Navigating the Grey Market: A Closer Look at Parallel Importation

Gestion

01 octobre 2024

Auteur

Student of the MAS ECI

Thématique

Contrefaçon, Fraude

Have you ever discovered your dream luxury watch or high-end camera offered at a surprisingly low price, undercutting the typical rates at official brand stores? An exciting find, no doubt! But have you ever wondered how such a deal was possible, or did you just simply seize the opportunity to make the purchase? By doing so, you have stepped into the realm of the grey market.

What is the Grey Market?

To clarify, this article focuses specifically on grey market products (grey goods), rather than grey market securities (company shares traded before official public release) or the grey economy (comprising unreported goods and services for tax evasion purposes).

The grey market refers to distribution channels where branded products are sold without the authorization of the trademark proprietor.¹ Grey market goods are genuine and legal, but their distribution occurs through unofficial channels without the authorization nor consent of the trademark owner.² The grey market operates in a legal grey area, distinct from both the fully authorized “white market” where business adheres to legal frameworks and the illicit “black market” involving smuggling or illegal activities.

Why does the grey market exist? What factors allow the Grey Market to prosper?

The grey market can be categorized into two types based on the level of trading: international (across different markets) and domestic (within the same market).³ In this article, we will examine the international type, widely known as « parallel imports. »

The grey market thrives particularly in economic sectors dealing with high-end products where significant price disparities exist between countries:

Automobiles,

Luxury watches,

Smartphones,

The camera market,

Video games,

Fine wines and champagnes,

Electronic equipment,

Cosmetics

Unauthorised distributors, entities trading branded products without contractual agreements with manufacturers, capitalize on these pricing differentials.⁴ They obtain goods at discounted rates from lower-priced markets and resell them in higher-priced markets, profiting from the price gap between legitimate markets and customers.⁵

Several factors contribute to these price disparities across markets: fluctuations in international exchange rates, discriminatory pricing strategies by manufacturers, varying authorization conditions for authorized distributors, differences in distribution costs, tax differentials across borders, and the diversion of export stock for illicit domestic resale at higher prices. Market arbitrageurs, with their keen eye for potential opportunities and profit margins, exploit these price gaps to form the grey market.

This phenomenon is also growing with the development of e-commerce where anyone can become a seller as soon as they find a supply source.

Alibaba, China’s largest e-commerce platform (B2B, B2C, C2C) with 1.31 billion annual active online shoppers (1 billion in China and 305 million outside China),⁶ ⁷ ⁸ features a substantial number of grey market products. This parallel import trade has proven so lucrative that even official authorized brand channels have established their own storefronts and integrated with Alibaba’s TaoBao.com virtual mall to participate in this market.⁹

Impacts of international Grey Market

Let’s look at 3 grey market scenarios:

A prestigious Swiss watchmaker officially sells its branded timepieces in Italy and China. A trader buys large quantities of these watches in Italy and imports them to China for resale at lower prices than the official local retail pricing but still earn a profit margin which is effectively lost revenue for the manufacturer.

Nikon cameras intended for the Japanese market are resold in the US with instructions in Japanese.¹⁰ When products are scarce or unavailable in a particular market, grey market traders seize the opportunity to source them from other regions and resell in the undersupplied destination market at significantly marked-up prices.

In 2010-2011, Apple initially sold the iPhone 4 and iPad 2 officially only in the US and EU. Grey market resellers obtained these devices and sold them unofficially in other regions before Apple’s official launches there.¹¹ Occasionally, manufacturers strategically withhold products from certain markets. However, this strategy can be undermined by grey market traders who obtain the products through unofficial channels and resell them in those restricted markets without authorization, profiting while avoiding the manufacturer’s intended pricing strategy for those regions.

Impact on final consumers

Grey market products are easy to come across when shopping regularly, and most consumers probably don’t even realize they are buying unofficial goods. The attraction of lower prices and the access to a wider range of products serve as the primary incentives driving consumers towards the grey market. However, these benefits come with inherent risks:

Grey market goods typically lack official warranty support since they are sold or used outside the intended market, leaving consumers responsible for repair costs if issues arise.

In certain regions, grey market products may fail to meet mandatory safety certifications and standards, potentially compromising consumer protection.

The absence of instructions or descriptions in the local language can lead to frustration and dissatisfaction when using the product.

Distinguishing genuine grey market products from counterfeits can be a challenging task for consumers.

Impact on brand owners

While the grey market may appear to boost brand recognition, product loyalty, and profits initially, the negative consequences far outweigh these short-term gains:¹²

Grey market goods are often indistinguishable from counterfeit products, which harms the reputation of both the brand and the manufacturer.

These goods are frequently customized for specific markets and unsuitable for use elsewhere, further damaging brand perception.

Grey market goods directly compete with authorized distribution channels by undercutting the manufacturer’s established pricing model, forcing manufacturers and their authorized distributors to lower prices and reduce profit margins to remain competitive.¹³

For many industrial goods, after-sales service is a key profit driver, often surpassing product sales margins. However, grey markets decouple product sales from service income, draining this critical revenue stream as customers turn to unauthorized channels, compromising a substantial portion of anticipated earnings.¹⁴

Impact on authorised distributors

The burden of competition from the grey market falls heavily on authorized retailers, who must reduce prices considerably more than the wholesale price reduction.¹⁵

The existence of grey market products makes authorized distributors lose their exclusive or selective right to sell the product, negatively impacting their reputations.

Gray market dealers undercut authorized retailers by offering more favourable pricing, overshadowing the official distribution channels which are often bound by minimum purchase requirements, cooperative advertising programs, and high rental costs for prime locations.

Regulatory considerations

Grey market goods purchased from one country and sold in another where pricing conditions are lower may not meet the second country’s regulatory requirements.

For example, automobiles traded across state lines on the grey market could fail to comply with regulations in EU countries if they were produced solely for non-EU standards. In such cases, unauthorized dealers or final buyers bear the responsibility and additional costs of modifying the vehicles to meet local regulations.

Similarly, grey market products like children’s toys, pharmaceuticals, and electronics often face challenges in conforming to various national regulations. These items are less likely to be modifiable, leaving unauthorized dealers unable to guarantee regulatory compliance. Consequently, consumers engaging in grey market transactions take a gamble on the legitimacy and safety of the products they acquire.

The grey market: Illicit trade of licit goods?¹⁶

Most countries lack specific laws prohibiting grey market practices. Lawsuits involving grey markets have been litigated for years, with court decisions largely favouring their existence.¹⁷

Tesco, a European retailer, bought Levi Strauss jeans from wholesalers in the US, Canada, and Mexico. They resold these jeans in the UK at half the price recommended by Levi Strauss. In 2002, the European Court of Justice ruled that Levi Strauss couldn’t restrict how Tesco acquired jeans within the European Union but could prohibit Tesco from acquiring goods from outside the EU. This ruling allowed European merchants to engage in grey market activity as long as the goods originated within the EU.¹⁸

A notable case in 2013 involved a Thai student reselling textbooks published by John Wiley & Sons in Asia to U.S.-based consumers on eBay. The U.S. Supreme Court ruled that products manufactured and sold abroad can be resold domestically without the original manufacturer’s permission. This decision supported the first-sale doctrine¹⁹ and marked a significant moment for copyright law and the resale of grey market goods.²⁰

Omega SA, a Swiss luxury watchmaker, experienced a legal battle with discount retailer Costco over grey market sales. Omega distributes its watches through authorized retailers with varying pricing across countries. Costco exploited this price disparity by sourcing Omega Seamaster watches from an authorized European retailer and reselling them in the U.S. at a steep discount ($ 1’299) compared to the standard U.S. retail price ($ 1’995).²¹ Despite Omega’s objections, Costco ultimately prevailed in 2015 after the case reached the U.S. Supreme Court.²² ²³

Grey Market: A Double-Edged Sword

The grey market, a practice that has persisted for over a century, presents a complex challenge for globally operating businesses. While it offers consumers access to highly desired products at reduced prices, it simultaneously poses significant risks to brand integrity, revenue streams, and authorized distribution channels.

For brands, the grey market is a Pandora’s box. The short-term benefits of reaching new markets and customers indirectly can be tempting, but the long-term consequences are severe. It’s crucial for brands to take a clear stance from the outset. Our world isn’t simply black and white, and these grey areas often prove the most challenging to manage. Any brand focused on long-term success must actively address the grey market threat. However, combating the grey market isn’t a one-time battle. It requires a multi-faceted, ongoing approach:

Implement robust tracking systems for product distribution

Educate consumers about the risks associated with grey market goods

Enforce consistent global pricing strategies to reduce arbitrage opportunities

Maintain strict control over distribution networks

Monitor authorized channels, including online marketplaces, for compliance

Enhance customer relationship management and after-sales support

By continuously adapting business models, refining pricing strategies, and implementing effective countermeasures, brand manufacturers can navigate this complex landscape. The goal is to uphold ethical business practices and deliver consistent value to customers in an increasingly interconnected world, while simultaneously protecting brand equity and authorized distribution channels.

Ultimately, the grey market challenge requires brands to strike a delicate balance between market expansion and brand protection. Success lies in developing strategies that address consumer demand while maintaining the integrity of official distribution networks.

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