What does grey market mean?
The terms Grey Market and Parallel Import mean the same thing.
Grey market is used to describe the sale of a product that has intellectual property rights, without the intellectual property owner’s permission in that market. Grey market goods are genuine rather than counterfeit goods. They are in fact branded goods legally manufactured in accordance with the intellectual property rights, but sold into a market without the consent of the intellectual property owner in that market.
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The grey market has expanded due to the increasingly global nature of commerce, especially with e-commerce offering new channels of sale and distribution, enabling unauthorized sellers to purchase genuine goods online from an authorized distributor and resell them online as they choose.
Looking at the sellers, parallel import sellers may be unauthorized resellers of purchased goods as described, but may also be authorized sellers selling out of their territory.
Now that we know what grey market is and who are grey market sellers, let’s find out if grey marketing is legal or not.
Are grey market goods legal?
Parallel import is generally legal. According to the exhaustion of intellectual property rights principle, once a product has been sold into a particular jurisdiction under the authorization of the IP owner, the owner of this product’s intellectual property rights cannot maintain control over the re-sale of that product.
However, in some situations, parallel import may be unlawful in specific territories.
For example, in the USA, the trademark law principle of preventing consumer confusion have led courts to hold that when “material differences” exist between grey market imports and authorized goods, the sale and distribution of grey market goods is unlawful. This held true even if the material differences are subtle, such as a difference in warranties offered for the grey market products. Variations in labeling, packaging, or quality control can also be sufficient if they are likely to affect purchasing decisions.
As grey market is generally legal, we’ll now examine situations that encourage such activity.
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5 examples of grey marketing activities
1. Unavailable Goods
Not all goods are available and accessible in every territory. This may be the result of the manufacturer’s strategic decision to not support the importation of specific products into a territory. It may be the result of pricing strategy or marketing efforts, or it may be caused by lack of distribution networks in a country or region. This void is an opportunity for retailers and e-commerce sellers to unofficially import products into the territory and offer them for sale.
For example, a jewelry maker may choose to limit retail to upscale markets as part of its branding strategy. Retailers who look to sell the jewelry may buy the branded items abroad, and bring them into the territory. As they are not bound by the IPR holder’s pricing policies, they may choose to sell them for a price of their choice.
2. Temporary Demand
Sometimes a new product is introduced, with its demand exceeding its supply temporarily, causing authorized suppliers in a territory to run out of stock. An example may be a new video game console or a new doll before the holiday season. This temporary demand can be used by sellers who buy the goods in demand, often in bulk, with the purpose of reselling. In these cases, grey market prices are often higher than the official distributor prices.
3. Price Differences
Brands know that some territories are willing to pay higher prices than other territories. Therefore, brands often have different prices for different distributors, countries or territories.
When brands apply different pricing strategies in different territories, it encourages grey market sellers to purchase a product in a lower priced territory and sell in a higher priced territory, where the goods are already marketed, at a reduced price compared to the official distributor. It may be as simple as making many orders of a discounted product, and then reselling the products without authorization from the manufacturer. Reselling at significantly lower prices creates competition that damages the bottom line of authorized distributors and channels as well as the manufacturer’s revenues.
This may be true for any product, but high-end branded goods are more vulnerable because price differences are more significant. This commonly takes place with electronics, such as cameras. Other vulnerable goods are watches, jewelry, designer clothing, and pharmaceuticals.
For example, entrepreneurs buy a branded camera where it is offered for a lower price, import and sell it for a price that provides them profit but is still lower than the market price.
Another example is a watch company that makes a strategic decision to grow its market share in Mexico. This company may decide to introduce a new design into the Mexican market at a discounted price compared to the price of the same watch in the U.S. If the discount is substantial enough, U.S. sellers may purchase watches in Mexico and import them to the U.S. for resale at a lower price than the authorized distributor.
Branded pharmaceuticals are another example. Prescription medications may have completely different prices in different countries due to government regulation. In addition, they have high prices compared to their cost of shipping. As a result, there is an extensive grey market for pharmaceuticals, such as around the U.S.-Canada border, as drug prices in Canada are generally lower compared to the prices in the U.S.A.
Grey market goods may also be sold because they are offered through distribution channels that are more convenient for customers. An obvious example is a case where a brand has very few brick-and-mortar locations in a territory, and no online sales. If an online reseller offers the branded goods through a marketplace such as Amazon, customers may choose to buy online for reasons of accessibility and convenience.
5. Rules and Regulations
Some territories have rules and regulations that apply to a manufacturer who officially sells in a territory or above a certain number of items per year.
For example, in some countries alcoholic beverages are highly regulated, but resellers may offer them through unauthorized channels.
Another notable example is cars. Automobile manufacturers divide their markets to control models and prices. This creates a market for parallel import vehicles. Parallel import usually offers buyers better prices, but it may also offer them an opportunity to purchase an otherwise unavailable model. However, grey import vehicles may not meet local regulations, and differences in specifications between countries may cause legal liabilities for the manufacturer.
Parallel import may also hurt unknowing consumers who make online purchases of grey market products. A U.S. resident, for example, may order a new phone online. When the phone arrives, he may find out that it was manufactured for the Chinese market, not the U.S. market. As a result, the phone may not be in compliance with U.S. regulatory requirements. In addition, this phone has no warranty service or technical support in the USA.
What can I do?
Manufacturers and brand owners have limited control over their distribution chains.
Many brand owners have seen their products sold outside of authorized territories, damaging their distributors’ sales efforts and decreasing their overall sales revenue. Once products are shipped to market there is simply no way of knowing where they will end up: in which territories they are sold and at what price.
There are ways to combat parallel import, as explained in this blog post: ‘Strategies to Combat Gray Market Sales‘
Eliminating Grey Marketing Activity
For a true solution for brand owners and manufacturers around the world, Wiser Market is proud to deliver its Parallel Import Control System (PICS), a solution for eliminating grey marketing activity.
Using innovative technology and creative approach, we offer a unique solution that allows brand owners to identify where their products are being sold.
With Wiser Market’s PICS you can detect leaks in your distribution chains, identifying distributors and resellers who sell outside their assigned territories.
Additional advantages include opening new DTC sales channels and improving your brand reputation by reducing the chance that your consumers will end up buying counterfeit products.
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