Grey market goods come with no support, no warranty and – all too often – no spare parts, so is the cost saving really the be-all and end-all?
The Afrikaans idiom ‘goedkoop is duurkoop’ is probably the simplest and best explanation of the problem that comes with the purchase of grey goods. Resellers of anything from hi-fi equipment to white goods (that’s washing machines, fridges and other domestic appliances) to IT products can save a few rands by buying grey, but the couple of bucks saved won’t seem worth it when something goes wrong. That’s because the grey market doesn’t tend to invest in things like warranties, technicians and market structure to support the products it sells.
Be that as it may, the channel faces a pretty big problem with grey goods, which ranges across hardware of most kinds (but generally mass produced products), and to a lesser extent, software. The real issue is that cost-conscious users – and resellers looking for healthier margins – don’t always consider the implications of their purchases beyond the initial price tag.
And while there is nothing illegal about the sale or purchase of grey goods, it quickly becomes a problem for the vendor and its approved distributors and resellers. That’s because the owners of grey goods often expect service and support to which they aren’t entitled.
Jacques van Wyk, Ricoh’s general manager, Indirect Channel Operations, sums up the problem: “If you want to provide customer service and maintenance, you have to invest in training technicians and stocking replacement parts and consumables. You have to own the supply chain and that’s a value-add in its own right. Buyers of grey products expect you to carry parts for their devices, but these are not necessarily the same devices which are made officially available in the country.”
He says the extent of the problem is such that it cost up to 30 percent of turnover before Ricoh clamped down.
Funny things can happen with products getting to market outside of official channels, too; some are ‘quasi’-legitimate, but with catches. “We’ve had a dealer bring in a container load of consumables that were past the sell-bydate, only to discover that customers were experiencing problems,” says van Wyk. “We’ve also seen used product come in from Scandinavia, where it hasn’t worked very hard through its lifespan, to be dumped in South Africa.”
Both these examples highlight the issues faced by the authorised channel. When problems occur, end users blame the vendor and/or the distributor.
Is grey bad?
All well and good, but the crux of the matter, both for resellers and for end-users, comes down to a simple question: is grey bad for you? As a reseller, says Anton Vukic, channel director, Phoenix Distribution, there is the opportunity to gain bigger margins, but at the expense of relationships with vendor and distributor (and, ultimately, end user, too), and sustainability. “Distributors are affected the most, as this is almost stealing from right under their noses. But resellers need to be more wary now with the CPA [Consumer Protection Act] as they might have to take over responsibility of the warranty.”
He takes a macro-economic view: “It boils down to more money leaving our country and supporting international businesses. The government is all about growing local business, entrepreneurs and improving employment opportunities [but] allowing grey product to enter the country takes away business from local companies, affecting our economy and growth. If the government is serious about this, they should ban grey products completely and support growth of local distributors.”
However, the fact of the matter is that most end users don’t think of macro-economics, they tend to think of how to run their businesses or homes as cheaply (and effectively) as possible. Resellers, too, don’t necessarily consider the value of a sound and mutually beneficial relationship with distributors and vendors, but can consider margins and the ability to compete on price as more important.
Van Wyk acknowledges this reality. “If I was a consumer and a half-price cartridge is available, I’d take it. As an educated user, however, I ask if it is the real deal. What happens if it breaks? Will I still have warranty protection?”
Those dealing in grey products also tend to come and go, he says. “It’s not a sustainable business model, so you get a ‘here today, gone tomorrow’ situation. That becomes a problem for resellers and for end users.”
How much are you *really * saving?
Aside from the potential satisfaction of getting one up on ‘the man’, there isn’t really much room for discounts, as Vukic explains. “Distributors pay the same price across the globe, so the same margin structures apply. You often find grey is a little cheaper as mass retailers do not take the risk of carrying grey stock, so generally you find small retail stores selling these products at reduced margin or online.”
Given the thin margins in most hardware products, the putative advantage isn’t likely to be substantial.
But how is it that the unofficial channel can get products in and offer them at a reduced price, even if the reduction is small? Aside from the oddities described by van Wyk, which often come with a catch, Vukic says it’s also a volumes game. “The volume of stock sold in our region compared to European and US regions can’t be equated. European and US distributors are pushing ten times the volume that local distributors are, so are often happier to sell at smaller margins. They also often sell at cost to chase their rebate targets,” he explains.
And van Wyk also says questions can be asked about how the product comes to market. “In some jurisdictions, less duties are paid. When goods on the local market are cheaper, they may have come into the country labelled as something else to avoid paying duties – and that’s an ethical grey area all of its own.”
Pull quote:
“If I was a consumer and a half-price cartridge is available, I’d take it. As an educated user, however, I ask if it is the real deal. What happens if it breaks? Will I still have warranty protection?” Jacques van Wyk, Ricoh