Impact of E-Commerce

The Internet has forever altered the retail landscape and continues to be the catalyst for constant change and evolution.  In addition to changing consumer’s shopping behavior, e-commerce has fueled the growth and appetite for grey market product – the practice of diverting goods out of the authorized channel of distribution E-commerce has grown the grey market from a problem with limited scope and visibility into a highly conspicuous, global issue for brands.  Today, the majority of consumers start their purchasing behavior online using a search engine or marketplace to research or shop for a brand or product.  This simple act is not only the consumer’s starting point, but it also reveals a cursory glimpse into how well a brand manages their distribution channel.

 

Grey Market Problem

The reach of grey market is global, even if the brand is not.  Brands of all sizes and differing retail product categories are affected by grey market.  If there is demand for a product, it becomes desirable for grey marketers.  Brands producing thousands of products are negatively impacted in the same way by grey market as a brand producing a single item.

 

Even with the diversity of brands impacted, they all have one thing in common:  The product in grey market originated in their channel of distribution.  While a brand may not know how or the exact point where the product is diverted out of their authorized channel; they are still accountable.  The brand owns their distribution channel from beginning to end and is ultimately responsible for the grey market issue.

Grey marketers operate outside a brand’s authorized channel and have no obligation to respect MSRP.  In most instances, grey market product is priced at significant discounts to attract price sensitive consumers and offset lower margins with volume; creating a vicious cycle that further drives the appetite for grey market goods.  Prevalence of grey market makes it difficult for authorized sellers to sell product at MSRP and in turn makes the brand less attractive to authorized sellers; creating unnecessary friction between the two.  Grey market becomes particularly disruptive for brands with global distribution agreements and pricing structure. 

Anyone with Internet access can check pricing in other countries.  In most cases, product can also ship from another country even if the brand’s authorized channel prohibits such activity, thus undermining their global distribution agreements.

Having this highly visible, discounted message not only damages the brand’s value, but makes the brand less attractive to authorized sellers.  In many cases discounting also has the unintended affect of creating a “race to the bottom” as both authorized and unauthorized sellers engage in price competition driving the retail price lower.  The more product available in the grey market, the lower the prices can go and for longer periods of time.

 

Brands and Consumers Lose

Most consumers are unable to differentiate between an authorized and unauthorized seller and are often swayed by price.  In many cases consumers do not know that this may void their warranty, that they may not receive post-purchase support and may have a bad experience purchasing a brand from a non-reputable seller.  Each example harms the consumer and they forever associate this negative experience with the brand.

 

The Solution

Clean Channel Consulting partners with brands to fully understand and regain control of their distribution channel to prevent product from being diverted.  The only way to slow the grey market problem is to cut off access to the product. Pricing policies such as MAP are tools that do nothing to address the root cause of grey market and further disadvantage authorized sellers by removing their ability to be price competitive for a problem caused by the brand itself.  Grey market is a brand distribution problem, not a pricing issue, and needs to be addressed as such.