A lot goes into the manufacturing of a product; especially with the luxury market, each product that goes out is the result of countless brainstorming, designing, and skilled craftsmanship. Imagine these products that are crafted by the manufacturer being sold in non-approved distribution channels instead of making it to the actual market it is meant to be sold in.
Gray Markets are certainly not a new concept. The selling of goods illegally has been a common practice for years. It has been a widespread international practice and one of grave concern to manufacturers and retailers since the mid-1980s. The products most affected by such unauthorized distribution channels are primarily high-value goods such as perfumes, spirits and alcohol, luxury devices, luxury clothing and a number of FMCG brands. There are different names for such markets – parallel imports, parallel or transnational trade, product diversion, and so on. The bottom line is that these are nothing but synonyms of ‘gray market’ and a dark economy that most laymen are aware of.
Although used synonymously with ‘counterfeiting,’ gray markets or parallel importing is often not the exact same thing. Akin to counterfeiting, the word ‘gray’ suggests it is like black market but not the same. It can be defined as ‘almost black market’. Parallel importing provides the opportunity for companies to bypass official franchise holders or agents for usually high-priced, branded goods and to source them direct from overseas suppliers. A non-licensed distributor cannot use the brand trademark in its actual form other than by a photograph of the label on the product or a photograph of the product itself if it bears the logo. Gray market might not seem as harmful as parallel import, it however has a slew of negative consequences.
Here are some recent examples of Gray Market and Parallel Import:
– Coca-Cola was badly affected when their products from Ireland were diverted to the UK.
– LVMH and other luxury brand have also suffered from gray-market activity. At times consumers travel and purchase the items cheaper abroad and re-sell them for a premium back at home.
– Perfumes are easily impacted as most products are distributed worldwide, and parallel imports may be as high as 50% of all perfume sales such as in the case of Chanel perfumes (Burr 2008).
Types of Gray Market
It might sound surprising but there are categorisations in gray markets too. Let take a quick look at the different types of gray markets:
– The first category is the original market where the original product is sold but through unauthorized distribution channels. This market deals essentially in new and original products.
– The next category is the green market. Put simply, the market where the original product is sold after use is known as the green market. Thus, when the real product has been fully used, its container is filled with a fake or totally unrelated substance and sold as the original.
– The third categorization is dark market. It is the market that deals in secretive and unregulated trading of commodities, crude oil for example.
The Growth of Gray Markets
It does not take people long to find opportunity to mint money. Of course, one of the major reasons behind the existence of Gray Markets and Parallel Imports is the appetite for criminals to make a quick buck. However, there are other reasons that foster the birth of such markets as well. According to Educba.com here are some factors influencing the existence and growth of Gray Markets:
Low Price Competition- To increase sales and sell in bulk, many manufacturers distribute their products through large distributors. This leads to a competition among authorized market distributors. To be in the competition, product prices are slashed, and discounts offered. This invariably leads to reduction in the profit margin of per product.
Price Difference in Different Countries- To maximize profits based on demand of a product in a certain country, manufacturers offer different prices or different costs for the same product in different countries. Aware of this, gray marketers often purchase goods from countries where the price is lowest, as such they are able to sell them at low prices in their country of operation.
Blocked Distribution- Certain distributors are blocked by some manufacturers from selling their products; the desire to sell those products usually causes the distributors to look towards Gray Markets.
High Product Cost- When we talk of premier luxury products, we are usually referring to products with high price points. Some products even derive their luxury status by being deliberately priced higher than their competitors by significant basis points. On the blind side of everyone else however, these same companies in a bid to sell their products and balance sales and revenue, sometimes themselves take their own products into gray markets to make up demand shortfalls and shore up revenues.
Negative Impact of Gray Markets and Parallel Imports on Businesses
The prevalence of Gray Markets and Parallel Imports cannot be healthy for any brand. It does not only thwart the existence of a brand but also poses challenges to the economy of a country at large. Here is an attempt to understand the harmful effects of these markets are they:
Affect Brand Reputation- Since products in the Gray Market are sold through unauthorized channels, they do not come with a guarantee. When such products face an issue, they affect the image of the brand it belongs to, and this raises questions on the credibility of the brand.
Harms profitability- Goods sold in Gray Markets are pegged at lower prices than the cost fixed by the original company. This therefore means that buyers would be much inclined to purchase the cheaper ones thus leaving the rightly priced products unattended to – this usually turns out to be detrimental to the revenues and profitability of the company.
Multiple Market Price- As mentioned earlier, the prices of goods sold in Parallel Marketing is lower than the ones sold through authorized distribution channels. This difference results in the presence of multiple market prices, and this leads to a situation where the customers begin to doubt the price quotations for the products on the market.
No taxation impacts economy- It is understood that Gray Goods are sold without tax charges since their channels of distribution are outside the purview of regulators. The absence of taxation has a very negative impact on the economy.
The Challenges of Gray Markets for Brand Owners
One of the biggest challenges for brands against gray markets is the tracking of their products. It is understood that many of the products sold in gray markets are genuine and hence we realize that the diversion of genuine products into unauthorized channels comes from official distribution channels. The lack of product tracking mechanisms for brands can create nightmarish situations and becomes a real challenge to them.
A Perfect Solution in the Gray Storm
The entry of products into unauthorized distribution channels can be prevented if the products are equipped with robust labels that help with geolocation. Cypheme promises one of the best solutions to this problem. Cypheme is a company that prepares labels powered by Artificial Technology. The brand offers the best AI Fingerprint Technology that helps to protect brands from counterfeiting.
What more? Cypheme’s tech also offers a vision of geolocation. The brand provides a dashboard that shows geolocation data of the customers’ products authentication activities, while strictly adhering to GDPR guidelines. The Cypheme label is one of the most trusted ways to not only prevent counterfeiting but also to prevent the entering of products into unauthorized distribution channels that brands are not aware of.
The solution to Gray Market and Parallel Import does exist – brands just need to think proactively to safeguard their products and take action.