Unauthorized Sales Threaten Major Brands

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Well-known brands command a premium price, but in a cost conscious environment everyone loves bargains. So when companies see a chance to buy name-brand electronics or software at a steep discount, many not hesitate to think—or even care—where it came from.

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Brands can take steps internally to improve contract compliance and reduce the risk of gray market sales.

Besides the obvious issue of counterfeit goods, companies have to contend with an equally damaging problem: unauthorized sales resulting from abuse of discounts for their products. The practice not only hurts revenue and profit but can threaten a company’s reputation.

The “gray market” refers to an alternative flow of branded products which have been diverted from authorized sales channels and into the hands of dealers, brokers, or the open market. These unauthorized parties then sell the products far below market price but, unknown to the customer, they come without the support, service or warranties of the original manufacturer. In this scenario, the original manufacturer can lose significant revenue and margin from price erosion, and faces risk to brand reputation.

Read our full report on how companies are responding to the gray market.

The damage doesn’t end there. If enough illegitimate sales hit the market, authorized partners may decide they can’t compete. So rather than lose business, they join the gray market with their own unauthorized discounts or sales exacerbating the issue. That starts a downward spiral of even steeper discounting as brands are left to compete not only with counterfeits and lower-cost rivals but with the unauthorized sale of their own products.

Manufacturers can end up losing control over their products, sales, and brand reputation. They have no way of knowing whether the products being sold in their name are authentic, undamaged, installed properly or supported. Gray market dealers are not obligated to uphold the manufacturer’s standards of quality and service.

Adding insult to injury, manufacturers can end up being blamed by consumers for gray market goods that fail, don’t have adequate customer service, product handling, installation or warranty coverage (which many brands may ultimately provide to maintain customer loyalty even though their policy technically doesn’t allow it). Dealing with customer complaints from illegitimate product sales, burns time and money in attempts to save brand reputation.

What can manufacturers do? Here are four keys that can help stem the flow of products into the gray market.

  • Establish a strong channel for authorized sales. Make sure contracts with sales partners set clear boundaries for the channel of sale your products and require approvals of any exceptions.
  • Monitor sales data to make sure partners are selling through approved channels. Track serial numbers and end users to verify eligibility for incentives and proof of sales performance.
  • Perform compliance reviews on a consistent but non-adversarial basis to validate that the information received is complete and accurate (as this is often the basis for discounts payment).
  • Be consistent in how you enforce contracts and compliance review findings with formal agreed consequence management supported by the executive team (including sales) whether it’s with warnings, recoveries of overpaid amounts, penalties or other steps (up to and including termination of the relationship).

Brands can also take steps internally to improve contract compliance and reduce the risk of gray market sales. They include:

  • Assigning a champion who has the responsibility of overseeing the sales channel behaviors and identifying/enforcing the rules with partners.
  • Continuous data analytics looking for unexplained sales spikes or atypical customers, and putting automatic alerts in place which can be acted upon appropriately and in a timely manner (through a range of compliance activities based on the risk perceived).
  • Reviewing incentive programs to identify potential areas of weakness that could be exploited by channel partners or brokers, and taking steps to strengthen them (e.g. ensuring all channel partners certify they will adhere to the specific terms and conditions).

Many brands believe the gray market remains a significant problem. According to a recent KPMG survey, most tech and manufacturing executives interviewed say they’ve seen gray market activity increase since 2008. To counter that growth, more and more companies are focusing on vigilance and monitoring of the gray market to protect their revenue, profit margins and brand reputation.

Learn more about how your company can minimize the impact of the gray market on revenue and profitability.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity. Some of the services or offerings provided by KPMG LLP are not permissible for its audit clients or affiliates.

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