Leading the High-Tech Industry in Best Practices for Preventing Gray Market Fraud
Gray marketing is unauthorized transacting in genuine branded goods resulting from diversion from authorized channels into the hands of third parties, including the open market. Also known as parallel importing, gray marketing is the sale of genuine branded products that have been diverted from authorized distribution channels or that have been imported into another country without the consent and knowledge of the brand owner.
The value of gray market products in 2007 averaged $58 billion, placing the gray market between 5 and 30% of total IT sales and impacting profits by $8-10 billion (KPMG/AGMA).
US Department of State has estimated that $1.5 to $2 trillion is laundered worldwide each year, with a portion of that drawn from the gray market economy.
Gray market activity is driven mainly by price disparity between local markets. Most IT vendors establish regional prices in order to compete in various local markets. Therefore, even at list prices there can be an incentive to move products from one region to another. Since price is one of the main drivers of gray marketing, incentive programs that provide legitimate opportunities for authorized channel partners to compete in local markets also create opportunities for abuse, theft or fraud - all based on a reseller’s desire to obtain discounted product for resale on the gray market.
There are a number of ways that products can enter the gray market - and impact a company's profitability.
The most common sources of gray market are:
- Over-discounted buys where partners or customers purchase a large number of products (under a contract that requires a smaller quantity of products) in order to achieve larger volume discounts and then resells the extra products without the consent of the vendor.
- Products sold in developing markets are often sold at lower price levels due to much lower purchasing power. These are often sold to brokers who import them back to developed markets in North America and Europe and compete against authorized distributors – often successfully due to lower prices.
- Software licenses provided at higher discount or no charge as “try-and-buy” in developing markets or for institutional customers and are then activated elsewhere without the knowledge or consent of the OEM.
- Products destined for export via logistics providers that never reach the destination.
- Inventory of excess, aged, or manufacturer-discontinued products sold by OEMs or distributors on the open market (usually as lower product class – take as is, no return, no support – and equally discounted) that are often sold as new to unsuspecting customers.
The key to avoiding gray marketing is to buy from and sell only to entities that have been authorized by the Brand Owners. This will ensure that warranties stay intact and end customers will receive new, authentic branded products. In order to launch and sustain a successful brand protection program, AGMA recommends that business establish strong internal controls, as any weaknesses will enable gray market activities.