The grey market diversion is a complex problem for brands to curb. The products are not counterfeited, rather they are diverted to a different location This impacts the brand’s trade partners, pricing strategy, marketing message, financial planning, revenue forecast, and more. However, there are advanced solutions that brands can leverage to combat this issue and increase their bottom-line revenue.
With the growth of ecommerce, brands have to juggle supply chain logistics, distribution channel partnerships, consumer relationships, marketing, and much more. Even after applying security features like a serial number or a QR code, brands aren’t protected from the parallel trade.
A simple QR code or a serial number can’t promise to protect your products from getting transported to unauthorized regions. This is due to grey market dealers becoming sophisticated in removing these markings, or simply replacing them. As a result, they’re able to get away with it without getting caught by the brand.
In 2020, experts in the luxury goods space estimated that 5-10% of luxury goods sales are lost to the grey market. In 2016, KPMG estimated the value of the products sold via the parallel market to be USD 58 billion. According to a report by the government of China, 418,000 vehicles were estimated to be imported via unauthorized channels in 2019.
What Is Grey Market Diversion?
The grey market diversion happens when authentic and genuine products manufactured by legitimate brands get distributed in unauthorized countries and territories, often at a lower price. It should be noted that these products are not counterfeited, but are being sold without the authorization of the brand owning the trademark.
Grey market diversion occurs as the profit margins are high for the dealers with little risk. The activity isn’t illegal, and the consequences are not enough to discourage them.
For example, a luxury handbag could have a lower pricing in country A compared to country B. An unauthorized dealer could source the handbags from country A and sell them at a slightly lower price in country B. Then the dealer would add a healthy markup on the lower price they bought and sell the bag at higher profits. This way, they undercut the official brand dealers, and steal the market share from them
It’s explained in detail in the following video with an excellent example:
Common products that usually become a part of the grey market include:
- Limited edition products
- Electronic items
- Luxury vehicles, clothes, handbags, and shoes
- Cosmetic products
- Products distributed for duty-free channels
The price difference is usually significant enough that even , the unauthorized dealers are still able to sell these products at a lower cost than the local market.
Two main reasons give rise to the grey market:
- Difference in prices across geography: Brands have to keep purchase power parity in mind when creating pricing strategies. They usually launch products at a comparably lower price in low-cost markets. For example, a Gucci GG Marmont reversible belt costs If a third-party Chinese dealer sources the Gucci belts from the US, they could sell the belt at $600 and still make a profit. At the same time, the market share of the authorized dealers is compromised as consumers would prefer to buy the discounted item.
- Supply chain disruption: If a brand doesn’t have control over the supply chain, it’s easy for dealers to divert products to the grey market.
Examples of Grey Market Diversion
In 2018, Dermalogica, a skincare brand, took Target to court for the unauthorized sales of the company’s product. Dermalogica alleged that Target was selling its products at a discounted price, procuring them from a third-party dealer.
Dermalogica claimed that some of the products being sold were expired and might not comply with the local FDA laws as they weren’t intended for the US market.
Grey market diversion can also happen at the consumer level. For example, the shares of Louis Vuitton Moët Hennessy (LVMH) were impacted by 8.4% when Chinese border authorities increased their surveillance of returning travelers. This was an attempt to curb the rise of the grey market as travelers could bring back products sold in a different region at a lower cost, and sell them illegally in their nation.
Impact of the Grey Market on Your Brand
The impact of the grey market sales goes beyond just lost revenue. It causes confusion in the pricing strategy, throws the marketing message into disarray, and can make genuine retailers frustrated. Here are the four important ways the grey market impacts your brand:
- Impact on brand reputation: When grey market suppliers target exclusive and high-end brands, it dilutes your brand reputation and image. The consumers might change their perception of your brand to being lower quality if they can find your products easily at discounted prices.
- Brand revenue loss: The sales from the grey market undercuts the authorized sellers, stripping away the planned revenue for the brand. It disrupts the financial planning as well as the distribution and pricing strategy of the brand. The bigger problem is, that even big-name retailers can start to procure the products from a third party, causing huge losses for the brand.
- Consumer safety and brand responsibility: In cases of products where consumer safety is concerned, such as pharmaceutical products, electronics, or vehicles, grey market products might not necessarily follow the safety regulations. That creates a concern for consumer safety, and the brand could be held responsible for the consequences.
- Product quality concerns and brand image: The products sold via the grey market don’t have the normal product warranty and could be missing important parts or documentation. Due to the non-standard handling practice, the products could also have damage or defects. This poorly reflects on the brand image as the consumer could have a lower opinion of the brand manufacturing.
Solutions Available in the Market
To combat the grey market, brands may take either a proactive or reactive approach. The reactive approach is the strategy created to tackle once products have been circulated in the grey market. This includes incentivizing customers with an extended warranty, limiting the product purchase capacity, limiting the supply to distributors, and more.
The proactive approach, which we suggest, is where you create a system and strategy in place that limits the ability of grey marketers to circulate the products. For example, with a robust security feature in place, the ability of the dealers is limited.
Here are the present solutions in the market that try to protect diversions (but not always succeed):
- UV marking: UV marking involves applying markings with UV inks to products that can be verified using UV light. This method offers the advantage of being covert and easy to verify. However, UV markings can be removed by skilled grey market dealers using advanced techniques, and the technology provides only a basic level of security against sophisticated diversion efforts.
- Serialization: Serialization assigns a unique serial number to each product, allowing tracking and tracing throughout the supply chain. While serialization helps track product movements and diversion points, serial numbers can be duplicated and/or removed by grey market dealers.
What’s more, implementing a serialization system requires significant investment and additional integration with existing supply chain processes.
- QR code: QR codes provide consumers and retailers with a convenient way to verify product authenticity by scanning the code with a smartphone. QR codes also provide detailed information about the product, including origin and handling.
However, QR codes can be tampered with, replaced, or covered up, making them unreliable if not properly secured. The underlying data linked to QR codes can be hacked or altered by grey market operators, and the codes may become unreadable if the packaging is damaged.
- RFID tags: RFID technology helps in the real-time tracking of products, and makes the entire supply chain transparent. The tags are durable and can withstand harsh conditions. However, implementing RFID technology is expensive – from the RFID tags to the supply chain infrastructure required to support them.
Plus, like the other mentioned solutions, they can be disabled or removed by grey market dealers. On top of that, there are , as the RFID tag information could be accessed by anyone with a RFID scanner. This could lead to consumer resistance
The Best Solutions to Combat the Grey Market Diversion
With the advancement of grey market dealers, companies have to stay one step ahead of them. This means using more advanced and secure solutions to keep their brand image and revenue intact. Here are the two technologies that the dealers can’t tamper with:
Unique Fingerprint by AlpVision
AlpVision Unique Fingerprint creates a distinctive identifier for each product that is virtually impossible to replicate. The technology leverages the intrinsic microscopic surface irregularities of products or packaging to create the identifier, without requiring any special inks, tags, or additional materials. It also seamlessly integrates with track and trace technology.
Each product can be traced back to its origin with precision, allowing effective monitoring and control of the supply chain. What’s more, the product can be authenticated simply with a smartphone by both retailers and consumers.
Cryptoglyph
Cryptoglyph is a digital, invisible product authentication technology that introduces micro-defects on the surface of printed products. This invisible marking integrates with your existing print suppliers, requiring no design changes or special inks. Cryptoglyph can be adapted for gray market as invisible product serialization.
Like Fingerprint, Cryptoglyph is nearly impossible to remove or replicate and supports track and trace capabilities.
Invest in Security and Guard Your Revenue from Grey Market Diversion
Brands need to take action before the grey market sets a downward spiral, which inevitably happens once products are sent into markets at lower costs. The retailers have to race to the bottom to stay competitive. This can lead to frustrated retailers giving up the partnership or asking the brand to compensate for the losses.
On the other hand, if discounted products become widely available, consumers might become reluctant to pay the full purchase price.
So, while traditional security measures offer some level of protection, they are insufficient against the advanced techniques employed by unauthorized grey market dealers. By adopting cutting-edge solutions like AlpVision’s Fingerprint technology and Cryptoglyph, you can better safeguard your products and maintain your reputation and exclusivity in the market.
Contact us today to learn more about these technological solutions and decide what would work best for your unique products.