“Get your high-quality Canadian meds at discount prices!!! A huge selection of medicines is available from our online drug store, just a click away!”
If you’ve ever received a spam email offering medicines from other countries, then you’ve seen the “gray market” in action. In the case of pharmaceuticals, the re-importation of drugs from Canada has been driven by the high cost of branded prescription medications in the U.S. and the cheaper prices over the border.
The impact of this gray market is even visible on a global scale. For example, if you’re ever traveling on the train network in Hong Kong, it’s highly probable that you will encounter gray market shoppers from mainland China. They are identifiable by the fact that they’re lugging two or even three large suitcases each, crammed full of luxury items that are unavailable or highly taxed in China. Infant formula, in particular, is so popular on the Chinese gray market that supermarkets in places including Hong Kong and Australia have imposed a daily “two-tin limit” per customer.
But the gray market is bigger than pharmaceuticals and infant formula. It’s a pervasive issue that affects all manufacturers, regardless of whether or not they’re aware of it.
What Is the Gray Market?
The gray market refers to genuine, branded goods being sold without the consent of the trademark holder, or outside of the brand owner’s approved distribution channels. This shouldn’t be confused with the black market (the goods are not illegal or stolen) or the counterfeit market (the goods are genuine), but the sale is always unauthorized and the price is usually heavily discounted.
How Does It Happen?
The “gray market feeds on scarcity or unavailability of a product through authorized channels,” InTouch explains. "Some products are simply unavailable in some countries, or taxed at a high rate, making unauthorized transactions attractive.”
Gray market goods don’t just end up in street stalls or discount stores – they’re also sold through e-commerce sites including eBay, Craigslist, Amazon, and Chinese equivalents, along with social media channels. Again, the product is usually genuine but offered for a heavily discounted price.
These goods enter the gray market in three key ways:
- Rejected goods: If your organization rejects a suppliers’ order, the supplier may sell these goods wholesale to help offset costs, including disposal costs. This becomes particularly problematic if these goods carry your brand name or logo.
- Excess stock: Suppliers may also sell excess stock at the end of a sales season through unauthorized channels at a heavy discount. This is more common when products have short lifecycles and salespeople “may feel pressure to sell to anybody.”
- Unauthorized or fictitious companies: Your sales team operating in difficult markets may be approached by people offering to buy discounted goods, then re-sell them to dealers in strong sales markets. Financier Worldwide reports that staff members are sometimes bribed if they have influence over discount decisions.
What Are the Consequences?
Gray market products in the technology sector alone equate to a share of 6-8% of the market, or $58 billion sold outside authorized distribution channels worldwide. In addition to lost margins, other issues include:
- Rejected goods sold on the gray market not meeting quality standards. This damages your brand and, particularly in the case of electronics, can put consumer safety at risk.
- The gray market reduces your ability to control the sale of your goods.
- Sellers exploiting differences between markets create price competition.
- IP risks, which arise when competitors can obtain a product through the gray market before it is sold through official channels. This could happen when test products – never intended for sale – are sold on the gray market instead of being destroyed.
- Customers will become frustrated when they discover their gray market product has no after-sales service, and companies will lose this source of revenue.
- Buyers of gray market goods still expect the manufacturer to address any problems with the product, despite having no warranty protection.
- Customers who purchase goods intended for other markets may find the product comes with incorrect designs or settings, such as the wrong power plug or instructions in another language.
How Can We Prevent It?
While the gray market is unlikely to ever disappear, its damaging effects can be mitigated through:
- Rigorous record-keeping and inventory management, including conducting random carton quantity and carton weight checks.
- Ensuring rejected products are destroyed at the factory. Ensure a trusted representative is present to monitor the destruction, as even professional destroyers can be tempted to sell goods on the gray market.
- Perform regular online searches of sites such as eBay and Craigslist to discover if your products are being resold. Engage in random test purchases and serial number tracking.
- Ensure regional sales interests take second place to global results. Financier recommends “explaining to employees that the gray market damages the company as a whole… employees [should] think about more than just local sales.”
- Set out auditing options and relevant conditions with distribution partners.
- Use an intelligence platform to create a central information database. This database will not only help prevent trade with suspicious parties but will enable the compilation of information to hand over to police investigators if necessary.
- Though expensive, targeted investigations are effective and will send a message to other gray market participants in your sales chain.