Gray Market Control

Don’t Fade to Gray – How to Protect Brands from Gray Market Activities

The lockdown has hit stationary trade very hard. What happens to brand products held in stock in full warehouses? Do they migrate to the gray market and then possibly damage brand image and margins? That’s not the only reason why there is a strong case for implementing effective gray market controls. Packaging and package printing certainly play an important role here as well.

There is hardly anything that brand manufacturers are more reluctant to talk about than the gray market. But one thing is for sure: the coronavirus crisis is intensifying the gray market problem for many suppliers of high-priced luxury products, such as perfume and cosmetics, but also up-market food specialties. After weeks of lockdown, distributors’ and retailers’ warehouses are now often full. This increases the pressure to sell these stocks to just about anybody and through every possible channel. Quite a few brand owners and brand manufacturers are very concerned that their valuable brands will be damaged if these products get into the wrong channels. The goods may reappear in street markets or discount stores, where they are sold directly from the pallet. In the worst case, they may even be offered with the blatant headline “Buy two, get one free”. Such practices can damage the brand image and, above all, the manufacturer’s calculated margin. This margin is important because it enables producers to recoup development and marketing costs, some of which are high. Not to forget: there are brands that deliberately keep their products in short supply in order to increase desirability. It would do them great harm if consumers were to get the impression that the products were suddenly available everywhere. “The pandemic has certainly created very extreme circumstances,” says an expert at Atlantic Zeiser who has been working on this topic for many years. “But even luxury goods are not generally immune to normal economic cycles. Full warehouses and reluctant customers will always be there, even without the coronavirus.”

An Effective ‘Soft’ Deterrent

Companies that have implemented effective gray market controls, however, can easily identify who is responsible for parallel imports, and who is feeding which products into which channels and where. “Mind you, we’re usually not talking about obscure players,” explains the gray market specialist for Atlantic Zeiser, “but about official distributors and regular trading partners of brand manufacturers. So it helps to signal to these partners from time to time: ‘Watch out! We’ve noticed through our gray market control system that some of the products we supplied to you for country X, for example, have now appeared in country Y. Please investigate and take the necessary steps to ensure that this doesn’t happen again in the future.’ In many cases this is already an effective ‘soft’ deterrent against further similar activities, even if some distributors occupy self-assured positions and are bigger than the brand manufacturer.

While gray market controls have so far mainly concerned high-priced perfumes and cosmetics, food manufacturers are now becoming increasingly concerned as well. Here too, well-filled warehouses are sometimes an indicator that the issue needs to be addressed, especially since food is perishable and requires higher turnover rates.

Another benefit of a control system is the contribution it makes to traceability. “If a health-related problem occurs with a certain number of products, for instance, you want to know very quickly and very precisely where the relevant products have been delivered and on which shelf or in which freezer they are located,” stresses the expert from Atlantic Zeiser. “This is of course much more efficient than having to retrieve the complete batch, which can take several weeks to produce, from every imaginable point of sale. A batch can consist of millions of units, but it’s possible that only 10,000 of these are defective. This makes a huge difference in recalls – as regards both response speed and costs.”

Less Travel

Such control systems operate by generating, printing, reading and storing serialized numbers, and assigning these to the individual products. It’s a procedure that reliably leads to success. “To be honest, all brand manufacturers are cautious when it comes to releasing actual numbers. As the leading provider of such systems, however, we can gauge the success simply by looking at the quantity of serial numbers used,” explains the expert. “Just ten years ago, our customers serialized an average of 30 percent of their products, and only the most expensive one. Now it’s more than 50 percent, and that includes mid-priced cosmetics, such as creams. This increase wouldn’t happen if the expense wasn’t clearly balanced by the benefit.”

In the past, to control the gray market, it was common practice for special agents to travel to individual countries in order to make test purchases. They then took the products back to the company’s headquarters for evaluation. Thanks to modern gray market control systems, brand owners, manufacturers, packaging service providers and distributors can now simply enter the serial numbers into a central database. More or less at the push of a button they can answer the questions: Where was the product packed? Which distributor introduced it to the market? And where?

The beginnings of such solutions date back to the 1990s. Initially, the primary purpose was to print consecutive numbers. Atlantic Zeiser first engaged in this segment in 2007. At the time, coding, serialization and personalization already ranked among the company’s core competences. “Building on these skills, we further developed and improved the technology for gray market control, including by integrating the advantages of drop-on-demand printing (DoD) for data matrix and QR codes, and other high-resolution codes, on the packaging,” comments the expert. “And now we combine CRM with anti-diversion measures.” In consequence, Atlantic Zeiser has emerged as the market and technology leader in this field.”

In Search of an End-to-End Solution

Brand owners and brand manufacturers are now urgently looking for an end-to-end solution that covers all parts of the supply chain, encompassing fillers, packers, printers and distributors. Is there a central database into which everyone can and must feed in the relevant serial numbers? Only then can users benefit from what is known as a ‘closed loop’: generating and printing the codes, reading the codes at different points in the supply chain, and storing the codes securely. And only with a closed loop can the system’s full functionality and the utmost security and control be guaranteed.

Brand owners, who are only now beginning to control the gray market, are benefiting from the infrastructure that has been built up over a period of almost 15 years. This is because many of their service providers, such as packaging printers or contract packaging organizations, have already implemented appropriate technical solutions. “In the perfume and cosmetics sector alone, for example, we have already supplied 20 of these systems to converters, that is to say, packaging printers, in Germany, France, Italy and Spain. Even in the USA, where the gray market has been largely overlooked thus far, the first system will soon be installed,” continues Atlantic Zeiser’s expert. Twenty converters represent an impressive figure in this sector, given that most of them work for multiple brands. In other words, a large portion of the key packaging markets in the perfume and cosmetics sector is already covered.

The Controller with a Positive Side-Effect

Atlantic Zeiser has repeatedly expanded the capabilities of its Gray Market Controller (GMC). “With the GMC Pro version, for example, we can accommodate even more information in a QR code because the print resolution has been further increased.” We can now rule out the risk of serial numbers repeating too quickly. Some major brand manufacturers now repeat their numbers every two years, precisely because serialization has been extended to so many products. The GMC Pro also gives brand owners greater freedom to use longer product names, or to include longer website addresses in one code. They can also use a single QR code to accommodate several codes serving different purposes, such as those used for CRM. There is a positive side-effect to this. It not only creates a clear view along the supply chain, but also brings significant efficiency advantages in coding.

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