News

23 February 2018

How the Internet Powers the Grey Market

The grey market is a $62 billion global industry that diverts control of a brand’s products, positioning and pricing power away from authorised partners and into the hands of third-party vendors.

Grey market impacts on brand revenue and brand equity can be grave, and nowhere are they felt more acutely than in the image-sensitive worlds of luxury and premium fashion.

A typical grey market transaction looks like this:

  • An authorised distributor or retailer — call him the seller — orders more units than he expects to sell in his own market. 
  • He sells the excess stock to an authorised retailer in a different geographic market where the same product costs more to purchase from the brand, or
  • He sells to an unauthorised retailer who wants to stock a hot brand but can’t obtain products in the brand’s official channels.

Christian Louboutin, famed French fashion shoe designer, discovered it had fallen victim to the grey market last year when online dealers in India were found selling discounted Louboutin products to customers in Europe and North America. 

Louboutin won a rare legal injunction to stop the sales, Fashion Law reports, by convincing an Indian court that luxury goods “have an aura of luxury and prestige surrounding them differentiating them from other goods,”and therefore “even very small changes in storage, packaging, labeling, after sale services, ware-housing, etc., can affect the quality of the goods and consumer's belief in them.”

Laws and legal precedents vary dramatically from country to country, however - while the threat is virtually everywhere.

Fighting an Uphill Battle

Unlike the black market in counterfeit products, grey market transactions are often completely legal. The confusing and sometimes contradictory array of regulations, combined with the global reach of online marketplaces, has paved the way for the grey market to flourish.

Popular online marketplaces such as eBay, Amazon and Alibaba have intensified the trend by making it easier than ever for third-party vendors to reach and ship to consumers globally.

Sourcing a brand’s products - whether at wholesale, or in country where retail prices are lower - is all it takes to set up shop and capture a margin on their sale.

More recently, social media sites such as Facebook, Instagram and Pinterest have evolved into platforms for third-party vendors to reach target customers. As large as these platforms are, it can be nearly impossible for brands to locate these unauthorised dealers, let alone engage them.

The result: In too many cases, brands are losing control over where consumers purchase their products.

Third-Party Vendors Don’t Protect Brand Value

How a third-party vendor positions itself, how it presents and ships a brand’s products, and how it addresses customer service are outside of the brand’s control, so standards vary wildly.

And while brands have no control over third-party vendors’ behaviour, consumers who have a bad experience with a third-party vendor may not understand the distinction. That’s a critical risk when you consider that it takes 12 positive customer experiences to make up for a single bad one.

It's Time to Regain Control

This is not a story without some good news, thankfully.

In our earlier example, we mentioned that Christian Louboutin took its unauthorised dealers to court in India. The Delhi High court sided with the designer and held “that the brand would suffer a grave loss if an injunction was not granted” to stop unauthorized sellers online - a win that could, in time, influence new rulings and legislation in other jurisdictions.

More immediately, the same internet technologies that power the grey market are giving brands new channels to control their brand image by speaking directly to loyal consumers

A good example is Tiffany & Co, whose website clearly identifies the brand's 22 authorised online dealers. Consumers who locate unauthorised retailers online, or find products they suspect to be counterfeits, are also invited to partner with the brand by reporting the offenders.

Other brands are empowering loyal customers more directly, giving them the ability to digitally authenticate or register the products they purchase. A simple, branded smartphone interface guides the consumer through the process and rewards them with additional services chosen by the brand — anything from exclusive entertainment and upselling opportunities to CRM enrolment and warranty extensions.

The digital interaction delights consumers at the same time that it collects the names and locations of the online or offline store where each product is purchased, giving a brand unprecedented, real-time data on where its products are being sold - and by whom.