Grey marketing: A $40 billion problem?

KPMG has just released the results of one of the first ever studies into the global grey market—and it makes for disturbing reading.

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By  Mark Sutton Published  February 22, 2003

KPMG has just released the results of one of the first ever studies into the global grey market—and it makes for disturbing reading. According to the study, the international grey market accounts for a massive $40 billion of IT expenditure each year, resulting in a loss to manufacturers of up to $5 billion per annum.

While the figure of $5 billion may sound like an exaggeration, the grey market is so impenetrable that it is difficult to know for sure. The loss is mainly attributed to damage to brand reputation, poor product handling by grey market dealers, poor quality of inventory management, and a general degradation of margins through multiple tiers.

Of course, there is also a loss of revenues when customers pay less for grey products than if they bought through legitimate channels, but apparently in as many as 60% of instances the consumer does not gain any price advantage.

The most disturbing figures are those relating to how widespread grey marketing is. The majority of distributors were aware of the risks of damaged, obsolete or unsupported grey products, and over 90% were wary of receiving counterfeit goods, but despite this, 71% of distributors believed that dealing with grey products is necessary to be competitive on pricing and fulfilment. That's almost three quarters of the brokers and distributors surveyed who rely on the grey market to have a profitable business.

Of course, there is more than an element of 'we only do it because everyone else does it' to the figure—81% felt that they could be more competitive if there were no grey at all. But all the same, 71% is an awful lot of distributors, especially given that 62% of manufacturers had discounted products for specific customers that never reached their intended end user, and 86% encountered inappropriate discount claims—that's brokers and distributors effectively trying to defraud vendors.

Worse still is that vendors don't even seem to understand the damage that grey marketing can do. Certainly not many of them seem to be in a rush to do anything about it. Only one third actually have permanent resources dedicated to dealing with the problem.

There are moves to change this, namely through the Anti-Gray Market Alliance (AGMA). The group aims to create awareness of the issues of grey in the same way that the BSA tackles software piracy, through education, lobbying for legislation and hotlines to report grey market activity.

The AGMA worked with KPMG on the study, but although its members are primarily manufacturers, the AGMA seems to suggest that the problems of grey marketing would best be addressed by the manufacturers first of all, and not the channel. After all, the grey goods have to come from somewhere in the first place, so controlling supply seems to be the best approach.

But while AGMA calls on manufacturers to gain a better understanding of how unscrupulous brokers might abuse a channel programme, or how closer relationships with channel partners would be a step in the right direction, it still seems that the manufacturers may not be as keen on tidying up their channel as they should be.

If only one third are actively trying to fight grey, what are the other two thirds doing? Forty billion dollars a year sounds like an awful lot of product to have simply been spirited away by grey brokers, without any vendors turning a blind eye to where their goods were going.

Eliminating the grey market is a huge task, but it all has to start somewhere. KPMG’s figures might be a bit ballpark, but they provide a starting point for discussion—but it is going to require true commitment from the vendors before the market will really clean up it’s act.

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