April 18, 2012
Nation’s Highest Court to Take on ‘Gray Market’
I can remember way too many years ago being an account executive at an ad agency and working with a small consumer electronics retailer. Month after month I’d walk into one of the stores to meet with the owner who would voice his frustration. Even though he was the only official retailer of a given manufacturer’s line of audio products, a competitor that ran commercials (touting its "insanity") was selling gray market items — products obtained outside of normal distribution channels — at about the same as it cost my client to purchase it wholesale. Consumers would come in and his staff would point out that the manufacturer would not honor the warranty if the product needed repair, but the vast majority didn’t care. They went to the "crazy" chain and spent their money there.
I can’t remember if the manufacturer took any steps back then in an attempt to curtail the practice, but in more recent years we have seen companies take retailers to court claiming that the sale of gray market items violates copyright law.
Back in 2010, a case pitting Omega and Costco made it all the way to the Supreme Court where the justices split 4-4 on the question. Justice Elena Kagan recused herself because of her involvement in a case in which she wrote a supporting position for Omega while a member of the Obama administration. In the end, most watchers of the nation’s highest court saw the decision as a victory for Omega since it is widely assumed that Justice Kagan would have voted in the company’s favor had she participated in the case.
Earlier this week, the Supreme Court announced that it would take up the gray market/copyright issue again.
According to a Bloomberg News report citing a 2009 Deloitte analysis, gray market imports cost manufacturers $63 billion a year in sales. On the other hand, as the Retail Industry Leaders Association points out, it also saves American consumers billions.
The point of law in question is the so-called first-sale doctrine, which maintains a copyright holder can only profit from the original sale of the first product. If manufacturers are able to profit from sales following the original purchase, it is argued, than services such as Netflix would be totally at the mercy of movie studios, for example.
On the other hand, manufacturers argue that it is well established that market pricing holds where a product manufactured overseas would be sold there at a lower price while a higher price would be applicable to the U.S. market.
Discussion Questions
Discussion Questions: Where do you come down on the gray market issue? Should retailers be able to go outside normal distribution channels to purchase and sell gray market goods or should manufacturers be the sole party to determine where products are sold?
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Retailers should be free — in all cases — to sell any goods which are legally sourced and can be legally sold, provided they comply with any and all legal restrictions on the sale such as not selling tobacco products to minors, etc.
Period.
The issue of gray market goods is a complex one, but more so from the manufacturers’ position. Some manufacturers appear to be opposed to gray market sales and some seem to foster them, for whatever reasons.
Gray market goods mess up markets, but as long as those markets are free and operated in a legal manner I’m not sure what can be done about them other than mandating global pricing which seems just a tad fanciful.
I can understand the argument of the manufacturers who want to control the distribution of the product if they are to be liable for product performance. However, do different channels of distribution affect the reliability or performance of the product? This argument is more clear in the case of counterfeit goods. Unless a manufacturer can establish that something happened to the product making it less reliable when a non-authorized channel of distribution is chosen, the harm question is problematic.
Provided the goods are not stolen, retailers should feel free to acquire product from any source. The gray market is fair game for everybody. Moreover, I’m not so sure of the legal niceties of the situation, but in my experience — mainly nonfoods — it has been the manufacturer that has prompted the diversion of product into the gray market. It may well have been that it was done by sales staff to make a number in a particular quarter, and the only way to do that was to offload a substantial amount of product to diverters. The gray market benefits consumers and generates competition, so it would certainly seem that RILA’s position makes the most sense.
It’s an easy decision for most parties; a retailer offers a lower price point and a consumer pays less for a product devoid of a warranty.
The macro picture is a lot more involved, and I favor the manufacturer perspective.
Marketing moneys will be spent enticing consumer purchases and creating brand loyalty. Jobs will be created all along the supply and promotion chain that depend on retailers and consumers buying the products directly supported by the marketing moneys. Gray market goods are a leak in the system that eventually hurts all involved parties.
I was once told by a friend who worked in the FBI that trademark and copyright fraud costs legitimate manufacturers (luxury goods), artists, retailers (I saw many franchise rip offs in China, like KFC, etc.) and other sellers trillions of dollars. Simply because the products are sourced in a legal fashion does not ensure that the products are legitimate to begin with.
Gray market goods are not counterfeit goods, but goods bought outside manufacturers’ retail network. My question is, where did the goods come from? The manufacturer sold them to someone and is now upset that their buyer is selling them to someone else?
If the manufacturer wasn’t complicit in the sale of gray market products, I could see the problem. But the manufacturer produced or had the product produced, sold it and is now whining because some entrepreneur figured out that if he bought it in Asia for $10 and can sell it in the USA for $300 he can make a profit.
Most of the gray market products are created by manufacturers dumping excess inventory. Fact is, they don’t care where it goes when they sell it, it becomes a problem only when it upsets their pricing structure in another marketplace. I feel for the retailers who have to contend with this; an easy answer is for them to quit handling brands that are available on the gray market. If you deny the manufacturers a retail outlet, then they will solve the problem they created.
Grey market is the international term and diverting is the domestic term. While working for a CPG company, I saw an international order come back onto the domestic market. It was like the boat left the harbor, did a u-turn and came back into port for unload.
Currency spreads feed the grey market. Retailers should and will purchase merchandise at the best price. It is not their job to police the supply chain. It is the manufacturer’s job to know their customers and have oversight on where their product goes. This can only be executed through properly enforced sales policy.
Yes, all retailers should be able to purchase their goods wherever they please. They should not be “limited” to their locale. We are in a global market and a global economy. Forcing goods to be purchased only from the manufacturer establishes a foundation for collusion and price fixing where the consumer loses and innovation and global economics are sacrificed. In the end, no one wins…
Oh yeah, this was the same problem that we faced in the 1930s until we had the Robinson Patman Act and the Sherman Anti-Trust Acts which made collusionary acts illegal since they restrained trade. This appears to be along the same issues.