Grey Trading is a growing risk to established Brands, are you are risk?

Updated: Nov 11, 2020

Is your company at risk of Grey Trading and would you know the signs to look out for?

Let RRed Consultancy guide you away from risk
Let RRed Consultancy guide you away from risk

What do we mean by Grey Trading?

Grey Trading is when your products or commodities are sold in territories not authorised to sell them. On the surface this could seem like a lucrative endeavour. It inflates your sales volumes and reach. But before you start counting the pennies, consider the implications. Managing Grey trading is extremely important for your image and long term profitability.

Why do we need to manage it?

Products or commodities must be registered in each country, at some level be legally distributed. Whether it’s in the form of a CE certification or more detailed registration process. This is even more pertinent within healthcare, Food and Beverage and pharmaceutical industries.

If your products surface in territories with no registration, it has a significant impact on you. Even if this happens indirectly through a third-party distributor. As the manufacturer, you will be liable to any fees, or repercussions. This could also include being blacklisted from trading legitimately or bidding on tenders.

If you have pre-agreed exclusivities that prohibit the product from being available elsewhere. The appearance of these products could also be in breach of these agreements. This is especially true where records of exclusivities are not easily accessible. Operational and sales teams run the risk of breaching the terms unknowingly.

Global companies will have strategically positioned satellite offices to manage certain geographical areas. They will predominantly focus on developing the business across the respective regions. In the main, the actual physical presence on the ground will be minimal or sporadic. As such tracking and monitoring the "final" destination of all orders is difficult.

This is even more pertinent in embargo countries and those with no registrations present. Both of which, you are unlikely to have any physical presence at all.

So how can you manage something that you don't even know is happening until it's too late?

To answer this question, first we need to understand what drives this behaviour. Only then are we better placed to prevent and manage it.

Why does Grey Trading happen?

First let's examine 3 key drivers to WHY Grey trading happens:

Demand - Your brand or some of your products are highly sought after. This could be the brand name itself, or the reputation for a product's performance.

Opportunity – We all want what we can't have. If the product is prohibited or there is no sales structure in place, there will still be demand. That creates a very lucrative captive audience.

Incentive – Ungoverned pricing strategies will allow discretionary discounts. These discounts, especially on bulk orders could offer enough margin for onward shipping.

How can we start to prevent it?

The key to mitigating against the risk of Grey Trading is to be prepared! Here are some considerations you should be mindful of:

Which of your products are at highest risk?

It might be your star product or one that has a particularly unique characteristics

How well do you know your distributor sales patterns and market share?

Understanding their usual sales trends will help you identify any unusual activity. This is especially important in comparison to the size of the market they trade in.

Do you have a Regulatory database and is it up to date?

Every company trading globally should have a single point of truth. This should include all current registrations and exclusivities by product. It should also include items of validity (ie expiration dates)

This will not only give you a simple quick reference guide. It will give enable you to proactively plan your applications for renewal.

Do you have up to date and documented distributor agreements?

You must document all trade agreement terms and exclusivities including any tender stipulations. These should be updated regularly. This will not only act as a good reference point, it will also enable you to plan for upcoming renegotiation.

Do you have an effective New Partner registration process?

Stringent and verified partner applications will safeguard you and your business. It will also provide assurance of the legitimacy of sales channels

Do you have a red flag system in place?

Training your staff on the key indications of Grey Trading activity is important. But this must be backed up with a clear and simple process to report such activities.

Do you have a structured Pricing Strategy?

A well-structured, governed pricing strategy will enable you to track discounting activities. As mentioned before, these discounts often provide the incentive.

Besides which you will also gain efficiencies by having more control and visibility of your profit margins.

What kind of Pricing Strategy works best?

Each company employs its own unique methodologies when it comes to pricing. When working across a variety of territories that are economically diverse, cluster pricing is a good option. Cluster pricing involves grouping certain regions that share similar market dynamics together.

The benefit to using this approach is that you provide a flat price across certain territories. This reduces the incentive by limiting the gaps produced by ungoverned discounting.

It has the added benefit of providing a good foundation for financial modelling and forecasting. You can produce regional price books and update them efficiently. It also makes annual audits much simpler to conduct.

Another option you could use would be to set a clear floor price for all your products. This will provide boundaries and governance to sales teams when providing any discounts. But unlike cluster pricing, you lose a certain amount of control. You are not able to drive target margins or profitability. And this method is still open to misuse for large bulk orders.

Another downside to this method is that you are less able to position and benchmark your products. You could be giving away margin if you set a floor price too low.

The world has become a very small place. With the growth of E commerce and a plethora of Market place type platforms, there are even more ways to trade.

Grey trading is a clear threat on a global scale, but it can also manifest at a local level too.


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