The focus by companies on fulfilling basic orders during the COVID-19 pandemic has allowed a more insidious problem to come to a head: the influx of gray-market products into the supply chain.
Gray markets, as their name implies, don’t consist of illegal items, such as contraband or counterfeits. What makes them problematic is how the items are obtained and sold — namely, without the permission of the brand owner that produces and markets it. But don’t let the term “gray” make you think that gray markets are harmless: they have tangible effects on businesses that are targeted by shady operators, as well as the customers who, whether intentionally or not, buy from these companies.
To see how this works in the real world, look at the networking space, where gray market components are rampant. As with pretty much every other industry, the COVID-19 pandemic disrupted the world’s supply of networking components. Then, when the global economic recovery from COVID began, demand for these components heated up, resulting in longer and longer lead times. It’s in this kind of hollowed-out space where demand outstrips supply that gray markets thrive.
In a scenario where everyone wants some of a commodity, but there isn’t enough to go around, unscrupulous actors tend to pop up selling seemingly legitimate products, but of questionable pedigree. How do these genuine articles get diverted from the authorized distribution chain and into customers’ hands? They often enter the gray market after being fraudulently diverted from the manufacturer’s authorized distribution partners.
The essence of the gray market is that while the items may have been produced by the brand whose name they bear, the sale is not authorized by the terms of the contracts between the manufacturer and its distributors.
Not ‘The Real Thing’
While not technically counterfeit, gray market goods present a host of distinct challenges for businesses. Desperate buyers who wouldn’t think of accepting counterfeits, or those for whom price is the only objective, might be willing to accept gray-market goods because they’re still “the real thing.” A more likely scenario is that they might not even know they’re purchasing from unauthorized sources. However, gray market brokers have no obligation to handle and ship the products according to the manufacturer’s specifications, and the diversion may invalidate the manufacturer’s warranty, software license and after-sale support. In some cases, the gray market brokers cross the line into counterfeiting, and might intermingle gray and counterfeit products. They might also strip out genuine components and replace them with generic or used components. In any case, as any serious wine collector will tell you, legitimate products of ambiguous provenance aren’t necessarily identical to those from a reputable seller.
This analogy actually hints at one of the biggest problems with gray markets, which is that products that are obtained through fraud, adulterated, old, damaged, returned or poorly handled while in the gray broker’s hands can result in inconsistent quality for customers, which in turn can cause real damage to a business’s brand reputation. Consider: If the gray market components don’t perform up to snuff, how will the customer feel about it? The customer will likely place the blame on the manufacturer, rather than the gray market broker. And how will the manufacturer respond? Will they service or replace the components? Will the customer choose to buy again from that manufacturer? These are the kinds of questions that brands obviously don’t want to find themselves scrambling to answer.
There are other concerns, too. Gray markets, consisting by definition of unauthorized good sales, compromise corporations’ abilities to maintain price integrity. This is especially true when the goods are obtained at huge discounts under false pretenses, then diverted and sold in the open market. For a legitimate business, gray brokers represent an unfair direct competitor to their own authorized resellers, whom they can undercut with little fear of consequences. On a large enough scale, gray market sellers can take a serious bite out of your profits and erode your margins.
What You Can Do
As a problem that cuts across brand, product, legal, fulfillment and more, gray-market theft calls for an interdisciplinary team consisting (at minimum) of your brand protection team, legal specialists, product designers, supply chain managers and communications professionals. Each plays an important role in identifying and stopping gray-market attacks on your business.
Next, businesses need to get a handle on the scope of the problem. Most companies have little idea of the extent of unauthorized sales, because gray marketers operate globally and are experts at moving quickly and staying under the radar. Losses to the gray market should not be considered a cost of doing business. Companies need to investigate product diversions and determine how and why they were victimized and act against those responsible.
Manufacturers need to maintain supply chain integrity to ensure that counterfeit and gray products aren’t supplied by vendors during the manufacturing process. Then they need to control their authorized distribution channels with appropriate contracts, including audit clauses and prohibitions against buying from, or selling to, unauthorized entities. Salespeople need to know their customers, to prevent selling to gray marketers in sheep’s clothing.
Most standard labeling systems are no match for today’s gray market mercenaries, which is why businesses should really already be using digital supply chain tracking technology. The goal should be to automate the collection of all pertinent data from supply chain management technologies into one centralized, gray-market dashboard.
Only from this vantage point can you develop an effective gray-market prevention strategy, that could involve anything from updating your gray-market prevention processes to firing or deauthorizing distributors and vendors who you suspect are compromising your supply chain integrity, to taking legal action against unauthorized sellers. In fact, there are many effective ways of taking down gray-market distributors — but you can’t do anything unless you know how it’s happening. When it comes to gray-market prevention, data is knowledge, and knowledge is power.
Daniel Mascaro is director of investigations and audits with True Pedigree, a brand protection platform.
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