No retailer really wants to use the grey market, but as as they battle to keep their prices low in the recession, more of them are doing so. Ronan Hegarty reports
An email arrives in a buyer's inbox. "Hi," it begins. "I have 50,000 boxes of razors and the price is £9.99 per box, would you like them?" It sounds like a modern-day twist on the dealmongering of Rodney and Del Boy, but hundreds of millions of pounds worth of goods are bought in this way in the UK each year via the so-called grey market.
This unofficial channel isn't illegal, but it is murky. No-one wants to talk about it, and it seems even the big four don't like using it. Yet it's part of the game of cat and mouse between suppliers and retailers: the main retailers all have buying teams dedicated to sourcing cut-price goods from it, while the big suppliers have teams tasked with preventing them doing exactly that.
And its use is increasing in frequency. Although there are no official figures for grey market activity, anecdotal evidence suggests it is growing, as retailers, desperate to keep prices as low as possible during the economic crisis, are understood to have grown tired of accepting requests for price increases from suppliers.
In one example, during the summer Unilever found itself in a row with the supermarkets after trying to push through a price hike for its Knorr Ragu pasta sauce. A spokeswoman for one of the big four told The Grocer it had accepted price rises in 2008 as production costs spiralled, but this year the same justification wasn't there.
But while Tesco preferred to show its strength by temporarily delisting the brand, other retailers are understood to have turned to the grey market, sending a clear message to the supplier as to what they thought of the price request, while still keeping the brand on-shelf. "There was definitely a feeling among retailers that suppliers were not engaging with retailers to keep prices down during the recession, so they bit back," recalls one grocery expert.
The supermarkets use the grey market in two ways, according to one expert who specialises in the trade. The first is a covert means to boost margins. The retailer trims its usual order from a regular supplier, performing a fine balancing act as it makes sure the order is close to the normal amount to avoid raising suspicion. But it leaves enough of a shortfall to be filled by cheaper grey market goods.
The second method as in the Ragu example is to use it as a weapon. A retailer may buy as much as it can and use the transaction to "beat up" the supplier and push for a reduction in price on the next consignment. "I've heard of some retailers buying a quantity of goods through the grey market and sending the supplier an invoice for the difference in price on their previous order," the expert says.
But more often, the grey market is used as a threat the mention of a consignment from Poland usually being enough to encourage a supplier to give ground.
To complicate matters further, it is not always the retailers that are the aggressors. Suppliers, it seems, will also often knowingly send consignments of goods on to the grey market to get a short-term sales increase or help boost cashflow.
Use of the grey market is not only on the up; the range of products on it is widening, too. Previously retailers would have only made forays into it for more expensive items such as pharmaceuticals and personal care products products with a retail price of £5 and above or clothing. Asda famously sourced England football shirts from the grey market in 2006 after falling out with official supplier Umbro, and another run-in involved Levi jeans, but now the retailers are sourcing far cheaper food lines, selling for as little as £1.50. A 500g jar of Ragu typically sells for £1.69.
A source from one major multinational supplier agrees retailers have increased their use of the grey market over recent years, and the issue is one it takes very seriously. However, he also admits it is becoming increasingly difficult to control and "there is not much we can do to stop it". Some try and introduce common pricing across Europe which, in theory, takes away the financial incentive for a UK retailer. Currency fluctuations can make this an almost toothless weapon, however, sudden changes in currency making a price in euros much more attractive than the sterling equivalent, and the deal can be done before a supplier has a chance to react. Suppliers may also be forced to react to competitive forces in different countries. A market leader in the UK may only be number three in France and will need to offer retailers there a better deal in order to compete with the market leader.
Price is only one way of steering retailers away from the grey market, however. Another is formulation. Steve Gates, MD of The Gap Partnership and an expert in supplier/retailer relations, says the quality of goods purchased via the grey market is not always as good as that bought through normal channels, as suppliers will often use different formulations for the same brand in different markets. "This is a big concern for a retailer, as they will have to pass it through their own internal quality assurance," Gates explains.
Suppliers take every opportunity to warn retailers of the potential negative effect for all parties. "Nobody wins, be it the retailer, supplier or customer, if a product doesn't live up to expectations," is the well-worn line one supplier uses.
There is also the possibility the product may be fake. Last December both Boots and Sainsbury's had to hurriedly recall a consignment of Colgate toothpaste, which they claimed came from a reputable source. It is understood one whiff of the stuff was enough to tell it wasn't real.
Suppliers are increasingly incentivising retailers to keep away. "They will suggest retailers will be rewarded if they don't dip into the grey market," says another source familiar with the negotiation process. "They'll offer them a 'good behaviour' price if they steer clear of it, and in many cases this seems to work quite well." Trade promotions are another bargaining tool.
It's also not always easy to integrate grey market stock into the increasingly streamlined supply chains currently operated by the big supermarkets. "It can be a pain for retailers and they don't like doing it," Gates claims. But with grey market goods from other EU countries now having universal labels printed in a number of languages, this is becoming increasingly common , particularly as products such as Cif now trade under the same name across the Continent as opposed to using different brands for each region. The crucial thing for retailers is that barcodes can be read in this country.
And so it goes on. It's murky, it's mucky, it can even be a little bit messy, but with recession, and the fact that deals can be done, perfectly legally, to purchase products at a cheaper price than suppliers will offer, the grey market will continue to be the unwritten sales channel.
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