The grey market: Let battle commence

Global market forces in virtually every industry sector are constantly influenced by factors such as currency exchange fluctuations, labour rates, commodity prices and the availability of components and - most significantly - consumer buying patterns.

The global IT industry is no exception. Over the last 20 years it has experienced considerable growth, yet it has been plagued by many problems, most persistent of all being the unpredictability of buying trends.

As a result, very few buyers in the major distribution organisations, resellers and dealers "get it right" resulting in either over- or under-stocked warehouse shelves.

This situation seems tailor-made for the "grey" market traders - particularly in the PC segment of the market.

Grey marketing - or the practice of bypassing established distribution channel structures - was previously rife in the software market, but now it is moving into the hardware arena as well.

Unfortunately, the South African market has been recognised internationally over the years as one of the most lucrative "dumping grounds" for obsolete or redundant technologies.

This was particularly true in the sanctions era when South Africans eagerly accepted any high technology products that were presented to them.

This seems to have had a long-term influence on the market as evidenced by the high levels of grey market activities still prevailing today.

Previously, grey marketers were divided into two camps: those that obeyed the law, and those who didn`t.

The key difference was that legal importers of grey products paid the ad valorem tax and duties as demanded by the government - the smugglers didn`t.

The presence of smugglers made it very difficult for members of the legitimate channel to compete in the marketplace, as they were able to offer their products at very low prices - for obvious reasons.

Many industry watchers believe the abolishment of ad valorem tax on computer components, peripherals and other PC accessories has contributed to the high levels of grey importing.

Today, official vendors and distributors are devising strategies to deal with the grey market problem. Many are collaborating with their rivals and working closely with the user community to stamp out grey marketing.

The more successful are adopting a "stick and carrot" approach.

The "stick" element consists of campaigns designed to publicise - and even blacklist - the resellers who actively support grey marketing practices.

The "carrot" approach looks to incentivise the resellers via high profile certificate and other programmes designed to boost their stature in the marketplace and help in their marketing efforts.

Against this backdrop, it is important that distributors and channel partners not lose sight of the fact that the South African economy is inherently freer today than before.

Consumers are being coerced by an increasing number of tempting, price-oriented offers - including those from grey marketers.

The official channel must redouble its efforts to emphasise the benefits of warranties, technical support, ongoing backup and the direct line it has to the manufacturer for upgrades and add-ons.

This will help consumers to gain knowledge about and embrace the official channel. It will help place the grey marketers in perspective - free riders in it for the "fast buck" with little or no concern for building sound, enduring business relationships.

One of the key dilemmas facing the official channel is the honouring of the "non-existent" warranties on grey market products.

Consumers find it hard to believe that the manufacturer, through its official channel, cannot legitimately support a new, branded product.

This message is bitter medicine indeed for the customer who bought the brand in good faith.

The answer to this question is essentially subjective, and must take into account issues such as brand reputation and the need to educate the buying public about the grey market politics.

It also underlines the risk that the official channel faces when taking hard line decisions - loss of future business.

In summary, to beat the grey marketers - whose sales pitch is based only on price - the official channel must:

* Work together and publicise the fact that the channel will not honour warranties on grey market products.
* Blacklist the resellers who actively support grey marketers.
* Get the message across to end-users that they should ask for products from authorised resellers.
* Distributors need to set up a certificate programme to support loyal resellers.