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  • Writer's pictureCoats Bateman III

The Impact of Grey Market Sales on Brand Value and Consumer Trust

Updated: May 24

Brand heat and brand health are fueled by driving demand through a brands desired retail outlets at high profit margins. The rise of marketplace sales channels has brought with it the unauthorized trade of genuine goods through channels not officially approved by the original manufacturer, also known as the grey market.


Understanding the effects of grey market sales is important as they can significantly impact brand reputation, revenue, and control over product distribution. The grey market drives lower prices and increases accessibility, which do not deliver an elevated consumer experience, usually lacking product warranties and after-sales support. This article will explore the definition and mechanisms of grey market sales, their impacts on both brands and consumers, and the ethical considerations involved. Readers will gain insights into how these sales affect the market dynamics and counter diversion strategies employed by brands to address these challenges and limit flow of product to the grey market.



Grey markets significantly degrade brand health.
Every grey market sale robs profit from authorized sales channels.

Why it's critical for Brands to control Grey Market Sales?


When genuine products are sold through unauthorized channels, brands lose control over the pricing, marketing, and distribution of their goods, leading to potential disparities in product quality and customer service. These further damage the brand’s reputation and consumers may associate negative experiences with the brand itself rather than the unauthorized seller. Additionally, grey market sales can undermine authorized retailers, reducing their sales and profitability, and ultimately harming the brand’s overall market presence and financial health. By controlling grey market activities, brands can drive demand to an elevated consumer experience, uphold their standards, ensure that consumers receive proper warranties and support, and maintain the trust and loyalty of their customer base.


Comparison Table: Grey Market versus Counterfeit versus Authorized sales channels

Characteristic

Grey Market

Counterfeit

Authorized Channel

Definition

Sale of genuine goods through unauthorized channels.

Trade of illegal goods and services.

Sale of goods through official, authorized channels.

Legality

Legal products but sold through unofficial means.

Illegal products or services.

Completely legal and regulated.

Pricing

Often lower than official retail prices.

Can be lower or higher than market prices, depending on scarcity and risk.

Standard retail pricing.

Consumer Risks

Lack of warranty and after-sales support.

Legal consequences, poor quality, and safety risks.

Minimal risks; warranty and support available.

Brand Impact

Loss of control over pricing and distribution, potential revenue loss.

Damaged reputation if associated, loss of trust.

Controlled branding, consistent revenue. Better brand health and long-term profitability.

Omnia Retail published a comprehensive article on the topic in 2002, citing that "An estimated 8% of the €243 billion personal luxury goods market is grey." That's €19.4 just in the personal luxury goods market. The article goes on to state that the KPMG estimated in 2016 that the "estimated value lost by products being sold through unauthorized sellers in the US amounted to $58 billion." This highlights the pressing need for brands to safeguard their authorized sales channels and maintain the integrity and value of their products.


How Grey Market Sales Occur

Grey market sales typically occur through channels such as online marketplaces like eBay and Amazon, unauthorized e-commerce websites, parallel importing by distributors exploiting regional price differences, unauthorized dealers reselling excess stock, and personal imports by individuals buying products abroad. These mechanisms bypass official distribution networks, leading to lower prices and greater accessibility.


The Omnia Retail article describes the situation, "If a grey market reseller sells a product - like a pair of Nike running shoes - closer to cost price, authorized resellers will take the knock. As the grey market reseller has thickened the competitiveness by providing the exact same product at a lower price."


This is the "The race to the bottom." The Amazon Buy Box, or "Buy Now," button is driven from several factors, chief among them is a competitive price (including shipping). It is important to note that the marketplace is tied together. Grey market sales trigger a response, either from another grey market seller, or from your authorized distribution channel, the later may have to adhere to a minimum advertised price policy.


The Effect on Brand Value


Loss of Revenue

Here's where it gets simple, when you lose margin, you lose revenue. When products are sold through unauthorized channels at lower prices, it undermines the pricing strategies set by the brand, leading to reduced sales through official retailers who cannot compete with these discounted rates. This not only affects the revenue of authorized distributors but also diminishes the brand's overall profitability, not to mention putting the brand in an uncomfortable position to address requests for margin relief. Additionally, grey market goods leech off of the marketing efforts invested by the brand, which create a confusing message, again impacting brand value and prestige. Consequently, the demand for that brands products will assume a lower value. This loss of control over distribution will likely dilute brand value and diminish customer loyalty, ultimately leading to long-term financial losses.


Brand Perception and Reputation

Products have inherent value, and the consumer shopping experience also holds significant value. The markets sweet spot is achieved when the right products resonate with target consumers through a retail outlet dedicated to providing the best possible customer experience for that consumer group. The combination of product performance and customer satisfaction enhances brand value for both the manufacturer and the retailer. However, each grey market sale undermines this shared value, eroding the benefits for both the manufacturer and the authorized retailer.


Statista published a report outlining the projected sales of 1P and 3P business on Amazon through 2027. In every year, 3P sales are basically double that of the 1P Amazon business, culminating in 2027 where 3P sales are forecasted at $783.4B versus $378.8B. The point for brands is, are your 3P sales complimentary to your brand strategy, or are they cannibalizing demand intended for authorized sellers and driving your prices into the ground across sales channels?


Impact on Strategies

In a 2022 post, we discussed the value of early adopters to brand equity and consumer desire. Traditionally, Amazon has been a market follower, responding to market trends in demand and pricing. This strategy enables Amazon to capitalize on proven opportunities while leveraging its extensive logistics and technology to gain a competitive edge and provide enhanced value to its customers. However, despite the benefits of long life-cycle products, Amazon places high importance on the efficiency of its fulfillment center space and inventory turnover, nearly as much as on sales. This focus, combined with supply chain disruptions, creates significant opportunities for third-party sellers. The entire eco-system is impacted if these third-party sales are not through authorized outlets.


In most cases, when a consumer purchases a product, it benefits the manufacturer. However, some transactions offer greater advantages by also enhancing brand desire and health. The best advice for brands is to incorporate Amazon into their distribution strategy rather than building the entire strategy around Amazon. Think of brand health as the locomotive that drives your business. Sometimes, the products that boost your brand health will succeed on Amazon, while other times, these products need to resonate in places where early adopters shop, thereby increasing overall brand appeal, pulling the train, which is demand for your higher-volume offerings.


We have worked with brands with every distribution strategy and have studied thousands of sellers, identifying the source of product to the grey market. Our process will provide you with actionable insights to address unauthorized 3P sellers and protect your product values.


The Effect on Consumer Trust


Product Quality and Authenticity

Say what you will, but scarcity fuels brand desire. Most brands cannot afford to destroy unsold inventory like Louis Vuitton, but the practice removes excess inventory from the market allowing Louis Vuitton to sell every piece at full price. The lack of clearance inventory also removes the anchor from the next seasons line. Again, not something Louis Vuitton has to deal with, but going back to the running shoe example, if a $150 shoe is discounted to $90, it is difficult for the consumer to recognize the successor to that product to be worth $150. It is the beginning of the downward slide of product values. By controlling distribution and removing grey market listings, the floor on your discounted products becomes higher. A higher floor allows everyone to operate with more profit throughout a products lifecycle fueling brand equity.


What Brand Equity means to a Consumer

Brand equity refers to the value and strength of a brand, derived from consumers' perceptions, experiences, and associations with the brand. It encompasses the added value that a brand name imparts to a product, influencing consumer preferences and loyalty, and allowing companies to charge premium prices and gain competitive advantages. Simply put brand equity is defined as the most products from a brand that can be sold through all channels at the highest prices, leaving the least amount of excess inventory. Thus, strong brand equity is crucial for long-term brand health and profitability, as it drives consumer loyalty, supports premium pricing, and minimizes excess inventory.


Brand Strategies to Combat Grey Market Sales


Market Surveillance, Analysis and Distribution Management

As good as the Omnia Retail article was on covering the issue, it was equally as bad on the advice for brands to fight grey market resellers. Educating consumers, putting stickers on products, simply monitor grey market activity? Counter Diversions' recommendation from day one has always been to identify the source of product to the grey market, enforce brand sales policies or adjust business practices enabling bulk buyers. In other words, take control of what you can control.


Brand Questions to Combat the Grey Market.

To really take action against the grey market, brands should ask themselves these questions at least every year.

  1. What do we want our marketplace 3P seller presence to look like?

  2. What are we willing to do to achieve our desired marketplace result?

  3. Will we take action (enforce sales policies) to cut off the source of product to resellers, if we have the necessary information to make those decisions?

  4. If we don't analyze and control our distribution, how many resellers are we willing to take legal action against? At what cost? Is there even a case?


These questions should help you define a strategy that works for your company to marry your desired results with the actions you're willing to take. As usual, every blog post ends with our statement that, Counter Diversion is a boutique SaaS company - we don't have marketing and we don't use high-pressure sales tactics. Our goal is to have solid, honest conversations about the issues at hand and then either recommend our service or another one that is a better fit for your needs. If you'd like to engage in that type of discussion, please schedule a free consultation.


The grey market is ugly and unloyal. The negative impact on profitability and brand health is unforgiving. The consumer experience is so much better when driven by healthy brands delivering real innovation and craftsmanship, we're here to protect that ideal.


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