmless: they have tangible effects on the companies that are targeted by shady operators, as well as on the customers who, intentionally or not, buy from them. businesses.
To see how this works in the real world, look at the network space, where gray market components are rampant. As with almost every other industry, the COVID-19 pandemic has disrupted the worldwide supply of network components. Then, when the global economic recovery from COVID began, demand for these components heated up, leading to increasingly longer delivery times. It is in this kind of empty space where demand exceeds supply that gray markets thrive.
In a scenario where everyone wants a piece of a commodity, but there isn’t enough for everyone, unscrupulous actors tend to appear to sell seemingly legitimate products, but of dubious pedigree. How are these genuine items diverted from the authorized distribution chain and into the hands of customers? They often enter the gray market after being fraudulently diverted from the manufacturer’s authorized distribution partners.
The essence of the gray market is that while the items may have been produced by the brand whose name they bear, the sale is not permitted by the terms of the contracts between the manufacturer and its distributors.
Not ‘The Real Thing’
While not technically counterfeit, gray market products present a host of distinct challenges for businesses. Desperate buyers who wouldn’t think of accepting counterfeits, or those for whom price is the only focus, might be willing to accept gray market products because they are still “the real thing”. A more likely scenario is that they don’t even know they are buying from unauthorized sources. However, gray market brokers have no obligation to handle and ship products according to manufacturer’s specifications, and diversion may invalidate manufacturer’s warranty, software license, and after-sales support. In some cases, gray market brokers cross the counterfeit line and may mix gray and counterfeit products. They can also eliminate the original components and replace them with generic or used components. In any case, as any serious wine collector will tell you, legitimate products of ambiguous provenance are not necessarily identical to those of a reputable seller.
This analogy actually alludes to one of the biggest problems with gray markets, which is that products obtained by fraud, falsified, old, damaged, returned, or mishandled while in the hands of the gray broker can result in inconsistent quality for customers, which in turn can cause real damage to a company’s brand reputation. Consider: If gray market components don’t perform up to par, what will the customer think? The customer will likely blame the manufacturer rather than the gray market broker. And how will the manufacturer react? Will they repair or replace components? Will the customer choose to buy from this manufacturer again? These are the kinds of questions that brands obviously don’t want to find themselves answering.
There are also other concerns. Gray markets, by definition unauthorized sales of goods, undermine the ability of businesses to maintain price integrity. This is especially true when goods are obtained at huge discounts under false pretenses, then diverted and sold on the open market. For a legitimate business, gray brokers represent an unfair direct competitor to their own authorized dealers, whom they can undermine without fear of consequences. At a large enough scale, gray market sellers can seriously eat into your profits and erode your margins.
what you can do
As an issue that spans brand, product, law, fulfillment and more, gray market theft requires an interdisciplinary team consisting of (at a minimum) your brand protection team, lawyers, product designers, supply chain managers and communication professionals. Each plays an important role in identifying and stopping gray market attacks against your business.
Next, companies need to get a handle on the scale of the problem. Most companies have no idea of the scale of unauthorized sales because gray marketers operate globally and are experts at acting fast and staying under the radar. Gray market losses should not be viewed as a cost of doing business. Companies must investigate product diversions and determine how and why they were victimized and take action against those responsible.
Manufacturers must maintain supply chain integrity to ensure that counterfeit and gray products are not supplied by suppliers during the manufacturing process. Next, they must control their authorized distribution channels with appropriate contracts, including audit clauses and prohibitions against buying from or selling to unauthorized entities. Sellers must know their customers, to avoid selling to gray merchants disguised as sheep.
Most off-the-shelf labeling systems are no match for today’s gray market mercenaries, which is why companies really should be using digital supply chain tracking technology already. The goal should be to automate the collection of all relevant supply chain management technology data into a centralized gray market dashboard.
Only from this vantage point can you develop an effective gray market prevention strategy, which can involve anything from updating your gray market prevention processes to firing or from delicensing distributors and suppliers who you believe are compromising the integrity of your supply chain, to taking legal action against unauthorized sellers. In fact, there are many effective ways to remove gray market distributors, but there’s nothing you can do if you don’t know how it happens. When it comes to gray market prevention, data is knowledge and knowledge is power.
Daniel Mascaro is Director of Investigations and Audits at True pedigreea brand protection platform.