Re: The Argument Against Gray Market Imports This article is somewhat technical, but it does offer a more comprehensive
discussion of the issues affecting gray market imports, which are often
overlooked:
http://foxweb.marist.edu/users/prema.nakra/graymarketing.html
GRAY MARKETING: A STRATEGIC THREAT OR A TACTICAL MARKETING PROBLEM?
ABSTRACT
The issue of Gray Marketing is often viewed by the multinational corporation
as a tactical problem. The corporation whose products are subject to gray
market activities may ignore the problem, encourage the activity in over to
meet short term sales goats, or try and find a legal remedy. Quite
frequently, the issue needs a strategic response since it can have a
damaging effect of the corporate image, as-week-as the relationship between
its distributor; and customers. This paper focuses on the causes and effects
of gray marketing recommending several strategic alternatives.
INTRODUCTION
If you live in Europe, you would be interested in leaming more about
Wolfgang Trenz. Approximately 112 miles north of Munich, Germany is a place
called Weiherhammer, where Wolfgang Trenz has a deal for you. Trenz's
American Motors Trenz GmbH sells Grand Cherokee limited for about $46,342,
or 1790 less than the official price of the car in Germany. Stocking almost
exclusively Jeeps and Voyager minivans, Trenz sold 1,000 new cars and 200
old cars in 1994 (Murk 1995). How can Trenz undercut the other dealers?
Tranz is a 'Gray Marketer,. but you might want to call him "carbitrager" or
a "parallel Importer."
Tranz uses communication technology to tap into the network of Chrysler
dealers in Ontario, Quebec and Nova Scotia or any where else where he can
find the cheapest price He pays retail but knows that he can sell it for
more. Once the product is in his possession, Trenz spends $10,000 per
vehicle to install new lights, to adjust the electrical system and change
the tires to meet German vehicle specifications. He then overrides a
computer chip that limits the North American Cherokee's top speed to 112
miles an hour. Finally, Trenz sets aside $1,100 per vehicle to cover
warranty costs. After paying transportation, duty and sales tax, and the
adaptation and warranty costs, each Cherokee sold by Tram provides him with
a profit of $3,370 (Murk, 1995). Trenz is not the only 'Gray marketer' in
the world, and automobile industry is not the only industry where gray
markets are developing so rapidly. .
UNDERSTANDING GRAY MARKETING
In the international context, gray marketing or "parallel importation'
refers to the legal importation of genuine goods into a country by
intermediaries other than the authorized distributors. Gray marketers are
typically the brokers who buy goods around the world from manufacturers or
authorized dealers in countries where prices, taxes and the trade margins
are low and sell them in countries where prices and markups are higher. Gray
market goods typically sell for 25 to 40 percent less than Imports handled
through authorized distribution channels. Parallel importation does not
Involve the selling of counterfeit products. The question of the legitimacy
does not involve the legality of the products, but the legality of the means
by which the product Is distributed. When goods intended for marketing in
one country are diverted into an unauthorized distribution network which
then imports the goods into another country, gray markets develop.
INDUSTRIES AFFECTED
The diversity of products sold in the gray markets is quite broad. The
products notably affected by this method of operation may be as expensive to
the consumer as automobiles or as inexpensive as chewing gum. The IM
includes many premium priced goods such as autos, tire and construction
equipment, watches, cameras, furs, jewels, liquor, prescription drugs, baby
food, upscale clothing and perfumes. Also affected by the gray market
activities are highly technical products such as disc drives, computers,
computer chips. Many well-known companies such as IBM personal computers,
Seiko Watches, Nikon, Minolta and Olympus cameras, Duracell batteries,
Mercedes-Benz and BMW, even Opium, the world's best selling perfume, find
their products sold in gray markets. (Duhan, Sheffet 1988).
The size of gray markets has grown steadily and substantially, from 2
percent of imports in 1979 to 20 perm in 1981. In 1986, the total value of
products distributed in the United States through gray market channels
exceeded $10 billion (Daeger, Dunkin 1988). Industry sources indicate that
about 1090 of IBM's PC sales and 20% of Sharp Electronic copiers are
accounted for by unauthorized channels.
The phenomenon is not restricted to Europe and the United States. Japan, for
example, is witnessing gray markets because of the high value of a yen and
the subsidization of cheaper exports through high taxes(Koeppel 1989). Asian
countries in general, and Kong Hong in particular are favorite targets for
gray marketing because wholesale prices there are usually much lower than
elsewhere. Gray marketing activities are also flourishing in Western Europe,
Russia, Poland, the Czech Republic, South Africa, Turkey, Zaire and
Kazastan.
REASONS FOR DEVELOPMENT OF GRAY MARKETS
Price discrimination - To maintain the image of quality and exclusivity,
strategies of some products included high profit margins at each level of
distribution, different prices among markets, and limited quantities, as
well as distribution restricted to upscale retailers. All these factors
create opportunities for gray marketers(Ono 1993). Eastman Kodak prices its
film higher in Japan than in other parts of Asia. Enterprising merchants buy
Kodak film in South Korea for a discount and resell it in Japan at 25
percent less than the authorized Japanese Kodak dealers. (Wall Street
Journal, 1994).
Exchange rate fluctuation - Variations in the value of currencies between
countries frequently leads to conditions that make parallel imports
profitable. Europe's gray market for cars is flourishing especially because
of the currency swings producing price gaps of up to 50 percent on
individual models from one country to another (Woodruff, 1995).
Product shortages - Gray markets also emerge due to the inability of a firm
to synchronize demand and supply in various country markets. In the event of
product shortages, the buyers, especially the Original Equipment
Manufacturers (OEM) turn to gray marketers. In 1988 many computer
manufacturers had to turn to gray marketers to secure their supply of DRAM's
or else watch their production lines grind to a halt (Cavusgil / Sikora
1988).
Channel member integrity - In almost all of the cases involving gray
marketing, someone in the authorized channel commits a diversion, thus
violating the agreements signed. If the distributor's margin is
disproportionately large relative to the marketing tasks it performs, they
are likely to be the cause of parallel importation.
Trade Barriers - Restrictions brought about by import quotas and high
tariffs provide an attractive opportunity for gray marketing. India has a
three-tier duty structure on computer parts ranging from 50 to 80 percent on
imports. As a result, estimates are that as much as 35 percent of India's
domestic computer hardware sales are accounted for by the gray markets
(Reuter 1994).
STRATEGIC IMPLICATIONS OF GRAY MARKETING
a.. Gray market goods can severely distort local country marketing plans,
erode long term brand images and eat up costly promotion dollars. Unexpected
expansion of gray market imports disrupts forecasting accuracy, pricing
strategies, merchandising plans, positioning statement, and other marketing
efforts.
b.. Gray marketing can obviously damage authorized dealers by siphoning
off sales. The authorized distribution network provides back up, spare
parts, repairs, and promotional support that are not provided to customers
who buy through gray markets. Thus, the gray market grows under the umbrella
of services provided by the regular charnels (international Executive 1991).
Some of the unhappy channel members may drop the product and seek out other
manufacturers who have not been adversely affected by gray marketers. Others
may pursue the "If you can't beat'em, join'em' approach and become gray
marketers themselves.
c.. Parallel imports can deceive consumers by not meeting U.S. standards
or their normal expectations of after-sale-service. Consumers who
unknowingly buy unauthorized imports have no assurance of quality of the
item they buy, of warranty support, and of authorized service or replacement
parts. When the product fails, the consumers blame the owners of the trade
mark and the quality image of the product is sullied. (Engardio et. al.
1988). This could lead to legal liabilities it an accident occurs due to the
equipment or product manufactured by a particular company which finds its
way into these markets through parallel importation.
REACTIVE STRATEGIC ALTERNATIVES
Hedging - Creative marketers and strategic global players sometimes price
their products in a foreign currency which they believe is more stable than
their home currency to hedge against exchange rate fluctuations which lead
to gray market opportunities. Thus sales contracts can be made in the dollar
or Swiss franc even though the parties are neither American nor Swiss
(Weigand 1991).
Price cutting and Price incentives - Some companies have introduced price
incentives to consumers. Hasselblad, the Swedish Camera Manufacturer, offers
rebates to purchasers of legalized imported serial numbered camera bodies,
lenses and roll filled magazines.
Termination of violators - The manufacturer could stop selling to
distributors who resell the products to unauthorized resellers. It might be
difficult to implement this strategy since products are likely to be
manufactured and distributed in so many countries around the world.
Promotion of gray market product limitations - Marketers may advertise the
warnings to consumers against buying the gray market products on the grounds
that these products may be obsolete, worn out models or models designed for
different countries or regions, and that the consumers might have problems
with their warranties. Minolta ran advertisements to inform consumers that
gray market cameras had an inferior warranty.
Collaboration and Buy-Backs - Some of the gray marketers can be added to the
authorized dealer network if mutually acceptable terms can be reached,
thereby increasing control of the channels of distribution (Weigand 1991,
Cavusgil/ Sikora 1988). Another solution is to buy up the merchandise bought
in by gray marketers to protect the authorized dealers. Though this gesture
would send strong signals that the manufacturer is committed to protecting
the interests of the authorized dealers, this approach could be expensive if
it encourages dealers to bring in even more merchandise.
Legal Recourse - Marketers need to take an active role in getting the new
laws enacted. The concern for public health and safety prompted Congress to
pass the Prescription Drug Marketing Act to stop what the industry calls
"the diversion market.' The new law provides that' . . . no drug.. which is
manufactured in a State and exported may be imported into the United States
unless the drug is imported by the person who manufactured the drug."
PROACTIVE STRATEGIC ALTERNATIVES
Product Differentiation - Developing different versions of a product to suit
different local tastes, national health and safety rules, packaging
requirements, technical standards, income levels for different markets would
curb the gray market activities to a great extent. Minolta Camera Company,
for example, markets an identical camera in the United States and Japan but
it gives it different names and warranties. (Armstrong et. Al. 1988) Posche
makes its cars for the US market more powerful and better equipped in order
to reflect the higher price. Like other strategies, however, the use of
multiple brands affects the economies of scale and increases the production,
inventory and marketing costs. These costs need to be weighed against the
opportunity costs of gray market activities.
Strategic pricing - Gray marketing of a product within a market often takes
place because of the channel structure and margins. A manufacturer who wants
to eliminate the potentially profitable gray marketing activity should
reevaluate is pricing and discount structure. The most effective way to
eliminate the gray markets is to eliminate the price and margin discrepancy
between the markets. One major problem with this strategy is that it
adversely affects the products prestige image and brand value. Certain
brands are successful because of their snob and exclusive appeal and they
must be promoted as luxury articles that must be expensive.
Long term image reinforcement - HILTI is one of the leading manufacturers of
drilling devices in the world. It follows a global high price strategy based
on superior quality and direct distribution. Its products are more expensive
than those of all competitors wherever they are sold. Nevertheless, HILTI's
prices in Japan are only 55 percent of European prices over all its product
lines because of necessary adaptation to local price levels.
FINAL WORD
The response to the problems posed by the gray marketing has been varied.
While some manufacturers are simply absorbing profit losses to gray markets
as an acknowledged cost of doing business, others are taking more aggressive
stands, through privately funded fraud investigation, litigation and even
corporate guerrilla tactics. Despite the Supreme Court ruling in May 1991,
to legitimize gray markets in the United States, foreign manufacturers, US
companies manufacturing abroad, and authorized retailers have continued to
fight the practice (Klein 1991).
The gray market activities can create serious problems for the manufacturers
of the products involved if the practices are widespread enough to disrupt
the manufacturer's ability to manage their marketing channels (Levin 1985).
There is obviously no easy solution to the problems associated with the gray
marketing activities, since it is illegal for manufacturers to dictate
prices charged by their channel members. Manufacturers can exercise even
less control over the pricing practices of unauthorized dealers and
distributors. The authorized dealers insist that they should be able to
block imports of merchandise intended for foreign markets because of quality
differences of goods intended for their customers. Parallel importers, on
the other hand insist that they should be able to roam the world for best
buys. Gray marketers claim that the main beneficiaries of gray marketing are
consumers who benefit from lower prices, resellers, warranty and service
centers, and discount distributors.
For the US market, all US registered trade mark owners are protected under
the Tariff Act of 1930 and Section 42 of the Lanham Act. These laws are not
much help to curb the gray market activities. The US supreme court has ruled
that gray market importation is legal. Courts in other countries often take
the same position. Japanese judges repeatedly rule for gray market
importers. In E.C. countries, parallel imports cannot be prohibited. The
British Fair Trading Act allows wholesalers to sell to any retailers, who in
turn can buy from any wholesalers. Germany stimulates the practice by
rebating all import duties and local VAT for reexporters. Paris' Roissy
airport is popular with international brokers because of its duty-free
warehouse space for transshipments, which are not tariffed. The airport also
allows quick delivery because goods simply flow through without any
encumbering intermediate delivery.
The dilemma faced by the multinational marketers will not be resolved by
mere tactical response to the problem. The industry participants need to
make a strong commitment to identify and monitor the key indicators of gray
market activities. Some of the indicators for gray market opportunities are:
price differentials between countries, growing inventories, sharp changes in
exchange rates, and slowing foreign economies. Opportunity costs of gray
marketing need to be assessed accurately and regularly and shared with the
distributors, customers, and other stakeholders.
REFERENCES
Armstrong, Larry and William J. Holstein and Alice Z Cuneo:1988; Now Japan
is feeling the heat from the gray market," Business Week (March 14), 50-51.
Business Week, 1988, "A ruling that doesn't do discounters justice; (May
14), 145.
S. Tamer Cavusgil and Ed Sikora:1988, "How Multinationals Can Counter Gray
Market Imports, The Columbia Journal of World Business, Winter
New Roman, Times, serifturn can A
Jeremy
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