Study: Gray Market For Unauthorized Products Growing8:14 PM EST Mon. Jun. 30, 2008
Gray market products accounted for between 5 percent and 30 percent of total IT sales in 2007, with a value of about $58 billion, according to a new report by audit firm KPMG LLP and The Alliance for Gray Market and Counterfeit Abatement (AGMA).
There is some good news. While gray market activity has increased since AGMA's first gray market study in 2002, it has not grown as fast as overall IT spending, according to Marla Briscoe, who serves as vice president at AGMA and is also brand protection-Americas manager for Hewlett Packard.
"There's a lot of work for OEMs to do in the space, a lot of opportunity to partner with the channel to really drive down this activity," Briscoe said.
The study defines the gray market as the unauthorized reselling of branded goods as the result of diversion from authorized channels into the hands of third parties, including the open market. The key to stopping the unauthorized activity is for manufacturers to establish strong partnerships with reputable distributors and resellers, according to the report. Additionally, IT manufacturers need to implement consistent policies and a strong set of business incentives designed to foster long-term and mutually beneficial relationships with their channel partners, according to AGMA.
Nearly two-thirds of respondents in the study believe gray market product availability has increased over the last two years, and more than half of survey respondents believe the increase is greater than 20 percent. About 13 percent of respondents said they are buying gray market products and selling them in another country, according to the study.
According to the study, 66 percent of solution providers say they make gray market purchases. Most claim it makes less than 5 percent of their annual purchases, but about a quarter of respondents say it represents 11 percent to 30 percent of their annual purchases. About 17 percent of solution providers who make gray market purchases say they have received counterfeit products.
In the study, KPMG and AGMA make several recommendations for vendors to implement to reduce gray market activity, including taking steps to review and strengthen incentive programs, issuing a comprehensive compliance and reporting policy to all partners; monitoring and acting on unexplained sales spikes from business partners; putting automatic alerts in place and act upon these alerts; and implementing a robust process for performing due diligence on new channel partners.
"You do have certain OEMs that have taken a proactive stance to put in protection and put in programs. There is room for other OEMs to take a look at their programs and partnerships with the channel to see where they can improve their processes and monitoring and enforcement," she said.
AGMA has worked with several vendors to help prosecute gray market offenders, but Briscoe points out that participating in the buying or selling of unauthorized products also can have a detrimental effect on solution providers' customer relationships too.
"If you're simply sourcing cheap product and have no idea of the provenance of the product, then it's likely you can impact your end customer relationship. I think there's growing awareness that it is a real risk. That's impacted decision making," Briscoe said. "It's a buyer beware message. Part of the success of mitigating gray market fraud is education. Resellers, when faced with competing against the gray market, need to educate their own customers about buying from unauthorized dealers."
The Internet has impacted the gray market in terms of pricing, product availability, warranty, service and maintenance, according to the study. IT companies need to do a better job of designing measures to reduce authorized partners' willingness to buy gray market products, according to the study.
The study also found that most IT companies have contractual provisions in place to address unauthorized sales, but many of those companies do not have programs that effectively monitor solution providers' adherence to those provisions.
"While IT manufacturers offer channel incentives that are serial number dependent, they either lack the means or do not check serial numbers when processing incentives," according to the report. "While many IT companies have indeed bolstered their management of channel partnerships, the next step must be a comprehensive approach of channel management from IT manufacturers in order to truly stem the flow of product into the gray market."