The gray market (Part 2) 30 July, 2009 By Steve Wexler

Gray marketing of IT products is a significant issue; it is estimated that products valued at $58 billion flowed through the gray market in 2007. KPMG Gray Market Study Update: AGMA Effective Channel Management is Critical in Combating Gray Market and Increasing Technology Company's Bottom Line, 2008. (KPMG Whitepaper) This figure represents between 5% and 30% of total IT sales and had an average impact on profits of $8-10 billion. KPMG Whitepaper

Gray market activity is driven due to price disparity from region to region. Most IT OEMs are pricing regionally in order to compete in each local market. Therefore, even at list prices there can be an incentive to move products from one to region to another. However, since price is the main driver of gray marketing, OEM programs that provide legitimate opportunities for 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.

Gray market goods enter the open market through various sources and are then traded through a variety of methods. Most frequently, products enter the gray market when a channel partner sells to unauthorized dealers or brokers who conduct business on the open market. Once these products enter the open market, OEMs and their channel partners must compete with the discounted products being offered on websites, internet auctions, trade boards, email solicitations and even direct sales. Likewise, channel partners are presented with the opportunity to purchase from the gray market, activity which would in most cases be considered a breach of their agreement with the OEM. In a 2008 survey, 38% of channel partners stated they received offers from the gray market through emails and 59% said auction websites present an opportunity to buy gray market goods. KPMG Whitepaper

Once the gray market is established, brokers must work hard to obtain inventory. Pressure is brought to bear on those individuals who have access to discounted products: authorized channel partners. Channel partners may be enticed to misuse incentive programs for purposes of obtaining discounted product to fulfill requirements of gray market brokers. If the OEM has strong controls established in these programs, then anyone seeking to misuse or abuse these programs may find themselves misrepresenting end customer information or committing fraudulent actions to obtain discounted products. These activities could result in civil or criminal prosecution.

In striving for a level playing field, many OEMs have taken significant measures to drive integrity in their channel model, such as entering partner contracts that require channel partners to purchase from authorized sources and sell only to end user customers with a specific region. If partners abide by these contracts, then an OEM can be assured that customers will receive new, authentic branded products. However, if a channel partner buys from non-authorized sources and resells to customers, there is a significant risk that counterfeits, used or remarketed products could enter the channel and eventually be sold to end customers. This is the basis for which most OEMs deny warranty on those products that are sold through non-authorized or non-approved dealers. In fact, 45% of OEMs surveyed in 2007 stated they will not provide warranty and/or technical support on products sourced from the gray market. KPMG Whitepaper Of course, each OEM has a different approach to managing the distribution and warranty of their products. Resellers of IT goods should ensure familiarity with each OEMs requirement.

The biggest risk for anyone participating in gray market activity is the propensity of counterfeiters to use gray channels to move their products into the mainstream. Likewise, used or remarked products find their way into gray channels and are misrepresented as new, genuine products. Resellers and brokers purchasing from the gray market may lack sound processes to distinguish counterfeits or used products from new authentic goods, as they may not be able authenticate or verify the source or condition of goods. Often, gray dealers will drop ship directly to a customer in the name of the reseller. This can present a real problem for that reseller if counterfeits have contaminated gray market inventory. When these products are sold to customers, the result can be major data loss or business interruption without any possibility of warranty or service from the OEM. The reseller will be forced to address the problems created by sub-standard or non-authentic goods and in some cases may face legal prosecution for reselling such goods.

In summary, the key to avoiding gray marketing is to buy from and sell only to those entities that have been authorized by the OEM. This will ensure the warranty will stay intact and end customers will receive new, authentic branded products.

Thanks to AGMA for the expertise and assistance in helping to put the training together.


Previous Trusted Business Advisor articles by this author:
07/23/09 The black market and counterfeiting
06/11/09 Education key to reducing channel mistrust
05/29/09 Speed up your sales
05/15/09 Software piracy costs everybody
04/24/09 GTDC: Selling direct doesn't work
04/08/09 Is there a need for vendor-neutral education?
04/02/09 Twittering for success
03/25/09 Companies need to think smarter
03/04/09 Social media the new 'big thing'




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