Brands and manufacturers are no strangers to the gray market. From offline to online, it has taken a significant amount of revenue out of the pockets of brands and manufacturers across all industries. In 2016, the gray market in the luxury watch industry accounted for 20% of the global market. With the rapid growth of e-commerce and social networks, as well as the shift in consumer behavior, the gray economy doesn't seem to be slowing down anytime soon.
The gray supply chain comes from a few different sources. It could be cross-border imports by an individual or by private businesses, factory seconds sold as brand new, or the result of a leak in the distribution network.
Gray market current outlook
In e-commerce, unauthorized and unknown sellers are operating in either the gray or black markets. What differentiates these two types of markets is the authenticity and restriction of the products being sold. In brief, gray goods are genuine and legally produced by the original manufacturers, but they are being sold by unauthorized sellers. Meanwhile, black goods are legally restricted, illegal or counterfeit. It's also not against the law for consumers to purchase a gray product. Thus, regardless of where it comes from, consumers still find the offer attractive enough to press the buy button.
For manufacturers who choose a selective distribution strategy, allowing a gray market to flourish is a dealbreaker as they must maintain homogeneity in their distribution network. Luxury companies, for instance, are more likely to select this distribution method because it distinguishes and embraces the perceived value of luxury goods to their buyers, thus preserving their prestige positioning and brand image. According to an e-commerce project manager of a European luxury eyewear manufacturer, selective distribution "only works if it is applied by everyone." As such, the presence of any gray activities sabotages the businesses' efforts to enforce their distribution network.
Fighting the gray market - some high-profile cases from top brands
Many top brands and manufacturers have been engaged in the brutal battle to fight the gray market, both online and offline:
- HP lost more than $1.8M in revenue when a private company sourced their products through an educational discount program and then attempted to resell the equipment to unofficial channels.
- Canon filed several lawsuits against some major eBay resellers for violating their trademark and creating unfair competition for the sale of Canon DSLRs.
- Coty Inc., the American multinational beauty company, won their legal battle at the EU’s highest court regarding the distribution of their brand’s products via third-party platforms online.
- Chanel was seeking $50M in damages from an eBay merchant on the basis of violating trademarks.
The activities of these unofficial channels frustrate the official distribution channels and have a negative impact on the brand, both internally and externally, ranging from brand image to quality issues and unfair competition.
Before escalating to costly and time-consuming legal battles, manufacturers are taking multiple approaches to prevent and respond to gray activities early. The most common practices can be summarized in three steps: Identify, Understand and Take Action.
Three steps to deal with the gray market
IDENTIFY unknown sellers
Being aware of sellers’ profiles will allow you to better plan your actions. In selective distribution, the sellers have registered their information, so it's easier to detect unauthorized sellers. But it gets more complicated for intensive distribution, as anyone could be selling your product.
One of the methods for uncovering unknown online sellers is manually scraping websites. The brand’s e-commerce team will perform research on major e-tail sites and marketplaces on a global scale on a daily basis. On the other hand, using keywords to search on search engines and major e-tailers and monitoring hashtags on social media are also useful ways to discover if the product is being sourced unofficially.
Many brands now use e-commerce monitoring software to help detect these unofficial sellers. By using the software, e-commerce managers can save lots of time and further investigate any cases that arise.
UNDERSTAND the causes
Once the unknown sellers who are operating in the gray market are identified, it’s time for an investigation. Methods such as test-buying are often used in this process. The e-commerce team will place an order from a few sellers to gather information that allows them to trace back to the initial supply point. The useful elements could be:
- Serial number
- Radiofrequency identification
- EAN code
- SKU number
As soon as the initial point of distribution is revealed, the manufacturers can take a closer look at the performance of that partner and determine whether or not they are supplying to unreliable third parties. This kind of leakage in the supply chain needs to be shut down by reminding the suppliers of the distribution agreement and demonstrating the consequences of these underground activities.
TAKE ACTION against the remaining sites
Now that the supply to the gray market has been stopped, manufacturers should also follow up with the sellers who are distributing their products without consent. The very first action from the manufacturer to unauthorized sellers is reaching out to them to inform the issue. Should the violation continue, more aggressive legal approaches will be made. Particularly in selective distribution, strict actions to shut down the unofficial stores are necessary for the sustainable growth of the distribution network.
Even with a perfectly controlled supply-chain, there are still some cases that you cannot account for, such as individuals who purchased in large quantities for cross-border reselling or wholesalers that use intermediaries to extend their distribution. Therefore, daily monitoring is highly recommended to get the full picture of the market in real-time and develop appropriate strategies to prevent and fight gray distribution.