A lot goes into manufacturing a product, especially in the luxury market. Each product is the result of countless hours of brainstorming, design, and skilled craftsmanship. But what if these products, crafted with care by the manufacturer, were sold through unauthorized distribution channels rather than reaching the legitimate markets they were meant for?
The growth of gray-market goods has increased the need for protection against illegal circulation in global trade. So, what kind of future-driven brand protection strategy can companies adopt?
Simply defined, a gray market is where authentic goods are bought and sold outside the brand’s approved supply chain or authorized distributors.
Gray markets are certainly not a new concept, as the illegal sale of goods has been a widespread international practice since the mid-1980s, and has been a grave concern for manufacturers and retailers.
But the products most affected by such unauthorized distribution channels are primarily high-value goods such as perfumes, wines and spirits, luxury devices, luxury clothing, and several FMCG brands. As the circulation of gray-market goods grows, the need for effective protection systems grows more urgent.
Parallel imports, parallel or transnational trade, and product diversion are all different terms for the same problematic entity: the 'gray market' and a dark economy that thrives in the echoing chasm of intellectual property enforcement.
Although used synonymously with ‘counterfeiting,’ gray markets and parallel importing are not necessarily the same thing. Much like counterfeiting, the word ‘gray’ suggests that it is like the black market, but not the same. That’s why it’s often called the ‘almost black market’.
Parallel imports allow companies to bypass official franchise holders or agents for typically high-priced, branded goods. In the absence of effective protection methods, gray-market goods cost manufacturers and labels a significant share of revenue. Instead of using legitimate means, they source products directly from overseas suppliers.
While the gray market might not seem as harmful as parallel importing, a lack of distribution compliance with an unchecked network has adverse consequences for brands.
It might sound surprising, but gray markets aren’t all the same. There are different types of gray markets depending on the goods they sell:
This is the same area where the original product is sold, but through unauthorized distribution channels. This market deals essentially in new and original products.
Put simply, the market where the original product is sold after use is known as the green market. Thus, when the real product has been fully used, its container is filled with counterfeits or unrelated substances, which are sold as the original. This is just one of the dangers posed by gray markets to health.
Such markets deal in the secretive and unregulated parallel import of commodities, such as crude oil, and make high profits in the absence of resale price maintenance.
One of the major reasons for the circulation of goods in gray markets and parallel imports is criminals' appetite for quick money. However, other reasons foster the birth and proliferation of such markets, such as poor channel conflict management. Here are some more critical factors influencing gray markets’ existence and growth:
To increase sales and circulate in bulk, many manufacturers work with large distributors, leading to competition among authorized market distributors. As a result, product prices are slashed to keep up with competition, and discounts are offered. This inevitably reduces each product's profit margin.
Manufacturers often offer different prices or costs for the same product in different countries. Aware of this, gray marketers purchase goods from countries where prices are lowest and then sell them at even lower prices in their country of operation.
Some manufacturers block certain distributors from selling their products; the desire to sell those products often leads blocked distributors to look to the gray market.
High price points define premium products, and some products even derive their luxury status from being deliberately priced higher than competitors'. Unbeknownst to consumers, however, these same companies introduce their own products into gray markets to make up demand shortfalls and shore up revenues.
Gray markets undermine the existence of legitimate brands and harm a country's overall economy. Here is a closer look at the various aspects of the damage caused by gray markets.
Since products in the gray market are sold through unauthorized channels, they do not come with a guarantee. But when those goods malfunction or prove to be of poor quality, consumers question the brand's credibility. This necessitates online brand protection.
Without protection, goods sold in gray markets are priced lower than the original company's cost. Buyers are naturally inclined to choose the cheaper option, leaving justifiably priced products unattended, thereby compromising revenue.
Parallel markets sell goods at lower prices than those sold through authorized distribution channels. As a result, multiple market prices begin circulating, leading customers to doubt the company's quoted price.
It is understood that gray-market goods are sold without tax charges because their distribution channels are outside the purview of regulators. The absence of taxation has a very negative impact on the economy.
One of the biggest challenges for brands against gray markets is global supply chain visibility. It is understood that many products sold in gray markets are genuine, and hence, we realize that genuine products are diverted into unauthorized channels through official distribution channels.
Implementing tracking mechanisms for goods that end up in gray markets can strengthen brand image protection, avert nightmare scenarios, and address revenue-related challenges.
One step companies can take to prevent their products from entering unauthorized distribution channels is to use geolocation Noise Print AI labels. Cypheme’s product traceability solutions, powered by AI, protect against gray-market goods.
How does it work? Your brand dashboard displays geolocation data from all product authentication activities, in strict compliance with GDPR guidelines. Since these labels are tamper-proof, unauthorized reseller detection is another leg up for brands.
The Cypheme label is one of the most trusted tools for preventing supply chain diversion, keeping products from entering unauthorized distribution channels that brands are unaware of. The solution to gray market and protection against parallel imports does exist — brands need to think proactively to safeguard their products and take action.
