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How Grey Market Diversion Kills Clothing Brands

As high-end clothing brands grow their global presence, the risk of grey market diversion also increases, sometimes exponentially. So, what is “grey market diversion,” and more importantly, how can brand owners fight back?

First, a definition: grey market goods, also known as “parallel imports,” are genuine products that have been diverted from one market (i.e., another country or economic trade area) and subsequently imported into a different market to be sold—often at a heavy discount—without the brand owner’s consent or authorization. As any global brand owner knows, one major aspect of an effective multinational sales strategy is the dynamic pricing of branded products according to the optimal price that each local market can bear. If these markets are properly segmented and economically walled off from each other, the strategy is golden—brand owners retain maximum value while simultaneously maximizing profits.

The double-edged sword of economic globalization, however, can cut both ways.

Given dynamic pricing structures and economic disparities, products sold in developing markets are almost always sold at a much lower retail price point to account for lower purchasing power. Accordingly, wholesale prices are lessened as well. However, if and when these products are sold instead to unscrupulous brokers who divert them back to developed markets in North America, Europe and elsewhere, the results are disastrous. In addition, in some countries rebates are illegal. Brands naturally have an incentive to offer discounts in those countries, only to find product intended for the “discount countries” making its way to countries that also offer rebates.

When your authorized dealers or branded stores must compete on price with unauthorized discount retailers—especially wholesale clubs and web sites—who buy authentic but grey market goods at substantially lower wholesale costs, the brand name is quickly devalued and profit margins plummet.

Predictably, as global retail channels expand, grey market supply chain diversion grows ever more enticing. In fact, a 2009 analysis by Deloitte LLP estimated lost U.S. sales of up to $63 billion (4.5 percent of sales) per year in the consumer products sector alone.

In some cases, grey markets arise when manufacturers and distributors fail to properly synchronize supply and demand across their various global markets. Over-saturation and poor sales in one country may create a glut, while under shipping and low sales forecasts in another region create an unintended shortage and high demand.

Global grey market brokers react with astonishing speed, using sophisticated databases and inventory tracking systems to divert the most coveted products to the hottest global markets with absolute precision.

That’s where we come in.

With over a decade of continuous growth and development in digital authentication, serialization and track and trace technologies, Verify Brand’s enterprise-level software protects and secures your supply chain using patented tools that are cost effective, user-friendly and integrate seamlessly with any web-connected device.

In fact, the Verify Platform’s item-level traceability feature allows brand owners to go beyond identifying genuine and suspicious items to uncovering supply chain security gaps, quickly identifying grey market diversion schemes and helping to enforce minimum pricing agreements with your authorized retailers. One client even remarked that our detailed transaction reports and audit trail reminded her of enterprise-level banking software.

Contact us to learn more about how the Verify Platform already fits with your anti-counterfeiting and brand protection initiatives.

How does the grey market work?

Imagine a pair of high-end running shoes with a retail price of $150. Say that that pair of shoes is sold by the manufacturer (brand owner) to authorized U.S. distributors at a wholesale price of $75 each. At the same time, in order to account for economic disparities and decreased consumer buying power, the exact same pair of shoes is also exported to Central and South America at a substantially reduced wholesale price of just $25. Then, sensing an opportunity to make easy money, unscrupulous and unauthorized wholesalers buy up inventory, mark up the wholesale price, take a cut of the margin, and divert the pairs of shoes back to the U.S. where they flood the market at much lower retail price of just $100 each.

Now, these unauthorized retailers—competing directly with your branded stores and legitimate retailers—sell your genuine products at heavily discounted prices, devaluing your brand, cannibalizing your sales and shrinking your profit margins. Your brand not only loses revenue and brand equity in the U.S., your brand presence in other countries is significantly lessened and its desirability stagnates. Gray market diversion—your own, genuine products—is killing your brand.

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