Identity crisis in the gray market

By Richard Tapping, Semicentral.com -- Electronic News, 12/4/2007

During the predictable bust in 2001, manufacturers and particularly franchised distribution decided to take action to safeguard their businesses from the cyclical market trends. While franchise distribution channels were making plans to become less dependent on commodity sales by taking the lead in demand creation, design implementation and diversification through acquisitions, the gray market decided to wait for the next boom period.
 
There is a lot more to a distribution partner today than delivering product. Today’s distribution models offer supply chain management tools, forecasting, kitting, in-house inventory management and buffer stocks. They offer technical expertise by product, manufacturer, application and industry. In many more cases, distributors have introduced manufacturing services. This change in focus was necessary to reduce the impact on revenue during a saturated market. Franchised distribution channels seized an opportunity to differentiate, to sell their value added services rather than sell parts. Franchised distribution channels raised the bar, challenging companies and entire markets to clarify their value to the supply chain. The role of franchise distribution has always been very clear, but what of the gray market and the services it offers?

There is no denying a place for the gray market during shortages. Additionally, the aftermath of a shortage leaves enormous amounts of excess material scrambling for a home. Desperate companies that double ordered and over forecasted were left looking to peel off excess quickly, the gray market being cash rich from the shortage market stepped up and purchased inventory for a fraction of its market value. Even 2 to 3 years after the shortage there is enough legacy excess to fuel the brokers need to compete with franchise distribution and factory pricing. In today’s market, however, the gray market isn’t so cash rich and it would rather speculate what cash it does generate by cherry picking parts against known demand.

Perhaps the gray market is left pondering a purpose, in the meantime it has obstacles to overcome, the biggest being quality. In recent years the gray market may have been shadowed by its franchised cousins, but counterfeiting is projecting these channels into the spotlight. Quality issues have risen dramatically since 2001. We can conclude that counterfeit products are not coming from factory. So, where are they coming from? Less opportunities means thousands of gray market channels are fighting to survive. Gray market channels may rely on legacy business or bad buying practices to be on an AVL, but vendor reduction programs mean business is being transferred back to franchise. 

The gray market must compete with their franchise cousins who have made it more difficult for them by getting better at it themselves. They are shutting the door on the kind of opportunities the gray market thrived and survived on. Obsolescence used to be an opportunity for broker channels to secure profitable orders, but manufacturers and franchise outlets improved their obsolescence management techniques and send in their FAEs (field application engineers) to support design-in programs. Gray market channels are left to offer promises of savings, but offering savings is not without risk. The general increase of counterfeit and substandard product is making the gray market a bad market. Many Asian companies are setting up store fronts in the United States and Europe looking to provoke business through more credible locations. Clutching to an obsolete business model for as long as the possibilities of high profit margins exist, the gray market will continue to balance the risk.

Gray market channels continue to offer services relating to hard to find, obsolete, and, of course, the illusive allocated parts. The reality is, however, there are little to no hard to find, obsolete and allocated parts. The gray market is failing to adapt to a different market and to a different need. Many outlets offer the same services today as they did in 2000, reacting to opportunities and risking quality for profit.

There are still many needs outside of the services provided by franchise distribution. It’s time to identify those needs and align value added services to meet them. By its very definition, the gray market is “an outlet other than those authorized or intended by the manufacturer or producer.” But there are innovative new solutions and services being introduced specifically tailored as a quality alternative to franchise distribution. These solutions may need a new market category color! How about orange?
 

About the author
Richard Tapping spent the majority of his career at the Abacus Group Plc in business management. Moving to the United States in 2004, he experienced the gray market for a short while before creating Semicentral.com, a Web-based system that aims to facilitate business-to-business trade of inventory. Contact Richard Tapping at Richard@semicentral.com.