Brand protection in a gray world

Akash Kumar, manager, marketing communications at Creed Engineers, looks at the counterfeit product situation in India and outlines some innovative solutions

The rapidly changing global economy demands ever-greater vigilance to combat brand piracy, which is currently responsible for losses and has become an ever-increasing issue facing many brand owners today. The gray market activity involves the unauthorized movement of commerce through various geographies by rogue distributors and trusted channel partners alike.

In India, even as the Federation of Indian Chambers of Commerce and Industry’s (FICCI) Brand Protection Committee estimates a loss of Rs  200 billion per annum, the media reports assess the damage to the Indian industry at around Rs 300 billion per annum. It is no wonder that companies are now taking a hard look at their brand protection strategies to combat this ever-increasing problem.

Gray market and parallel economy

It refers to a series of illicit activities that are associated with intellectual property rights (IPRs) infringement. Also known as `product diversion’ or `parallel importing’, it is a fraudulent activity that deflates profits of participating distributors, while reducing the revenue of the brand owner. Counterfeiters capitalize on surplus money, lower manufacturing costs, fluctuating distribution costs and currency exchange rates by exporting goods without country specific permission or those of brand owners.

In this process the prices are undercut and on par or higher profit margins are attained due to lower cost of production in the originating countries. This activity disrupts the invisible hand of competition in a given sales region by keeping purchasers and consumers away from authorized channels.

Impact on brands

•          Loss of market share

            The gray market activity spoils business relationships between manufacturers and their channel partners. In the end, authorized distributors may reduce their ordering from manufacturers, which ultimately reduces the profits of both business entities.

•          Deterioration of brand image
In the open market customers are not aware that the product has been diverted through unauthorized means potentially creating issues with warranties and returns. The imported product from gray market may not have the functionality, accessories, and features that lead to the customer dissatisfaction towards brand, creates brand equity issues, quality, packaging, instruction manual, price, and safety concerns.

Loss of control on supply vs demand

Low prices as supply goes up causes the genuine channel partners to slow down in their order patterns from the original manufacturer as he gets more profit on the product from gray market. This results in conflict in various systems as inventory planning issues, demand problems within the prevailing distribution system that ultimately affects product pricing and availability concerns of the product. It also causes reduction in profit margins and impact of the brand.

Other concerns

Apart from these main conflicts gray market creates various issues as negative customer experience, legal and regulatory risks, health issues (pharmaceutical and FMCG industry faces the direct impact), and also directly affects the economy. It also creates factors like surplus inventories, falling of manufacturing and distribution costs. Brand owners may experience channel conflict, inventory issues, price fluctuation, reduced profit and brand erosion concerns.

Steps to take

•          A comprehensive brand protection strategy against counterfeit activity, infringement of trademark, intellectual property rights, and copyright

•          Regular awareness about brand among internal stakeholders as well as channel partners and other associated partners

•          Seeking an external brand protection expert

•          Implementing various technologies available for brand protection

•          Regular audit of the product, packaging, and gathering feedback from the market

•          A compete legal framework

This article was published in L&L issue 5, 2012