Gray Market Continues to Haunt Channel

Report from KPMG and AGMS pegs gray market at $58 billion in 2007. Survey finds two-thirds of channel admits tapping into the gray-market pipeline.

The gray market for computer products continues to thrive, despite warnings by some channel players that it undermines legitimate product sales and hurts business users. The companies that purchase gray products forego warranties and after-sales support for better pricing, according to a recent report from the Alliance for Gray Market and Counterfeit Abatement (AGMA) and KPMG.

The report, titled “Effective Channel Management is Critical in Combating the Gray Market and Increasing Technology Companies’ Bottom Line,” reveals that the value of U.S. gray market products in 2007 was about $58 billion, which means it comprised between 5 and 30 percent of total IT sales. AGMA and KPMG surveyed representatives from 82 channel companies of various sizes and annual revenues.

“A lot of gray market merchandise is created by incentive or diversion fraud,” said Ram Manchi, president of AGMA. “Some resellers take advantage of an OEM’s incentive or special pricing to procure products under false pretenses such as claiming they have a deal with a school district while knowing the OEM offers lower pricing to schools. Those resellers can then sell those products at higher prices elsewhere.”

About 66 percent of channel respondents said they buy gray-market products, but claimed those products make up less than 5 percent of their annual purchases. Nearly a quarter of respondents said their gray-market items represent 11 to 30 percent of annual purchases.

The most commonly purchased gray-market products are hard-disk-drive storage products (48 percent of gray purchases). The reason? These highly commoditized, low-margin items sell through multi-tier channels where they are very susceptible to diversion fraud, theft and being counterfeited.

The second-highest category of gray-market purchases (37 percent) is in consumer electronics and memory/integrated circuits.

“If prices move markets, markets often move in favor of the lower-cost alternative,” states the report’s executive summary. “Faced with a competitor undercutting its prices by 25 percent, a company must seek an effective counter-strategy. Sometimes this counter-strategy includes selling products outside authorized channels such as the gray market. And there’s the rub, because branded IT products have to compete with their competitors as well as

lower-cost brands and counterfeits of their own products.”

While channel partners have a clear responsibility to adhere to the terms and conditions of partner programs, the burden falls on OEMs to establish clear guidelines for reselling and enforce those guidelines, said Manchi.

 “Vendors must have a strategic solution to counter the gray-market issue,” he said. “The gray market will not disappear no matter what they do. However, they can minimize it by establishing tighter management policies such as tying incentive claims to serial numbers, which would reduce the flow of product into the gray market.”

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