Gray's Anatomy: Dissecting A $58 Billion Market

GRAY MARKET GROWING

Sixty-three percent of channel partners, identified as resellers, system integrators, retailers and distributors in the study, receive offers for gray market products and believe the availaibility of those products is increasing.

"Putting things into perspective, when we talk about the IT industry, which has grown more than 81 percent since 2002, it should not be a surprise that the gray market, in terms of dollar volume, grew as well," said Ram Manchi, president of the Alliance for Gray Market and Counterfeit Abatement (AGMA), in a white paper published jointly by AGMA and KPMG.

BUYER BEWARE: COUNTERFEIT GOODS ON THE RISE

Seventeen percent of channel partners that received offers for gray market products have received counterfeit products from gray market sources.

"What is encouraging is that the gray market grew at a lower rate than the overall IT market. What is worrisome is that some of this growth is coming from goods that are misrepresented and sold as new but are really used, altered or even counterfeit," AGMA's Manchi said in the white paper.

TAKING A TOLL ON CUSTOMER SATISFACTION

Vendors believe the biggest impact of the gray market is in customer satisfaction and profit. About two-thirds of 90 vendor respondents rated those two categories as 4 or 5 on a scale where 1 is no impact and 5 is significant impact. Meanwhile, vendors did not think their brand or channel-management costs were impacted as much.

WHAT'S THAT BELOW-LIST PRICE?

Twenty percent of vendors said their products are discounted by more than 40 percent below list price in the gray market. Just more than half of those polled said their products are discounted -- on average -- by more than 25 percent.

THE NET CASTS A WIDE NET

Vendors said the Internet has a significant impact on pricing policies, product availability and movement of product across borders.

KEEPING ON TOP OF GRAY MARKET ACTIVITY

Fifty-eight percent of vendors said their company has a process to identify or monitor gray market activity. Of those that are monitoring activity, sales and marketing are most involved.

LIVE AND LEARN: LACK OF EDUCATION HURTS

Most vendors do not have a formal training program to educate their own employees or customers about gray market concerns. Only half of the vendor respondents said they include provisions in their reseller agreements.

SOME VENDORS GET TOUGH WITH SANCTIONS

Vendors that have gray market provisions in their reseller contracts said sanctions are their top response to discourage the activity.

WHAT'S MY INCENTIVE?

About 90 percent of vendors said they offer incentive programs to their channel partners. Promotions and volume rebates were the incentives offered most often. Meanwhile, only 45 percent of the vendors surveyed said their companies do not support warranty and/or technical support on products sourced from the gray market. Forty-three percent said they sometimes support warranties and tech support for gray market products, while 12 percent indicated it is common to do so.

WELL, THAT WAS INAPPROPRIATE

Sixty-three percent of vendors said they have not identified situations where inappropriate claims have been made in their incentive programs. Among vendors that have identified those situations, the claim cited most often was sales to ineligible entities. The chart illustrates what type of incentive programs are offered.

BETTER TRACK THOSE REBATES

Nearly half (48 percent) of vendors said they do not verify end users for rebates. Vendors that do track rebates cited tracking serial numbers and process control as used most often. Also, nearly a quarter of the vendors said they do not require channel partners to track product serial numbers on sales out to customers.

YOU'VE GOT E-MAIL

Thirty-eight percent of channel partners surveyed said they receive offers for gray market products. E-mail advertisements are the most common method for receiving those offers, while Internet and telephone solicitations were the next most cited methods.

MOST CHANNEL PARTNERS NOT BUYING IT

While the majority of channel partners that receive gray market offers said the gray market accounts for less than 5 percent of their annual purchases, it makes up more than 20 percent of purchases for 1 in 10 channel partners.

DISCOUNT RANGE CAN GO AS HIGH AS 50 PERCENT

The majority of channel partners said the discount range is greater than 20 percent, while 1 in 5 said the discount range was greater than 50 percent.

CAN I HAVE THAT DELIVERED?

Two-thirds of channel partners said products purchased through the gray market are received within a week. Forty-six percent of channel partners that purchase through the gray market said delivery time for those products is faster than through authorized channels. Another 46 percent said delivery time was about the same and only 7 percent said delivery time for gray market products was slower.

IT'S EASIER NOW TO GO GRAY

Sixty-three percent of channel partners said the availability of gray market products has increased in the past two years, while 67 percent said it has become easier to source from the gray market.

CHANNEL PARTNERS WANT DAMAGE CONTROL

Just more than half of channel partner respondents believe their company's competitive position would benefit if all gray market activity was eliminated. More than 60 percent of those that receive offers for gray market products said they are very concerned about sourcing damaged or counterfeit products.

Seventeen percent said they have received counterfeit products from gray market sources.

PRODUCT QUALITY ASSURANCE NOT SO ASSURING

Two-thirds of channel partners said they have concerns about selling gray market products to their end customers. Product quality and technical support were the concerns they cited most often.