Competing With Gray Markets

In recent years, a growing problem has become the bane of brand owners and the scourge of successful supply chains. In fact, gray markets — in which a firm’s products are sold or resold through unauthorized dealers — have become so prevalent that one trade publication called them a “disease to be eradicated.”1 In response to this increasing threat, manufacturers in a variety of industries have been waging a pitched battle against gray market sales around the world.

The concern over this issue is well founded. Gray markets are ubiquitous —they exist for tangible products (lumber and electronic components) and intangibles (broadcast signals, IPOs); for massive goods (automobiles and heavy construction equipment) and light, easily shipped products (watches and cosmetics); for the mundane (health and beauty aids) and the life saving (prescription drugs). It is estimated that gray market sales come to more than $20 billion in the information technology sector alone. A study of manufacturers of health and beauty aids determined that gray market sales amounted to 20% of authorized sales in some markets and as much as 50% of authorized sales in others. The problem is so substantial that multinational companies such as Motorola, 3Com, HP, DuPont and 3M devote full-time managers and staff to dealing with gray market issues.

Furthermore, gray markets aren’t going away any time soon. Although gray market activity ebbs and flows as exchange rates, price differentials and supply conditions change, surveys confirm the increasing incidence and scope of gray markets in many industries. In the European Union, a rapidly growing unified market, eroding trade barriers and a highly efficient logistics infrastructure are expected to result in gray markets across products increasing by a whopping 120% to € 7.4 billion by 2006. Some industries have experienced a tripling of gray market activity in just three years.2

An inability to compete with gray markets can wreak havoc on firms and industries. In many situations, gray market sales outstrip authorized sales. Consider Malaysia, where cell phones purchased on the gray market account for 70% of total cell phone sales. Similarly, in India, sales of gray market personal computers outnumber authorized sales by two to one, as was also the case for IBM Corp. in the early days of PC sales in the United States. Numerous companies have experienced substantial damage to their profits (Beanie Babies and Ty Inc.)

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References

1. See “Pharma Firms and Wholesalers Join Forces To Curb Grey Markets,” Chemist & Druggist, June 12, 1999, p. 32.

2. See J. Michael, “A Supplemental Distribution Channel?: The Case of U.S. Parallel Export Channels,” Multinational Business Review (spring 1998): 24–35; M. Myers, “Incidents of Gray Market Activity Among U.S. Exporters: Occurrences, Characteristics and Consequences,” Journal of International Business Studies 30, no. 1 (1999): 105–126; and P. Brent, “Auto Dealers In Push To Stamp Out Grey Market: ‘We Have to Stop This Before It Gets Worse,’” National Post, Sept. 12, 2002, sec. Financial Post, p. 1.

3. See P. Hollinger and S. Jones, “Asda To Continue Defying Designer Goods Ban,” Financial Times, Aug. 7, 1998, p. 7; and K. Antia and D. Everatt, “Looks.com(A): A Grey Issue,” Richard Ivey School of Business case no. 9B00A012 (London, Ontario: Ivey Publishing, 2000).

4. Most of the existing literature on gray markets is focused in this area. See, for example, G. Assmus and C. Wiese, “How To Address the Gray Market Threat Using Price Coordination,” Sloan Management Review 36, no. 3 (spring 1995): 31–41; and F.V. Cespedes, E.R. Corey and V.K. Rangan, “Gray Markets: Causes and Cures,” Harvard Business Review 66 (July–August 1988): 75–82.