What is the Grey Market & how does it affect brands and consumers?

We sat down to speak with Scantrust Head of Partnerships & Blockchain Advisory, Ricardo Garcia, and Scantrust CEO and co-founder Nathan J. Anderson to talk about grey markets, sometimes referred to as parallel imports. We started by asking Ricardo and Nathan to help us define what the grey market is and to explain what effect it has on brands’ ability to control supply chains and distribution. They explain not just what the grey market is but also how Scantrust helps their customers address grey market problems with expert solutions that pay off.

M: What exactly is the grey market?

Ricardo: Right. So when we say “grey market,” we’re talking about company distribution policies, which is about which markets companies are selling into, at what prices, and with which distributors. These factors can lead to problems for brands and even consumers when someone buys products in one market, with particular pricing and market conditions. Then they resell it in another market where there is already an importer buying products at specific regional, legal, or other market requirements.

M: Okay, give me an example.

Ricardo: A great example is one we’ve seen with a client of ours that has experienced a pure, grey market product challenge. The challenge is that manufacturers of automotive car components export from one production site into many different markets. They have a contract with one importer that imports these batteries and resells them under agreement in their region. What’s happening is two things. First, there are batteries that, for example, are shipped to Country A, but then they show up in Country B. The local importer doesn’t want that because it diminishes his margin. Then the second thing is that some batteries also show up in markets such as Country C, where they don’t have an official importer yet. Regardless, there are still batteries showing up there, and the brand wasn’t expecting that. Today, these brands cannot trace back via which distribution chain their products ended up in these markets.

Nathan: Exactly. So, you have an intended market, and you have an intended channel. You have a distributor who covers, let’s say, only Germany. And what happens is that for various reasons; it could be because there’s a high tax in one country, like China where there is a 30% tax on a particular product, some people might bring in products from elsewhere to get around that tax, right? So they’re now selling the market to chase a bit more profit. They can either sell at a lower price or sell at the same price and still profit. You have situations where maybe a distributor has different pricing in different Markets.

For example, a distributor may buy more products, so they’re getting a discounted price for a specific market. Or let’s say you’re trying to move stock off your shelves, so you set a special price. Sometimes people then turn that around and look at these regions, where there are people with the same pricing benefit they have, and try to flip products to turn a quick buck. But now another party is also selling the same product that they buy from another market. And what you can do is arbitrage because sometimes a product costs less in one market than it would cost in another. So essentially, it’s the activity of buying products in markets with different margins and pricing policies and reselling them in a market where the product might be more expensive and making money off that difference.

Ricardo: The beauty care industry also sells products in specific markets, and the problem is not the margin. So the problem is not that they buy the cosmetic products in one market, resell them in another, and destroy the local importer’s margin. Sometimes, they don’t even have an importer in that market. So they’re not supposed to sell into that market because maybe they don’t have regulatory approval. After all, it’s perhaps a product you put on your face, so there are bound to be particular regulations around that. In these situations, you need local approvals. If you’re not approved in that market, you technically shouldn’t be selling your product there. But still, it happens that by some channels, people buy a product in Germany, and then they sell it in Russia, although that product is not authorized in Russia by the local authorities. So that’s more of a compliance topic where products sell in markets where they’re not supposed to be sold.

M: Nathan, you just spoke about products selling in markets where they’re not supposed to be sold. What’s the difference between the grey market and the black market?

Ricardo: Grey market? Strictly speaking of grey market activity, it’s not illegal. So you can buy products from other channels, and it’s not illegal, right. It’s just that companies don’t want that because it hurts their margin or creates tax issues, or would create compliance issues if they were sold officially through that avenue. Buying a product on the black market is usually illegal for other reasons: that product may be stolen or sold against the law. I don’t know, like some unlawful product in itself, like organs or whatever stuff you just shouldn’t buy, like drugs or stolen products and so on. So black market usually means that it’s illegal, whereas the grey market is, strictly speaking, not illegal.

M: What’s the difference between grey and counterfeit goods?

Nathan:  I think, to point out that it is real products, right, it’s authentic products, not fakes like counterfeit goods. Essentially, grey market goods are authentic products ending up where they’re not supposed to be.

Ricardo: So a counterfeit good is a fake product, as Nathan explained. So the product itself is not genuine. In the grey market case, the product is authentic. It’s just coming from another market. So imagine I’m in Switzerland. Grey market means I buy a product from Germany. We are selling it in Switzerland. But the companies that produce that product don’t want it to be sold in that market because the same company produces products they shipped to Germany. They have products they ship to Switzerland, and they want the products that are sent to Germany to sell in Germany and the products that are shipped in Switzerland to sell in Switzerland.

They don’t want the products from Germany to be sold in Switzerland. There are countless reasons for this, but usually, there is at least one good reason for it, and that is to protect consumers.

M: Can you point to one type of product or good with challenges dealing with the grey market?

Ricardo: I think what we have observed is It’s not that homogeneous. There is a grey market activity in motor oil, automotive parts, alcohol and spirits and cigarettes, and cosmetics. So I have even had investigatory conversations with a company that produces speakers. The point is grey market happens for almost all physical goods. When it becomes a problem for a company, then it comes on our radar, and it’s a problem that affects a very diverse group of companies. I have seen two cosmetic companies that both had a grey market issue, which might be surprising to some people.

M: So it exists across the board, I see, and sometimes brands do not see it as a priority. And so tell me about how this affects brands and scale.

Nathan: Sometimes, this is systematically done. Sometimes it’s large scale. Sometimes it’s small scale. Products that go to an unexpected market end up there despite plans and expectations. I’ve seen a fundamental shift in the past years. There’s one philosophy that is “off-market doesn’t matter because ‘my product’ is still being sold, right? It doesn’t matter. Whatever: a sale is a sale, and we want to sell more.” Now here’s the challenge: these can be painful lessons for a company to learn.

The first thing to understand is that just controlling your branding or messaging becomes difficult. Sometimes, you create packaging or messaging from a specific product for a particular market and target a region, and it might be a somewhat distinct market. In that instance, you’re risking losing your brand, the ability to control your branding in addition to creating pricing pressure. If you see products typically coming into the market unexpectedly, that’s primarily because of price arbitrage. That’s going to put pressure on your official channels to come down on price to compete. If you’re a buyer or end-user, if it’s the same product, say it’s a bottle of liquor, maybe you don’t care. Suppose it was intended for Germany or China: it’s the same thing to you, it’s a genuine product—except 20% cheaper.

So what happens is if you have this going on long-term and it’s at scale if it’s placing pressure on your official channels, your distributors realize that, and then ultimately, that pricing pressure comes up to you. So that will impact your margin over time. Short term, maybe not, but in the mid to long-term, that turns into lost profits. And so you want to prevent that, stamp that out. When people know grey market goods are being sold, what’s going on? Distributor A points their finger to distributor B and so on. So maybe you realize what’s going on. You know that this is happening, but you don’t know who is causing the problem. You don’t know which channel or channels, and you lack the insight to do anything systematically. Right?

M: Is there something that brands can do to gain these insights?

Nathan: Yeah. Well, I mean, here’s the new paradigm shift. And the new paradigm shift is when you get a digital ID on each product, and you can now associate information to that with a code and crowdsource the status of products. So what does that mean? For the companies getting data through our company, Scantrust, you put a unique digital ID in or on your product. Then you’re able to associate logistics information to that code, even updating throughout shipping. For example, here’s a case that’s now going out with one client in the premium liquor industry, and they’re, by the way, far out and ahead with this technology. “Hey, this is going to distributor A. Its intended market is signing for it.” So we geofence that group of codes, etc.

If you have that same code scanned outside of its intended market, say that intended market is China because we’re getting a geo-location from every scan, you will know when a product from China is now in Vietnam. It’s now in Singapore; it’s not in Germany where it’s supposed to be, or vice versa. And then you also know that not only is that product out of the intended market, but it’s directly associated with that distributor A that we mentioned earlier. So we know there’s something funky going on in distribution. We don’t know if it’s distributor A or their sub-distributor or whatever at this time unless you do some work, but at this point, you know something is not going to plan.

That inside intelligence is directly related to the scan that happens. Then in the backend, in our system, you see all of the data and the information associated with a code. We have alerts set up to ring the alarm when this happens: “Here’s the information associated with that and this happened then.” so that’s powerful. What’s more, you’re getting that information without sending out inspectors. It happens even if a consumer is scanning the code just to go to a marketing redirect, and they’re authenticating a redirect or just opening up the code on the webpage.

You’re getting that data back, right. So you’re able to crowdsource a high amount of data from your consumers. And I think that’s a crucial point, even though they don’t know they’re helping you to help them. The power of Scantrust is empowering the brand and consumer.

M: Just to clarify for me, because it’s pretty interesting when we speak about this, we talk about taking preventative measures or gaining insights into where these things are happening so brands can take corrective action. At what point in the supply chain are we pinpointing the activity? Is it with the distributors and not necessarily when the products are with the end-user?

Nathan: Yeah, exactly, the end-user or consumer doesn’t always care if they are “helping.” They may not even know they’re helping “the brand” or helping themselves because each scan is a data point. Right? You’re tagging information either at production or when a shipment is being made. And in some cases, that information you’re only getting on the first tier. It goes like, “Hey, we know we’re sending this case with products out, and we’re tagging all codes to distributor A. Distributor A is only selling in Germany.” ut there are often cases with more steps between distributors A and an additional distributor B. There are sub-distributors and regional distributors, and there are sometimes six or seven layers in between.

Our system can track further than that, probably to infinite levels. But then it becomes a process question, too, because of its associated information. You only know that information when the product goes from that previous step, so this is where parent-child associations happen. When you put a unique ID on a product, you can put that ID on the product label or integrate it into the existing packaging. There are multiple ways you can do it now. Typically, all of that either happens pre-printed or at the production line. That’s a good start. You can use that right away, even without doing anything else. You can use it for anti-counterfeiting even, something that Scantrust is particularly good at, by the way.

Of course, you can also use it for consumer engagement, where someone just scans the product, and they’re whisked away to whatever experience: anti-counterfeiting is a part of that too. When you scan a code, though, you are probably going to open up a web page. It can be anything. You can do that right away.

But when you want to do advanced supply chain track and trace, grey market tracking, you need to do more with that code. You need to associate information with that code, but the information doesn’t get associated without some setup. It would be nice to print out a million labels, and then when someone does a production run where only 10,000 of those printed labels are needed, you magically know which 10,000 were grabbed off the shelf. Well, you don’t “just know” which 10,000 are used. This is where there’s some slight complexity. You have to set up an inline camera on a production line. So it’s scanning the code, and that camera is associated with the production information. This way, we know all the details of, say, batch 3247. Boom. And then, you can start to associate production information. And then if you want, you say, okay, where are these products? And you may need to be able to say, well, these products are going to distributor A, etc. This is powered by parent-child association. What does that mean? It’s like, let’s say there are twelve bottles of anything in a case. You have a unique ID on the case label and up to twelve unique IDs in the case. Inline or camera scanning associates those twelve bottles as one unit to the case ID. We don’t know where they are going, but the bottles, in this case, are associated with that case label. Then you can do the same thing with cases and pallets made up of cases. Let’s say it’s 40 cases on the palette to create this association.

For a bit of cost and time investment, including automating this, when I go ship a pallet of bottles to distribute it, let’s say 40 cases with twelve bottles, so that’s 480 bottles, we’ve got a handy reference of information now. With this in place, you can just scan a palette label and use a handy app to tag this as associated with distributor A. That can also be associated automatically with case cost, intended market, etc. Because those bottles now have updated information in the system for distributor A, anytime they’re scanned from there on out, you know that.

What some companies do with this functionality is even more complicated. Let’s say this pallet goes out to distributor A. When they receive it, they need to scan it. When sales happen, once again, there’s a scan. This level of detail can inform demand planning. We’re also back to being alerted if the products are going off-market, which is great. It’s all great intel to have.

Here’s another thing: do you have leverage over your distributor? You can say, oh, not only do you scan it and ship it out, but you also know which market distributor is supposed to sell the products in. This is a more complex solution, and it has the most upfront costs, partially because we always need to work with a system integrator, which is a professional third-party who goes in there and installs whatever hard label applicator is necessary, installs a camera system that can scan the codes, installs a PLC, which is just like a mini-computer, so that gets installed. The program or logic controller is installed like in a Siemens device, and that takes in the data from the scans and communicates it all to the ERP system, connects to SAP, for example, and nails all that data. And then the data gets into our system, uploaded automatically via API or what have you. Once you automate that, it runs rather well, sometimes with minimal to no, well I won’t, so no cost, but minimal cost. Some companies are reluctant to update their processes, to install the hardware for something like this, maybe concerned because it takes an investment. Really? But there’s no other way. There’s no other way to create this invaluable insight, and it always pays off.

Ricardo: So essentially, what we do with our product is two things. I would say three things. So we can treat each product as a unique ID, and you can connect the transaction, let’s call it, supply chain information with that ID. So you can equate which product, which market you’re shipping the product to, which distributor you’re shipping it to when it was produced, and what batch it was part of. Once that information links with the code at any time, if you have a product in a specific ma

There are two ways we can identify grey market goods. One is an Inspector approach. So we have a mobile application that inspectors in the field can use and just do sampling. Or if, for example, you suspect you have a product in Russia, and you want to trace them back, you just buy one, and then you check with the Inspector app. So they just buy products, scan the code, and verify whether this product was indeed in the right market.

What data links to the code? So this is the Inspector approach. And the other method is crowdsourced consumer scanning. So we have an alert mechanism, which for every scan that you do, it checks. Was this product scanned in the market it is supposed to be in, the market it is supposed to be sold in? And if yes, nothing happens. If no, then an email alert is sent to a specific company telling them, hey, a product intended for the Czech Republic was just scanned in Romania. Wake up! ‘Do you want to take action here? Is all the info okay?’

M: I think we have covered so much today. Thank you both for taking the time to talk about the grey market. I feel we are just scratching the surface here.