RTM: My impression is that most manufacturers don’t take serious steps to stop grey markets. For many, the grey market may even be a good thing.

AC: I agree. Certainly, I think many manufacturers are simply unaware of the extent of the problem.

Others feel that the grey market, where a real branded product gets distributed through legal, but unauthorised channels, reaches markets which their full price products may not reach.

It only becomes black if the goods are fake or if they are re-imported in such a way that a law is broken, such as the avoidance of tax.

Some manufacturers actively promote and build routes to market which look very much like grey markets.

"Grey product only exists because the supplier has created pricing discrepancies which allow it."

Take clothing. Manufacturers’ factory outlets, which offer deep discounts, are akin to a grey market because they offer real, branded product at a discount price. The difference, of course, is that factory outlet stores are run by the manufacturer itself, while grey market sellers are not under the manufacturer’s control.

RTM: How big are grey markets?

AC: No one knows, but estimates for watches and cameras go as high as 20%.
RTM: So when does grey become a problem?

AC:  Where it starts to damage existing channels by undercutting them. And it really becomes a problem when the manufacturer’s authorised channel starts buying grey!  This happens all the time in the book trade  in the USA.

"Examine pricing discrepancies. Are they really justified?"

RTM: How so?

AC: Well, Marketing Channels, the textbook I co-authored, retails for $120 in the USA, but in Asia the identical book is sold for a lot less.

An Indian student came back from vacation having purchased an authorized, licensed Indian version (in English) in India for $10! This is just one example; the problem is common for all textbooks today.

But it gets worse.

The authorised channel in the USA has now tapped into this. For instance, the bookshop at Purdue University has started buying some of its textbook stock through grey channels – that way it can offer much lower prices to its students. And US book shop industry associations even give seminars for their members where they teach them how to buy from the grey market.

RTM: Which, of course, kills the margins for the publishers.

AC: Yes. Grey markets also make it very hard to get rewards right.
I came across a pharmaceutical company in Europe where grey marketeers were exporting product from Portugal to the UK.

So the pharma company’s Portuguese managers vastly exceeded their targets, whilst the Brits, who had spent a year diligently creating the demand, came nowhere near theirs.

AC: There are some legal steps you can take. These vary from country to country, but, in the USA, contract law is very strong.

If you stipulate that your intermediaries mustn’t buy from grey channels and they break that clause then you can sack them  – even if the grey channels are perfectly legal (whether the manufacturer wants to sack them is a different story, that depends on the intermediary’s value in the channel overall). But that varies from country to country and, of course, the intermediaries have to agree to the contract.

RTM: Say they don’t, or, say, the clauses are not legally enforceable in that country?

"Grey becomes a problem when the producer hasn’t segmented the market well enough."

AC: Essentially, grey product only exists because the supplier has created pricing discrepancies which allow it to. If the supplier is really serious, it can just buy up grey inventory.

RTM: Does anyone ever do that?

AC: Very occasionally. Minolta camera company came up with an interesting slant on this.

It decided it did want to protect the authorised resellers who maintain and develop its brand equity. It told them: ‘If you discover grey market product, then we will remove it, but you will have to want it badly enough to share in the pain.’

"Minolta said it was a gesture that the dealers very much like and appreciate."

It said that the cost of any intercession would have to be borne equally by the manufacturer, the distributor and the dealer or retailer channel. 

As Minolta owns its own distribution in most countries, this meant that, in practice, it bore two thirds of the cost.  I am not sure how many dealers took Minolta up on this, but Minolta says it was a gesture that the dealers very much like and appreciate.

RTM: What other steps can you take?

AC: You can either reduce the price differences between markets or make products different from one market to the next, by localisation.

Whilst prices have tended to equalise over the last decade, few manufacturers are prepared to swallow the pill of complete equalisation, as they know that leaves money on the table.

Some suppliers void the warranties on products which are grey imports. But that is pretty dumb, as it leaves a bunch of unhappy consumers who were unaware that they bought a grey product and believed it was warranty-protected.

RTM: What else can you do?

AC: Essentially, grey becomes a problem when the producer hasn’t segmented the market well enough.

One form of purposeful market segmentation through channel design that manufacturers have exploited is factory outlets.  Here the suppliers hope to have done this segmentation exercise so thoroughly that they have created a completely new channel which creates little or no conflict. 

Take factory outlets for clothing.

Here there are several ways to differentiate from offerings in the high street stores. Often the lines are not the same, sometimes it’s old inventory or just the more basic items – sweatshirts and jeans.

Manufacturers claim that the people who are prepared to drive to outlets are not the same as those who flock to department stores to buy the premium priced products.

AC: Yes, but the whole point is that they claim they are not competing, that they have segmented the market by placing these outlets well away from town centres.

"Ralph Lauren has close to 125 factory outlets."

Historically, outlets are positioned 30 or 40 miles from conurbations and suburbs – although, as cities grow, that is becoming progressively harder.

RTM: And almost every big US clothing brand has embraced the concept, haven’t they?

AC: Yes, and in huge numbers. Ralph Lauren has close to 125 outlets, Jones New York has 150 and a lot of others have thirty or so.

They view it as a huge, new market which they simply can not reach otherwise. To minimize any negative impact on the designer’s brand equity, some designers also open their own flagship stores in major downtown shopping venues.

Ralph Lauren has done just this in both Chicago and New York. In a recent interview, Ralph Lauren claimed that these flagship stores were an important way of building the brand. He explicitly stated that he had no intention of making a profit from them, but saw them simply as a way to create brand equity.

"Avoid action such as voiding warranty which will hurt the consumer."

There is always a balance to be struck between capitalizing on the brand’s fame – perhaps through outlet stores to increase sales and expand the target market – and preserving the overall brand equity – perhaps through supporting high-end flagship stores.

RTM: So what steps can manufacturers take to avoid grey imports?

AC: Perhaps the first thing to ask is ‘Is this really a problem for us?’ It can be a benefit. Take a close look at who is buying grey product. Is it a more price sensitive market which you wouldn’t be reaching otherwise?  Most suppliers do not segment their market properly.

If it is a problem, there are various strategies you can adopt. Examine pricing discrepancies. Are they really justified?  Perhaps you need to revise your assumptions here.  For example, the book trade still prices Singapore as though it were third world, which is manifestly not the case!

Look at product differentiation. Can you make the products different enough to make them less attractive and obviously different from the fully priced product?

Look at legal options. But avoid action such as voiding warranty which will hurt the consumer. If all else fails, consider a buy in scheme to get rid of grey inventory.