Gray Marketing’ is diverting imported products meant for one market at lower pri
ID: 392129 • Letter: G
Question
Gray Marketing’ is diverting imported products meant for one market at lower prices and reselling them at higher profits in other markets. This happens in many industries, including pharmaceuticals, apparel, high-tech electronics, auto parts, luxury goods, textbooks, cosmetics and tobacco. The designer sweater you bought at Marshalls or TJ Maxx most likely got into those stores through gray market trading. Although U.S. federal law prohibits importing prescription drugs from abroad, the same is not true in other countries. For example, gray traders purchase pharmaceutical drugs in poorer countries and resell them in the United Kingdom or Sweden, where higher prices garner profits for the traders. In fact, parallel importing of most products is legal, and some experts claim that it’s just the free market working. In some cases, though, counterfeit goods are mixed in with the legitimate brands.
a) Learn more about this phenomenon by quick online research (if necessary). Who receives value in such transactions? Who loses value? Should the ‘government’ step in? On whose side?
b) How are manufacturers dealing with this problem?
Explanation / Answer
a) When gray markets are rampant it becomes very difficult for companies and their products to be optimal through official channels. Gray markets tend to bring in products from a region where the price of the product is low and take advantage of the price arbitrage. Due to this, the gray market products usually cannibalize the legitimate products and cause opportunity loss.
In a gray market, the consumers usually receives the value of low priced product. In addition to that, the unorganized sectors/industries gain as well. The main problem with this is that the official channels and network does not gain anything. As a result, the official partners such as distributors, wholesalers, retailers lose out on opportunities.
Government often condemn gray market transactions but in many cases do not take any major steps to prevent it. This is due to the fact that, gray market does serve a large section of people who are employed and engaged in unorganized sectors/industries. Government should only step in to manage gray market issues only if the product has the risk of hazard and other dangers. Products such as drugs, foods, beverages etc. must be closely monitored. On the other hand products such as apparels, clothes, etc should not deserve a lot of attention.
b) For manufacturers the gray market can be a boon or a bane. Sometimes it is both. Gray markets help manufacturers reach customers who otherwise would not purchase their product under normal circumstances. However at the same time, it hurts their official supply chain and distribution network. In order to deal with gray market issue, manufacturers often apply strict rules throughout their supply chain system. The key to understand about gray market is that, in many cases it is the intermediate parties such as the distributors or wholesalers who release the goods into the gray market. They are able to do so because they usually get the large volume discount from the manufacturer. So the important point to note here is that, irrespective of whether the product is sold through official channel or through gray market, the manufacturer usually makes profit.
However, in order uphold their brand and long term sustainability, the manufacturers usually take action against distributors and wholesales if it is found that they have been responsible for the leak. This is done through explicit contract agreement in the downstream supply chain system.
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