But Black Is Black, Right?

Popularly called parallel importing, the gray market prevails when an
authorized reseller of a product sells it beyond his defined market geography,
often without the explicit (but implicit?) knowledge of his principal.

Indeed, it is a debatable point whether or not the principal is aware of what
his resellers are doing. But for the time being let us assume that the principal
does not know. Because if the products remained in the markets where
vendors/principals intended them to be, then the gray market would cease to
exist, right? But rarely are things outlined so well in black and white.

Whiter shade of pale

To begin with, there are different shades of gray. It starts with cross-border
gray, when a legitimate reseller buys irregular quantities to sell elsewhere. It
gets darker when multi-tiered channels can't (or won't!) 'prevent' the product
from being sold somewhere by the parties lower down the supply chain.

Strangely, countries that claim to have completely free market economies (but
perhaps with porous boundaries) are places where gray markets are most
prevalent. Some may even argue that special economic zones or SEZs actually
encourage gray market where probably the flow of gray market goods is stronger
going out than coming in.

In some cases the conflict between the laws of nations makes it more
difficult to define, if not determine, whether the transaction is gray or not.
And who exactly is complaining?

Import of gold was restricted at one time in India and contraband goods used
to flow into the country from places like Dubai where the Arabian dhows that
carry gold towards the subcontinent were merely called 're-exports'!

There are three cities-London, Hong Kong and Dubai-where maximum trading
happens in the world and where the gray market is most prevalent. Some may wish
to include Amsterdam and Singapore to that list.

Losses or gains

Back in 2003, a research conducted by KPMG revealed that gray market sales of IT
products gross up to $40 billion in annual sales. That collectively cost the
vendors up to $5 billion a year in lost profits. Demand for a product that
sometimes may be in short supply is also an active catalyst for gray market.

Often buyers and consumers are led to believe they are, indeed making 'smart
purchasing' decisions. Products that are small, fast moving and more or less
commoditized and mass distributed are far more susceptible for gray markets.
Products that carry a warranty are not always popular in the gray market
considering the consequential exposure of the defaulter who is actually the
buyer.

But consumers will frequent gray market if they perceive less or acceptable
risk in managing failure of the product in seeking remedial post-sales service.
Products sold in the gray markets often enjoy cash payment. That would probably
explain the mind boggling discounting ability of the sellers. Smugglers and
pirates are also part of the gray markets, definitely the darker shade of gray
considering the fact they are selling bonafide goods albeit illegitimately.

Gray markets prevail where the mode of transport is air rather than by sea.
Apart from the obvious risk of being caught, the shorter sales cycle dictated by
sharp prices is also a reason why participants favor this mode of delivery.

Smirking service providers who are reading this need not get too complacent
by thinking that gray market is only a problem attributed to product vendors. An
employee who is moonlighting also contributes to the gray market phenomenon!

Cause and effect

Most resellers dabbling in gray markets when interviewed listed a number of
reasons. Top of the list is liquidity preference. How can a businessman resist
cash deals? Channel dumping by the vendors is another reason cited by resellers.
Acute stock pressure forces them to sell elsewhere, or so they claim.

Volume-based partner programs, unrestrained OEM deals, periodic schemes and
in some cases ageing product models are a few other reasons that contribute to
the problem. The day and nighttime divide only accelerates transactions that are
commonly understood as gray. Low import duties often act as catalysts just as
ill-defined import regulations and custom practices.

People do it because it is possible-why else would people go to a country in
Africa to register their ships especially if their cargo is not likely to be
clandestine? Occasionally, countries recognize gray markets but may simply
choose to regulate it rather than eradicate it completely.

For instance, look at what some of the major IT vendors have decided to do in
the UK and EU-all imports of their products from outside have to be justified to
customs! Is business truly laissez faire?

Some argue that gray markets are necessary particularly when it comes to
getting products into embargoed countries. Whatever be the political equation,
Iran continues to get American goods and we are not talking about defense goods
here.

In particular, import oriented economies, especially small countries, will
cite our notion of the gray market as vibrant business opportunities that they
need to pursue to stay alive. And then there is always the plain ol' human
greed. No one has a clue on how to control greed let alone manage it.

Arguably, the root cause of gray market is not entirely greed but strangely
'pricing'. Someone is offering a better price for a product that is well
marketed-why wouldn't the customer take it? If a vendor keeps differential
pricing among its resellers whose customers are in close proximity, then gray
market is bound to be prevalent. High margin items like application software
products are most likely to be hot in gray markets because the seller decides on
the elasticity of profit without any specific brand or product loyalty.

Good, bad and ugly

So we need to ask ourselves, is this a problem, really? After all, exploiting
one's opportunity is what business is all about, isn't it? Unlike fake goods,
which may even be damaging to say the least to the welfare of the consumers,
what is the harm in gray market then?

Some manufacturers actively promote and build routes to market, which look
very much like gray markets. Take clothing. Manufacturers' factory outlets,
which offer deep discounts, are akin to a gray market because they offer real,
branded products at a discount price.

The difference, of course, is that the manufacturer itself runs factory
outlet stores, while gray market sellers are not under the manufacturer's
control. So when does gray become a problem? When it starts to damage existing
channels by undercutting them. And it really becomes a problem when the
manufacturer's authorized channel start buying gray!

Book publishing is a business where the cost of textbooks in the USA differs
vastly to the prices at which the same titles are sold in India ostensibly under
licensed local printing. Why wouldn't the retailer in the USA be tempted to buy
from India and retail the books back in the USA?

Perhaps the best person to regulate the gray market would be manufacturers or
vendors themselves. If they can't, who else will? Seriously, has any
manufacturer or principal ever done such a thing like self-regulation?

Ralph Lauren has done just this in both Chicago and New York. In a recent
interview, Ralph Lauren claimed that his 125 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,
so that his resellers would prosper.

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.

Prescription for success

HP, Microsoft, Cisco and Symantec lead the war against gray markets. Many have
adopted the strategy of rewarding sell-outs as opposed to sell-in. Many global
players have established stronger local presence often at the cost of being
criticized as policing their partners.

There is also a perception, if not a belief, that centralized principals
perhaps inadvertently encourage channels as opposed to vendors who are
reasonably decentralized. Managed dis­counts among resellers, better stock
management, right pricing, and product differentiated but market segmented
positioning are some of the ways and means to discourage gray markets. Add to
that list, data transparency among vendors and resellers with a unified channel
policy.

But why is the customer smiling?

By: Vijay Kumar The author owns and manages Equitek, which provides consultancy on channel management in addition to training. He can be reached on vijay@studybiz.net