How manufacturers can combat the grey market

November 2014 | SPOTLIGHT | SECTOR ANALYSIS

Financier Worldwide Magazine

Manufacturers of consumer electronics and computers, producers of textile products and perfume creators all have to fight against the grey market. In the case of technology products alone, goods worth an estimated $58bn are sold every year outside authorised distribution. This equates to a share of 6-8 percent. For manufacturers, the grey market not only means lost margins; it often also leads to problems with official distribution. The effective management of sales channels and targeted investigations can help to reduce the grey market and associated harm.

Unauthorised dealers like to argue that it is only margins that manufacturers are concerned with when they make prices different from country to country. Close consideration makes it evident why price differences exist between regions and why they may sometimes be significant. For instance, statutory guarantee standards, environmental provisions, product requirements and the associated sales and service costs vary considerably. It is true that manufacturers could choose to carry out a combined calculation and define a standard price globally. But this would mean that they would not be competitive in many regions if competitors operated with locally calculated price models. If additional discounts are granted as part of major projects, the danger of goods flowing into unauthorised channels increases.

In the IT sector specifically, there are groups operating internationally that have specialised in obtaining additional discounts of this kind for themselves through devious means. As these are frequently achieved using incorrect information and, in some cases, bribery, they are committing a punishable offence. The same danger exists with targeted promotion campaigns in a difficult sales market. Products make their way into stable markets and create pricing pressure there. The importing of products from outside the European Economic Area into it is litigable if this occurs contrary to the wishes of the brand owner.

Frequently, the customer is not aware that they have bought a grey-market product. Even if it is obvious (e.g., if a camera on eBay is offered with the item location Hong Kong), consumers are generally unaware of the problem caused by the issue. They are delighted with the apparent bargain. However, if the instructions for use are illegible, devices are delivered with the wrong plugs or a software update fails, their joy is marred. The end customer’s relationship with the brand is damaged. Not infrequently, goods from the grey market are interspersed with counterfeit products, as resellers have no real control over their sources.

Who supplies the grey market?

Participants can often be found along the entire sales chain. On the one hand, some official distributors offer goods to unauthorised dealers to improve their own turnover. On the other hand, unauthorised dealers or corresponding fictitious companies pose as potential customers under the pretence of considerable in-house requirements or special sales in an economically difficult region. As soon as the heavily discounted goods have been delivered, they pass on to dealers in strong sales markets. Sometimes, the manufacturer’s employees are bribed if they have an influence on the decision-making process with regard to discounts granted.

A cross-regional problem

There is also often insufficient awareness of the grey market among manufacturers’ sales departments. This is partly due to the fact that the negative consequences do not arise in the country of origin. If, for example, heavily discounted goods are sold in Eastern Europe and ultimately turn up in Germany, the sales division in Eastern Europe will benefit initially, while colleagues in Germany will feel the negative consequences. Companies are required to establish an effective anti-grey-market strategy that goes beyond sporadic campaigns. A uniform corporate philosophy marks the start of this. Regional sales interests should take second place to global results. It should be explained to employees that the grey market damages the company as a whole. Employees are expected to act accordingly and think about more than just local sales.

Partners, contracts and consequences

The second element in the strategy is contracts with distribution partners. They should not only describe the general conditions for sale in detail but also set out auditing options, documentation obligations and possible penalty payments. However, manufacturers are well advised to regard their distribution partners not only as possible sources of supply for the grey market but also as allies. Most resellers have no interest in driving prices through the floor and behave in complete conformity with contracts. Producers should be willing to listen to partners, who often have a much better insight into the markets and hence may contribute valuable information.

Know your customer

It is more difficult when a manufacturer notices an outflow of products from a customer as there is usually no corresponding contractual framework and nor is one desired. For large-scale projects at least, it is advisable to act preventatively and get adequate information about the customer in advance: How long has the company existed for? Who placed the order for the customer? Is senior management really aware of it? Are there any apparent connections to known grey-market dealers? Do order volumes fit the supposed project, the size of the company and the number of employees? In many parts of the world, such information is not easy to generate.

To actually identify an outflow of products to the grey market, monitoring is required. This includes regular, random test purchases as well as serial number tracking, the evaluation of guarantee cases and other escalations. At present, one trend is for goods to be sold to countries subject to embargoes, in which the manufacturer has no sales of its own. There is no official service partner there, meaning that tracking via serial numbers breaks down.

To bring together all information, the use of an intelligence platform is recommended. This can be employed to compile, analyse and visualise the data from reports, documents, diagrams, emails, websites, telephone recordings, photos and videos as well as other unstructured information. Through the use of intelligent data analysis, unsuspected connections may be revealed, for instance about perpetrators cooperating for years. Ideally, a central information database such as this will grow constantly. It enables manufacturers to prevent trade with such parties in advance.

To bring the measures to a successful conclusion, the results of investigations must be processed so that they can lead to legally valid action being taken against the perpetrators. It should be noted that the provision of evidence must be in accordance with the legal requirements applicable in the respective country. Professionally prepared investigation findings support cooperation with the police and the relevant criminal prosecution authorities. For the optimal flow of information, the authorities can also be given a direct insight into the intelligence platform.

Jörn Weber is a managing director and Bastian Moritz is a senior investigator at corma GmbH. Mr Weber can be contacted +49 2161 277 850 or by email: jw@corma.de. Mr Moritz can be contacted on +49 2161 277 850 or by email: bm@corma.de.

Jörn Weber and Bastian Moritz

corma GmbH