GRAY MARKET

The potential impact of gray/parallel trade in the electronic industry.

Outline
Introduction Definition Forms of Gray Market Causes Effects and Consequences Solution Conclusion References

INTRODUCTION
US Air-compressor manufacturer all indicators proved that they were growing in Germany but the true value of their sales showed it was stagnant Problem Identification and findings

Three other dealers instead of one authorized dealer

Myers , B., & Griffith, A., (1999), Strategies for Combating Gray Market Activity, Business Horizons , Nov-Dec

Types of Markets

1. White Markets (Registered/Genuine Product and Authorised dealer - iPhoneO2)

2. Black Market (Illegal and unauthorised dealer heroine, weapons)

3. Gray Market

DEFINITION

Gray marketing is the sale of genuine trademarked products through [legal] distribution channels unauthorized by the manufacturer or brand owner (Anita et al., 2006) It could be Domestic or International (parallel/lateral) (Thomas & Peters, 2006; Doole & Lowe, 2001)

Degree of preference or favourability varies depending on the direction of flow (Zafar, 1999)

Forms of Gray Market Occurrence

Parallel Importation Parallel Re-importation Lateral importation Lateral

Doole, I. & Lowe, R., (2001), International Marketing Strategy; Analysis, Development and Implementation, 3rd. edn, London, Thomson Learning

Forms of Gray Market Occurrence

Doole, I. & Lowe, R., (2001), International Marketing Strategy; Analysis, Development and Implementation, 3rd. edn, London, Thomson Learning

Gray markets exist for

Tangible products (lumber and electronic components) Intangibles (broadcast signals, IPOs) Massive goods (automobiles and heavy construction equipment) Light, easily shipped products (watches and cosmetics) Mundane (health and beauty aids) and Life saving (prescription drugs) (Anita et al., 2004) However, for the purpose of this presentation we would be focusing on tangible products (Electronics)

Figures/Statistics
Malaysia - cell phones purchased on the gray market account for 70% of total cell phone sales. (Anita et al., 2004) In India, sales of gray market personal computers outnumber authorized sales by two to one. (Anita et al., 2004) An iPod is $160 cheaper than the $440 that authorized dealers sell it in

BIG QUESTIONS ARE

STANDARDIZE PRICE

OR

OR
STANDARDIZE PRODUCT

OR

CAUSES OR INCENTIVES FOR GRAY MARKET ACTIVITY

Price differentials that are large enough (Thomas & Peters, 2006) Easy access from one market to another (Thomas & Peters, 2006) Managerial incentive that is outcome-based (Zafar, 1999) Attempt to cover costs or meet quotas (Anita et al., 2004) Excess inventory problems. (Zafar, 1999)

CAUSES OR INCENTIVES FOR GRAY MARKET ACTIVITY

Difficulty to differentiate between ordinary customer and a potential reseller. (Zafar, 1999) Poor or unstable financial health of network partner (Zarley & Burke, 2006) Degree of product standardization (Cavusgil & Sikora, 1988 cited in Myers, 1999) Consumers attitude towards quality-price inference and risk

EFFECTS AND CONSEQUENCES OF GRAY MARKET

Manufacturer

Undermine companies' existing international price differentiation strategies (Backhaus, 2007) and Marketing strategies (Usinier, 2009) Forces them to hold down prices to dealers (Badley, 2002) Erodes consumers confidence in Global companies (Doole & Lowe, 2001) Loss of marketing control. (Zafar, 1999)

EFFECTS AND CONSEQUENCES OF GRAY MARKET

Manufacturer

Increased or decreased sales and profits (Cavusgil & Sikora, 1988; Zafar, 1999) Eroding of brand equity (Cavusgil & Sikora, 1988, Anita et al., 2004), reputation and dilution of exclusivity (Anita et al., 2004) Strain on manufacturer-dealer relations. (Cavusgil & Sikora, 1988) Legal liabilities (Cavusgil & Sikora, 1988) and litigation costs

EFFECTS AND CONSEQUENCES OF GRAY MARKET

Distributor or Reseller

Forced to lower prices (Badley, 2002) Price-based competition (Zafar, 1999) Increase or decrease in sales and customer base (Bannerji, 1990) Inability to justify investment in addedservices

EFFECTS AND CONSEQUENCES OF GRAY MARKET

Consumers

Quality products at cheaper prices (Prince & Davies, 2000) Price-quality inference confusion (Gallini & Hollis, 1999; Doole & Lowe, 2001) Loss of after-sales services (WIRED, 2006)

SOLUTION
STANDARDIZE PRICE = Alienate some customers in certain countries

ADAPT PRICE = Encourage opportunistic Gray Marketers

SOLUTION
REACTIVE STRATEGY

3
PROACTIVE STRATEGY

GRAY

MARKET

(Cavusgill & Sikora, 1988)

SOLUTION

Reactive Strategies
Quick response to price-differentials due to currency fluctuations Price cutting Supply interference Legal action None or expensive after-sales service Punishment revoking of distributors rights legal dealer selling to unauthorised dealers Private investigation/investigators

SOLUTION

Proactive Strategies
Unbundle services (Bannerji, 1990) Establishment of legal precedence Join or form AGMA (Anti-Gray Market Alliance) Educate Consumers Toll-free hotline to encourage the publics assistance

SOLUTION

Proactive Strategies
Coordinate distribution channel horizontally Marketing Information System accessible to all Increased distributor communication Centralize pricing decisions Inventory Management

MANUFACTURER

Coordinate distribution channel horizontally Web-accessible database Increased distributor communication Differentiate distributors products (bar-codes, serial numbers or secondary trademarks)

Provide technical assistance where necessary e.g. stocking and inventory control

GAPS FOR GRAY MARKETING TO TAKE PLACE

A, B, C, D and E are different distributors in different countries/territories

Motivation to Stop Gray Market

Price Discrimination Brand equity

Prevention of free-riding

CONCLUSION
Focus on leaks (i.e. product diverters) rather than product differentiation or litigation. (Zarley & Burke, 2006) Distributors also should ensure legal precedence as regards Manufacturers Finally, exclusion of gray goods should be allowed, except when it is used to facilitate collusion or to enforce anticompetitive price discrimination (Lee, 2006).

ANY QUESTIONS