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[6 comments]

Alibaba ousts gray market goods as luxury brands come on board

August 11, 2014

There probably isn't anything that luxury goods manufacturers hate more than counterfeiters (an up to $650 billion issue worldwide). A not too distant second on the scorn list are sites that sell gray market goods. Alibaba (China's largest e-commerce company) has been addressing the gray market issue head-on. According to a Wall Street Journal report, Alibaba has been making good on a promise to rid its Tmall site of gray market goods if luxury brands open their own stores on the marketplace.

Alibaba needed to take this action because, as an Internet Retailer report from June pointed out, "Western retailers hear much about the gray market and copycats on Tmall, but very little about why Tmall came to dominate China's B2C market."

Burberry is one of the luxury brands that put Alibaba's word to the test. According to the Journal, there were more than 50 unauthorized vendors selling goods with the Burberry brand before it opened its own store in May. Today, that number is down to two.

According to a Burberry press release issued in April, its presence on Tmall offered "the purest articulation of the Burberry brand on any of the Alibaba platforms to date. A luxury brand first, the collaboration reflects a shared commitment to offering Chinese consumers the best luxury experiences."

The Journal report says that American brands New Balance and Nike are among the companies that are seeing gray market goods being removed from Tmall. That has led to sales increases for the brands. The New Balance store saw its share of the total sales of the company's products on Tmall grow from 57 percent in April to 69 percent last month.

FINANCIALS:     [ HKG:1688] [ ]

Discussion Questions:

Do you see gray market goods as a serious issue in the U.S.? Are American online marketplace operators diligent in removing gray market and counterfeit goods from their marketplaces?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How active are online operators in the U.S. in removing gray market and counterfeit goods from their marketplaces?

Comments:

The U.S. Supreme Court set the mandate that gray market goods can be sold in the U.S., so this create a rush of micro-entrepreneurs flying to Shanghai and Ghangzhou to buy gray market goods wholesale, to sell at table vendor events around the U.S. The kids want to be different and want the Nike that none of their friends own, and rush to grab hold of these "gray market" shoes to be unique.

Nike and other luxury brands are the problem here, creating an artificial barrier and not providing these "gray" items to the U.S. market, fulfilling the demand that causes the problem these luxury brands are complaining about.

Ed Dunn, Founder, (Stealth Operation)

The issue of diverted, gray market, and counterfeit goods on open online marketplaces has been a critical issue for many years, and not only for luxury brands like Burberry. Last year Johnson & Johnson made the press when it briefly withheld its products from Amazon to underscore the issue.

The level of diligence among U.S. online marketplace operators varies. It is certainly stronger in the U.S. than in China, but it is still woefully inadequate. Amazon in particular is increasingly under scrutiny for its laissez-faire approach, as recent articles from Slate and The Wall Street Journal have illuminated. Counterfeit goods, prescription drugs, and other questionable merchandise are more accessible than many realize.

The growing competition among marketplace players appears to be helping brand owners build a bit of momentum in their ongoing effort to gain more control over their brands' distribution. Over time, the launch of Alibaba's 11 Main in the U.S. and eBay's rumored "The Plaza" should give brands more choice; not only over where and how their brands appear, but about where to spend the marketing dollars that these marketplaces are increasingly pursuing. Until now, this issue has largely been a matter of who needs whom more (Amazon or brands), but with a growing number of marketplace players, brands are increasingly vocal about the standards they expect from marketplace operators.

Many sophisticated brands are already carefully monitoring online channels for unauthorized distribution, MAP violations and other common issues. Knowing is half the battle; all brands should be tightening their selective distribution policies, enforcing violations of authorized reseller agreements and aggressively protecting their brands' equity online. Growing awareness of the issue and a growing number of good examples set by Amazon competitors is a good thing.

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Keith Anderson, VP, Strategy & Insight, Profitero

How are you defining gray (grey) market goods? If it's an illegal counterfeit of a product, then yes, these are a serious issue. If it's actual product from the brand/manufacturer, then that becomes a little more complicated.

And yes, this is an issue in the U.S., although not nearly as big as it is in other parts of the world. Both Amazon, and eBay have profited from the sale of gray market goods. While stopping this is impossible, it is pretty well contained, although there is always room for improvement.

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Bill Davis, Director, MB&G Consulting

Are gray market goods a serious issue in America? Yes! Look at the increasing gap between the haves and the have-nots. There's your market.

About Alibaba's move—it's good news. Not just for the luxury goods manufacturers, but for business as a whole.

The reason is that the protection of brands, trademarks, patents and copyrights helps preserve an incentive to continue to innovate and compete, regardless of the country of origin. A level playing field benefits everyone, and that should be the goal, even if we need many steps to ultimately get there.

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Liz Crawford, VP, Strategy & Insights, Match Drive

Gray market goods—genuine products manufactured for a particular market or country, but which are re-sold by distributors for greater profit in another market or country—are a problem that has vexed brands for generations. I don't believe it is a very large issue here in the U.S., thanks to some restrictive covenants and other pressures brought by brands to make gray market sales very uncomfortable for retailers.

Never mind that in the past some legitimate retailers have sold excess merchandise out the back door with a nod and a wink from some manufacturers. There's also a fuzzy legal question for the retailer or distributor: If they purchased the goods legitimately, don't they have a right to sell them to anyone they want?

Brands seek to control gray market activity for reasons which make sense. Goods manufactured for an economy with a lower standard of living may be lower in price. The distributor in that market finds a margin opportunity by purchasing at the local price then re-selling in another country at a price point which may still be below the price of authorized goods. This translates into unwanted price competition and possible lost margin for the brands and their authorized retailers.

Counterfeit products are a separate instance which is much easier to oppose. Fake goods are a clear violation of the law—even if they are made in the same overseas factory line and are of nearly comparable quality, as sometimes happens. More often they are inferior in quality but use the brand or trade dress in violation of trademark laws. Brands are on firm footing when they bring pressure to root out this practice, and no retailer should knowingly trade in these products nor allow partners to do so.

High-profile chain and online retailers—now including Alibaba—cannot afford to get on the wrong side of either of these practices with respect to its suppliers. They require large flows of merchandise, which can't be dependably fulfilled through gray market or counterfeit sources. If the legitimate brands turn away, that leaves the retailer's pipeline empty and its reputation hollow.

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James Tenser, Principal, VSN Strategies

I would not qualify it as a serious issue, but an issue that needs more objectivity and continuous action. We are in early days. I would describe it as "know-do" gap.

With the proliferation of digital shopping channels, many brands don't know what they don't know and use manual, anecdotal methods to find out what's really going on.

On the other side, marketplace operators have not been "doing" much or taking appropriate or timely action to effectively support the brands. Brands need to "know," marketplaces need to "do" or take corrective action. There is evidence that brands are deploying monitoring software to know, and increasingly there is better communication and demonstrated action by marketplace operators.

Things are moving in the right direction ...

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Mihir Kittur, Co-founder and Chief Innovation Officer, Ugam

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