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Graumarkt - ein Milliardenmarkt

Grey Market, a Market Worth Billions

The Global Fight against Unauthorized Product Sales

Neither White nor Black, but Grey
07.09.2021
Retail & Consumer Goods
Counterfeit Protection
Digital Transformation
Supply Chain Management

Pharmaceutical and medical products and prestigious branded goods traded in selective distribution systems through authorized distributors are protected against parallel imports by German and European intellectual property regulations. Under certain conditions, the manufacturer can prohibit a parallel importer or another reseller from importing its original goods and distributing them in the European Economic Area (EEA). So far, so good.


The news and headlines we have read lately, however, show a different picture here: "ghost vaccines" - the grey market also offers in Germany, mask deal with "Graumarkt Kids" from Switzerland, Eucerin stops "Douglas partner", Zalando sells pharmacy cosmetics, diabetic supplies on eBay, bargain shirts from Adidas and Puma at NKD. We can go on endlessly now, and we are only talking about the so-called "grey market" here. We'll talk about fakes and counterfeits, i.e., the black market, another time.

But What Is This Grey Market All About?

The grey market is the term for a niche market in demarcation to the black market, between legal and illegal (black market). Here, opportunities are exploited to obtain original goods more cheaply away from the official trade route (e.g., manufacturer - concessionaire - customer). Where and how these products are acquired is, in most cases, difficult to trace or find out.


Concessionaires often have to buy large quantities of products from manufacturers and are obliged to include less popular goods in their stock. This regularly results in licensed dealers sitting on their stock. So they sell the surplus goods to other dealers who do not hold a concession. In some cases, these are products from abroad. For one thing, certain models are less in demand in some countries than in their own. On the other hand, lower VAT rates apply in some countries to be worthwhile buying and importing. Sometimes these traders operate on the edge of legal trading practices.


Once the goods have been purchased at a lower price, the second step is to offer them for sale at above-average discounts.

The Internet Is a Great Help

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The Internet, in particular, now offers a suitable platform for this. Here, the trader can maintain his anonymity to conclude mostly unknown deals. Whether in online auction houses, relevant forums, or official online shops, grey market traders use many channels to search for interested buyers with their discount prices. Many of the existing online platforms of luxury items go back to grey market traders. What seems like a marginal issue in the age of Amazon is actually the messenger of a development that, until recently, both manufacturers and retailers of luxury watches, for example, have resisted: Buying luxury watches for five-figure sums on the Internet? Impossible! This was a thorn in the side of an industry that resisted illegal piracy and the usual market mechanisms.

What to do about this sheer market power? The more the internet giants Amazon, Alibaba, eBay, etc., grow, the more numerous the complaints. At the beginning of 2018, the sandal manufacturer Birkenstock wanted to stop its supplies to Amazon and fixed this by terminating the contract. As a reason, the manufacturer cited plagiarism and fakes, which were offered there as Birkenstock originals. However, it remained with the conjunctive "wanted" because Birkenstock products are still available on Amazon to this day. The reason: online sellers buy remaining stock from other retailers - and third-party sellers also advertise the brand products, even though they have no direct relationship with the manufacturer. To the detriment of the specialist retailers or concessionaires officially selected and regulated by the manufacturers, who at first glance hardly seem to be able to keep up with the dumping prices of grey market retailers.

“Like New, Used and Super Rare”

Trade in second-hand goods also takes place on the grey market and is hardly regulated, if at all. Rolex sports models, for example, have been so sought-after for years that their grey market prices are continuously rising and are far above the concessionaire price. In the past, some manufacturers have developed strategies to combat the grey market and dry it up.


For some years now, some watch manufacturers have therefore been buying used watches in order to sell them serviced and as Certified Pre-owned with a manufacturer's warranty back to the end consumer. This business model can be compared with the used car market, as here too car dealerships of the major brands buy used vehicles, recondition them and finally resell them. However, as these highly sought-after luxury goods remain subject to very high demand and specialist dealers are unable to satisfy this demand, many of these strategies against the grey market are not really effective.

What to Do about the Grey Market?

In recent years, grey market trade has increasingly been brought within its bounds. Above all, the active approach of the luxury cosmetics industry has led to a sharp drop in the estimated grey market rate, a development that points in the right direction. Nevertheless, the grey market continues to cause considerable economic damage. It also destroys the value created jointly by manufacturers and retailers by conveying false price messages and offering luxury products in an environment that destroys their luxury image. Therefore, the industry has initiated a plethora of measures to stem the flow of goods into unauthorized distribution channels or to stop it altogether. In some cases, companies employ internal and external specialists whose sole purpose is to clean the channels. The number of coded products is increasing. However, a major threat comes from Internet trade, which uses illegal chains and networks that are difficult to trace.


A very great desire and one of the most frequent concerns of brand owners, besides proof of originality and direct communication with consumers, is the traceability of distribution chains. Here, digital components have gained massively in importance in the verification of products. Predominantly, however, the interweaving of product IDs with copy-proof printing elements and protection against tampering is regarded as necessary building blocks in product authentication. For example, unique codes, unique combinations of letters and numbers that are either printed as QR codes or stored in a chip (NFC, UHF), can identify products at piece level. This, in turn, enables digital communication with and among products. Customer loyalty programs and identity services would also be worth mentioning here. The analysis of data collected through scans opens up a new pool of market information for brand owners, but also logistics data. Thus, better production planning can be the by-product of tracking - track & trace - in the supply chain.


Blockchain technology, which is based on distributed, non-reversible storage technology, subsumed under the umbrella term "distributed ledger architecture", will play another role. The interesting thing is that you can trace any transaction in the blockchain back to its origin at any time. This is especially important when considering how a supply chain works. In addition to combining distributed ledger technology with QR codes, blockchain solutions are also compatible and linkable with other technologies to further enhance anti-counterfeiting: for example, technology solutions such as RFID or GPS, which are based on contactless data exchange. So, if a supply chain is built around a blockchain, it would be possible to record and track every contact with the product, from manufacturing to shipping and registering it in the warehouse to selling it as a transaction in the blockchain. This would create a completely transparent tracking system.

Conclusion

The grey market moves on the edge of the legal to the illegal. It will continue to exist and probably increase and is the gateway for real product piracy. Digitization can help to maintain control and transparency in this market, which is worth billions. For the future, this is a competitive advantage that you should not underestimate.

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Written by

Horst-Peter Eisen
Horst-Peter Eisen
Expert for Counterfeit Protection