Seeing Red Over International Gray Markets [Prince-Davies]

7/28/2019 Seeing Red Over International Gray Markets [Prince-Davies]

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Seeing Red O ver Internationa lGray Markets

Me lv in P r inc e a n d Ma r k Da v ie s

I nternational gray markets are imports by anunauthoriz ed party that result in the paralleldistribution of a manufacturer's product

through an unplanned channel. This channelperforms the same functions as plann ed chan-nels. However, a pr oduct is generally available toconsumers at a lower cost when purchasedthrough gray market channels. Operationally,goods are secured by gray marketers (a) as iden-tified customers who rapidly ship merchandise tooverseas gray markets, or (b) t hrough third par-ties who k eep the gray marketers anonymous.

Despite manufacturers' legal claims of repu-rational damages f rom gray market activities, theU.S. appeals court has not been convinced. It hasruled that manufacturers can eliminate consumerconfusion over the authenticity of their brandedproducts. This is because manufacturers maychoose to identify their products and where theyoriginate through product labeling. Furthermore,manufacturers' goodwill need not be tarnished bytheir own refusal to warranty goods sold in graymarkets. Goodwill may be retained by consumereducation about the distinction between graymarket and authorized channels through thetrademark owner's marketing communications.

Manufacturers' rights to have gray marketgoods blocked is a complex matter of legal dis-pute in the United States. One way gray marketgoods can be blocked is when U.S. firms holdfights to domestic dis tribution from an unaffili-ated foreign trademark owner. An exclusion or-der from U.S. Customs can be obtained if othersources seek to sell the same goods here withoutmanufacturer authorization.

U.S. trademark owners who have invested topromote their brands may be protected under theTariff Act of 1930 and the Lanham Act, Section42. An exclusion order by U.S. Customs may besecured if other parties seek to sell the samegoods without authorization. However, Customsmust determine whether the unauthorized goods

a r e physically andmaterially differentfrom goods of the

trademark owner.The EuropeanUnion's revoking o fborder inspectionsand non-tarif f barri-ers has facilitatedthe growth of graymarkets in the EUarena. No longercan parallel channelimports of identicalproducts to EUnations be blocked by the creation of exclusivearrangements.

Accusations that manufacturers and theirauthorized dealers level against gray marketersinclude characterizing them as parasites whounconscionably live off the genius of the originaltrademarks and manufacturers' investments madein brand equity. Gray marketers are por trayed asengaging in deceptive practices, offering goodsbelow manufacturers' quality standards---withoutwarranty---to unsuspecting consumers.

The pos ition o f gray marketers is, first of all,that they are engaging in legal and ethical activi-ties under the free enterprise system. As such,they are represented as serving the consumer'sbest interests by providing products of equalquali ty at a fair price. Further, they criticize thehypocrisy of manufacturers who seek to improvetheir cash flow positions by selling off excessinventories to gray marketers. They also assertthat manufacturers are looking to protect theirhigher prices and avoid competition from diversechannels.

Are gray marketers the "bad guys?" Are com-panies justified in seeing red over the predica-ment? Some selected cases can help shed light onthe controversy.

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Distributors are hardest hit by the sale of graymarket cigarettes in the United States. They arguethat cigarette manufacturers are indifferent to theproblem because gray market cigarettes keepprice-conscious smokers smoking.

Cigarette manufacturers take exception to

this allegation. "From a marketing standpoint,"reports Hwang (1999), "tobacco companies investa lot of time and m oney building brand loyalty.These gray market products do not meet con-sumers' expectations of U.S. brands."

It is not just cigarette manufacturers and dis-tributors who fear the consequences of gray mar-kets. States are concerned about this issue forthree reasons:

1. They fear the loss of revenue from therecent court decision awarding them $206 billionto cover smoking-related illnesses. The amoun t ofmoney each state is awarded is based on thenumber of cigarettes sold with in its borders. Salesof gray market cigarettes are exclu ded from thef'mal count .

2. They fear the loss of revenue in the formof taxes, because untaxed gray market cigarettescontinue to reduce the numb er o f "legitimate"cigarettes sold.

3. Due to the re duced cost of gray marketcigarettes, they fear that there will be an increasein the number o f resident teenage smokers. Thiswould undermi ne their long-standing policies oftrying to reduce that number.

Cigarette manufacturers and distributors alikeare having trouble lobbying for effective new

legislation at thefederal level torestrict sales ofgray market ciga-rettes. Federallaws banning thesale of such ciga-rettes are sched-uled to take ef-fect in 2000, im-posing stiff fineson the sellers.But the large

cigarette manufacturers, such as Philip Morris andR.J. Reynolds, believe the new legislation isworthwhile in principle, although it will be hardto enforce.

Philip Morris is suing five Indian-sourcedcigarette wholesalers. Its suit is based on the newfederal code that intends to protect consumersfrom being misled. Along with other cigarettemanufacturers, the compa ny believes that cus-tomers rely on consistent packaging, ongoi ngpromotions, and familiar taste that may be lack-ing in cigarettes made a different way.

A p p l e C o m p u t e r s , I n c .

Many authorized Mac dealers resent the impact ofgray market resellers. Authorized dealers, to-gether with Apple, have spent a great deal oftime and dedicati on enhancing the Apple name.They assert that gray market channel service ispoor and gray marketers have little knowledge of

Apple's business. Hence, gray marketers are de-grading Apple's reputation.Many gray market Apple customers have

complained about repair services, while com-plaints about authorized Apple dealers are rare.Said one authorized dealer in Tallahassee, "Al-though profit is of course a motivation, showingpeople a better way of computing--the Appleway- -is our guiding principle" ("Gray-MarketCrackdown" 1998).

Though not illegal, gray market sales areforbidden by Apple, which only sells computersto authorized dealers. The company tries to haltthe gray market supply by retracting permissionfor authorized dealers to sell Apple products ifthey sell to gray marketers.

Apple is one of the few computer companiesthat are extremely reluctant to authorize marldealers, since such dealers are likely to be graymarketers. The compan y strongly advises anyon ewho is thinking of purchasing an Apple com-puter throug h the mail to ask the seller somequestions over the phone: Is it brand new equip-ment? Does it have a serial number on the prod-uct2 And wha t is the return policy? It is up to theconsumer to research the purchase.

Another reputed failing of Apple resellers inthe gray market concerns the quality of after-salesupport. Most marketers an d retailers in Apple'sauthorized channels call their customers after thepurchase, to see how the product is working andhow they feel about it. This makes customers feelthat the retailer really cares about them and pro-motes bra nd loyalty. Instructions and warrantiesfor gray-market Apple computers may also bewritten in a foreign language. Because gray mar-ket products were originally meant for salesabroad, they often do not come with a warranty.Other potential liabilities are that computer s maynot be eligible for rebate and the specificationsmay not comply with U.S. regulations.

A s d a a n d Te s c o S u p e r s t o r e s

Ascla, an English superstore, sells gray-marketgoods. These products include such designerfashions as Versace, Gucci, and Christian Lacroix,as well as o ther goods, such as Calvin Klein per-fume, dog food, and designer neckties. Tesco,another English superstore, sells gray-marketmotor scooters, Levi's, and Nike polo shirts. Graymarket practices in both superstores have been

72 Busin ess Horiz ons / March-April 2000


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O f t e n , h o w e v e r, f e w e a s y s o l u t i o n s o f f e rt h e m s e l v e s to t h e p r o b l e m s p o s e d b y g r a y m a r -k e t e r s . A d d i n g d i s t r i b u t o r s w h o m i g h t o t h e r w i s es e r v e g r a y m a r k e t s w i l l a n t a g o n i z e c u r r e n t d i s -t r i bu t o r s . P roduc t d i f f e ren t i a t i on s t r a t eg i es a re no tw i t h o u t t h e ir i n c r e a se d m a r k e t i n g a n d m a n u f a c -t u r i n g c o s t s . E d u c a t i n g c o n s u m e r s a b o u t g r a y -m a r k e t p r o d u c t s m a y l e a d to c o n s u m e r f e a r s

a b o u t t h e q u a l i ty o f th e t r a d e m a r k e d b r a n d i ts el f.T h e s e k i n d s o f r i sk y t ra d e - o f f s a c c o u n t f o r th ec h a l l e n g i n g c o m p l e x i t y a n d u n c e r t a i n t y o f st r a te -g i c c h o i c e s a v a i l a b l e t o c o m p a n i e s a n d t h e i r a u -t h o r i z e d d i s t ri b u t o r s w h e n f a c e d w i t h g r a y m a r -k e t c o m p e t i t i o n . U I

R e . ~ r e n e e $

"Apple Grapples With Huge Computer Gray Market , ' ,Kan sas City Business Journ al,www.am ci t y. com /kansascity/stories/1997/06/30/ story/2.html

Gert Assmus and C arsten Wiese, "Ho w to Address the

Gray M arket Threat U sing Price Coordinat ion,"SloanManagement Rev iew,Spring 1995, pp. 31-41.

"Buying/Sel l ing," www.cnet .com/Resources/Tech/Mac.faps/Sel i /sel i6.html

S. Tamer Cavusgil and Ed Sikora, "How MultinationalsCan Coun ter Gray M arket Import s , "Co lu m b ia Jo u r n a lof World Business,Winter 1988, pp. 75-85.

Frank F. Cespedes, R aym ond E. Corey, an d V. KasturiRangan , "Gra y Markets: Causes and Cures,"Ha r v a r dBusiness Review,July-August 1988, pp. 75-82.

David Ch ampion , "Marketing: T he Bright Side of GrayMarkets,"Ha rvard Bu siness Review,September-October1998, pp. 19-22.

Dale E Du han and M ary Jane Sheffet, "G ray Marketsand the Legal Status of Parallel Importation,"Jo u r n a l o fMarketing,July 1988, pp. 75-83.

Eur opea n Cosm etic Market . "Things Look Grey forDiscounters ," S eptem ber 1, 1998, Lexis-Nexis AcademUniverse, Quinnipiac Web Resources.

"Gray Market Crackdown: Readers Respond,"M a c We e k

Online, June 17, 1998, Macweek.zdnet .com/1224/nw_grayreaderreact :h tml

Peggy HoUinger, "Traders Unite to Fight Ban on Sale Grey G oods ,"Financ ia l Times,August 11, 1998, p. A1.

Suein L. Hwang, "As Cigarette Prices Soar, a Gray Market Booms,"Wall Street Jou rna l,March 28, 1999, p. B1.

Don Linville, "Doing Business in the Single Market,"Business America,March 8, 199 3, pp . 20-23.

Margaret Talev, "Cigarette Makers Seek State Protec-t ion," (Tampa)Tribune,March 9, 1 999, A62

Bernard A. Whyatt, "Do Tesco and A sda Know Som e-thing That We Don' t?" TheTimes(London), August 10,1998, p. 42.

M el v i n P r i n ce is an a s so c i a t e p ro fe sso r o fm ark e t i n g a t Pac e Un i v ersi ty, New Yo rk ,N e w Yo rk .M a r k Da v ie s is a lectu rer Inm ark e t i n g a t t h e Un i v e rs i ty o f Lo u g h -bo ro ug h in Leicestershire, U .K.

74 Business Horiz ons / March-April 200

Seeing Red Over International Gray Markets [Prince-Davies]

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