What Is a Grey Market?

The gray market is referred to as the gray market. Refers to a market channel that sells branded goods without authorization from the trademark owner. The products in the gray market are genuine brands, but the sales channel is an "informal" channel without the authorization and consent of the trademark owner. The gray market indicates that it lies between a legitimate white market and an illegal black market.

Grey market

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The gray market is referred to as the gray market. Refers to a market channel that sells branded goods without authorization from the trademark owner. The products in the gray market are genuine brands, but the sales channel is an "informal" channel without the authorization and consent of the trademark owner. The gray market indicates that it lies between a legitimate white market and an illegal black market.

Chinese name

Grey market

Short name

Gray market

Location

Between white market and black market

Classification

International and domestic

1. The authorizer of the sales channel is the brand owner, not the manufacturer. If the brand owner and the manufacturer are not the same company, the authorization of the brand owner is the main.

2. The authorized channel level is not limited, so the gray market may occur at the level of trade between countries, such as parallel input of genuine products; it may also occur between members of domestic channels, such as cross-border sales.

3. The goods sold in the gray market must be genuine products with the correct trademarks and authorized and recognized by the brand owner, otherwise they are counterfeit and belong to the category of the Black Market.

4. As long as the channel being sold is not authorized or agreed by the brand owner, whether it is informed or not, it belongs to the gray market; in some cases, the brand owner will tolerate the existence of the gray market without stopping.

Classification of gray market:

Grey markets can be divided into international markets (within a market) and domestic markets according to the level of their transactions.

Causes of the international gray market:

When gray product transactions occur between commodity importing countries, an international gray market is formed. The starting point of international gray market transactions occurs between authorized channel dealers in exporting countries and unauthorized channel dealers in importing countries. Common products such as automobiles, pharmaceuticals, precision electronics, and brand-name cosmetics. With the development of the Internet, the rise of e-commerce has also provided a breeding ground for the development of gray markets. On the Internet, as long as you have a credit card, you can order CDs, software, and books from sellers around the world, and even buy medicines online after visiting the Internet hospital, which all challenges the traditional distribution channels. The fact In the past, the e-commerce field is growing a larger and more hidden gray market.

The opportunity for arbitrage brought by the price gap between different markets is the main reason for the formation of the gray market, and the price gap is due to different authorization conditions for channel dealers, discriminatory price strategies by suppliers, and fluctuations in international exchange rates , The difference in distribution costs of distributors, the same product faces different product life cycles in different markets, and so on.

For example, the price of KODAK in the Japanese market is higher than that in other parts of Asia, so speculators will buy KODAK film at a lower price in the Korean market, and then in Japan at 25% lower than the authorized local operator On the market.

The existence of market gaps is another important reason for the formation of an international gray market. Due to the limitation of fund size or the prudent consideration of market development, brand owners have not yet established a distribution channel for markets where demand exists. In addition, brand owners have limited information on the market, which will also cause them to ignore potential markets and customers, and market arbitrage speculators have discovered this with their keen insight into potential markets and profit margins. Arbitrage opportunities, thus forming a gray market. In addition, low transfer cost (dlersion cost), that is, the entry cost of genuine products into the gray market, ineffective legal regulations, etc. will lead to the formation of the gray market.

The reason why brand owners tolerate the gray market repeatedly is that from a certain perspective, the brand owner is also a winner in the gray market: first, the gray market is also the real product, so its realized sales, Is part of the performance composition of the brand owner; secondly, the gray market arbitrage speculators have a keen insight into potential markets and profit margins, which can help brand owners find potential markets and customers that they have overlooked; third, in the channel In management, the gray market is another type of internal competition that can promote authorized channel members to improve their operating efficiency.

Although the existence of the gray market can bring certain benefits to brand owners, its negative effects on the brand, especially a brand that hopes for sustainable development, are undoubtedly greater. First, gray markets cannot provide consumers with accurate and complete product information. Modern product quality commitment includes two aspects, one is the commitment to the quality of the product itself, and the other is the commitment to the quality of after-sales service. Gray markets often fail to meet such promises, especially for the latter. This is to make the quality and service of the same product uneven in the regional market, which will reduce consumer satisfaction in the regional market. The chaotic price structure in the authorized placing area will also make consumers doubt the relevant information of the brand, and then affect brand loyalty.

Brand owners can also get some short-term benefits from the gray market, but authorized channel dealers are the true gray market victims. Most of the gray markets are dependent on authorized channels to survive. Authorized channel vendors will make a lot of promotional efforts in order to expand the authorized market. When gray channel vendors enter the market, they actually enjoy the promotional functions provided by authorized channel vendors for free. This can attract more customers at lower prices than authorized channel dealers. This behavior will not only take away the existing market of authorized channel vendors, but also lose the trust and loyalty of customers because of the inability of gray channel vendors to provide complete product value, and thus the potential market. If the brand owner fails to respond in a timely manner, the continued existence of the gray market will worsen the financial status of the authorized distributor, and due to the loss of profit margin for the sales of the brand, it will be unable or unwilling to invest more funds for the promotion of the brand's products , Which in turn caused the brand's market to fall.

For consumers, the gray market has created more selectivity and more favorable price discounts. At the demand level, because consumers are different in price sensitivity and required service levels, the gray market seems to be able to meet different requirements. The needs of the consumer group. However, because the gray market is sold through channels not authorized by the brand owner, consumers cannot obtain complete product value, such as obtaining product information and after-sales service. From a long-term perspective, if the gray market destroys the original channel structure and affects the brand owner's marketing mix strategy, causing a blind price war, it will inevitably lead to a decline in product quality and ultimately affect consumer rights.

Because the gray market is the brand owner's genuine products traded on unauthorized channels, the core factor for solving the gray market problem is still the brand owner.

First, brand owners must establish a screening mechanism for gray products. LOTUS used to mark different bar codes when providing the company's software products to various distribution channels, and inspected the products sold in various markets from time to time to find the root cause of gray products and enter the gray market in accordance with the distribution contract. Channel dealers. The LOTUS company's move sends a strong message to the channel dealers against the gray transaction, and at the same time, it can give promotional support to those channel traders who have responded strongly. 3Com has also adopted two measures to affix Chinese labels and product serial numbers to facilitate consumer identification through its import and export companies.

Second, the establishment of a unified price coordination mechanism can eliminate or reduce the spread of the same commodity in various markets. If the brand owner has authorized OEMs in different countries, the price coordination clauses should be established in the licensing contract: such as the coordination mechanism for price adjustment, and the establishment of price space by specifying upper and lower limits.

When gray markets emerge, brand owners must also reflect on existing distribution channel strategies. The first thing to check is whether the existing authorized channel vendors are qualified. Authorized distributors who enter the gray market maliciously should terminate the contract and be held accountable; general distributors who enter the gray market should be warned. Secondly, when the existence of the gray market is due to the existence of market gaps, you can consider increasing the distribution channels. For unauthorized distributors, you can consider incorporating them into the marketing system after a thorough understanding of them. The brand owner should also consider checking the marketing contract to see if there are defects in the terms of the contract. If there are no provisions against gray market activities, they should be supplemented and improved immediately, and relevant reward and punishment measures should be added.

IT manufacturers lose $ 5 billion in profits each year, and that number is growing.

Most original equipment manufacturers (OEMs) have formal distribution system management solutions, but these solutions face the challenge of failing to eliminate the gray market.

The gray market is a convenient channel for legitimate distributors to obtain and distribute products. Its obvious product price advantage drives distributors and brokers to participate in gray market behavior.

Most companies do not allocate resources to deal with gray market issues.

The internal audit department works across corporate walls to confirm the transactions and processes of the distribution channel, but it is often very difficult. A recent survey completed by KPMG and the Anti-Gray Market Alliance shows that gray markets provide information technology manufacturers and their Distributors pose serious challenges. The gray market is also affecting many other industries, including automotive, consumer goods, pharmaceuticals, and more. This research confirms that computers and related products are one of the industries most adversely affected by the gray market, and the annual sales of IT products through the gray market are as high as $ 40 billion. The survey examined the gray market issues raised by 11 major OEMs, 43 authorized distributors and 10 organizations engaged in the brokerage industry. Risks and returns Grey markets have risks and rewards. The huge spreads and high profit opportunities make gray market participants trade behind manufacturers. Authorized distribution channels are inevitably involved with the participants in the gray market, and many also set foot on two boats. OEMs, distributors, brokers and large institutional customers are involved, but only individual consumers are unaware of it. Dilemma surveys of OEMs show that OEMs products have entered the gray market in the following main channels: using fake documents or other deceptive methods to obtain legal discounts, authorizing distributors to purchase more than the actual number of products they supply to end consumers, and selling the remaining products To the broker instead of returning to the OEM. OEMs sometimes need to deal with backlogs of inventory to make room for new products, which also provides opportunities for the gray market. The gray market also brings secondary costs to OEMs. These costs are manifested as: end consumers will complain about the manufacturer due to product quality problems and thus damage the manufacturer's brand. In addition, 67% of the companies surveyed continue to provide aftermarket guarantees for gray market products, which will also erode their profitability. All OEMs acknowledge that they have been hit by the gray market, but 87% of respondents said they still need an authorized distributor system, and only half of them have proposed controlling their distributors' transactions. Only 33% of the companies surveyed really attached importance to gray market issues and allocated resources to this task. 61% of the responsibility goes to the sales and marketing department, while only 13% goes to the internal audit department. Distributing distributors and distributors sometimes have difficulty meeting the terms of distribution contracts with OEMs, not only because of the harsh distribution terms but also because there are no control systems in the distributors to ensure sales channel monitoring. All the distributors surveyed stated that they were competing with brokers who offered the same products but had a price advantage. The average gross profit margin of distributors is only 2%. 71% of distributors claim to have a price advantage of at least 10% from the gray market, while 35% said they have gained a price advantage of up to 30%. However, the outstanding feature of the gray market is its delivery efficiency. 71% consider it necessary to purchase products from the gray market, and 41% make regular purchases from the gray market, even if this violates the terms of the distribution contract. Innocent consumers are faced with beautiful and legal packaging. Consumers are completely unaware of possible hidden defects and damage to their interests. These defects include no effective guarantee, unqualified, damaged or even forged parts. Consumers rarely get satisfactory results from products bought in the gray market, even if they are discounted. The survey estimates that 60% of end-users spend the same amount on gray market goods as on legal market goods. The surveyed distributors are most concerned about invalid quality guarantees that annoy gray market consumers, while placing a lack of technical support and quality uncertainty as secondary concerns. Can the gray market be transformed into a value-added factor for the IT industry? The gray market has become a mature and common part of the information technology supply chain, so if it is completely banned, it may break the existing balance system. To this end, action must be taken to redefine the relationship between the parties. The key is to improve the interests of all parties in the distribution channel, and take proactive measures to mitigate the impact of gray market behavior to ensure the integrity of legitimate channels. An agreement between manufacturers and authorized distributors across the industry to improve the design of terms to limit gray market behavior and achieve a win-win situation is clearly a breakthrough. But only contracts that are implemented in close cooperation between manufacturers and authorized distributors negotiate and make decisions are the basis. Most respondents acknowledge that they are affected by abuse and fraud, so remedies need to start here as well. The solution to the gray market problem also needs to be addressed from the sales and marketing departments, because violations of regulations may be widespread in these departments. In addition, it is important to seek external resources to integrate and manage the relationship between manufacturers and distributors.

Screening mechanism in gray market

LOTUS company used different barcodes when providing the company's software products to various distribution channels, and inspected the products sold in various markets from time to time to find the source of gray products and enter the gray market in accordance with the distribution contract. Channel dealers.

Differentiation of product design also provides conditions for identifying gray products. You can personalize the packaging of products sent to different channels, and even clearly label the price on the packaging. In some large markets, you can even provide compliance This market uses personalized products based on conditions, human environment and consumer preferences.

MinoltaCameraCompany offers the same cameras in the US and Japanese markets, but their brand names and product guarantees are different. Because consumers' awareness of products is based on the promotion efforts of authorized channel dealers, differentiated gray products are difficult to accept, which effectively prevents the entry of gray products.

Establishing price mechanism in gray market

The price gap is the root cause of gray market activity. Therefore, if the difference between the same commodity in each market can be eliminated or reduced, it will undoubtedly effectively suppress gray market activity.

The discriminatory price strategy should be mainly based on the distribution cost of the channel provider. Therefore, the brand owner should implement a reasonable price strategy according to the transportation cost, tax rate, validity period, and degree of product differentiation. The higher the transportation cost and tax rate, the more effective it is. Products with shorter deadlines or more differentiated products can increase the price gap; on the other hand, the price gap can be reduced, so that the overall profitability of the distributors is comparable.

Grey market adjustment channel strategy

First, it is necessary to check whether the existing authorized channel vendors are qualified. Any gray product must have its own supply source. Authorized distributors who enter the gray market maliciously can consider terminating the contract and hold them accountable. General distributors who enter the gray market can be warned.

Secondly, when the existence of the gray market is due to the existence of market gaps, it may be considered to increase the distribution channels. Unauthorized distributors may consider incorporation into the marketing system after a thorough understanding of them.

Finally, when the gray market is rampant, the brand owner should consider checking the marketing contract to see if there are defects in the terms of the contract. If there are no provisions against gray market activities, they should be supplemented and improved, and relevant reward and punishment measures should be added.

Gray markets seek legal protection

For the containment of the gray market, the help of law can increase the potential risks of the gray channel dealers, thereby increasing their transfer costs. First, existing laws can be used for regulation.

In the United States, relevant law states that if a U.S. company legally purchases a foreign manufacturer's trademark and distributes the product in the U.S. under the foreign manufacturer's trademark, parallel imports by a third party are illegal. ;

If a U.S. company is authorized by the manufacturer to produce a designated brand of product in the United States, parallel imports of this product will not be allowed. Secondly, it can promote the establishment of specific bills.

In 1999, related organizations in the United States effectively promoted Congress to pass the Prescription Drug Marketing Act in the interests of protecting public health and safety. The bill stipulates that: import."