Fighting the gray market, an underground sales channel where unauthorized or counterfeit goods are sold, can feel like a game of whack-a-mole. As soon as a company shuts down one rogue distributor, another pops up. But this channel can be worth billions and hits all global sectors.
“I think it’s the single biggest vulnerability to brands in the next 20 years,” says Sucharita Kodali, principal analyst with Forrester. “If you can’t control the gray market, it’s hugely problematic for the long term.”
On average, $58 billion of gray market products flow through the global economy. Experts project that number to grow to $1.5 trillion worldwide in the coming years. Today, nearly 80% of console game revenue in China is generated by gray market sales. And the gray market is thought to be 8% of the $267 billion of the luxury personal goods market, as of 2021.
To stem some of these losses, companies are turning to innovative technology tools from the blockchain to the Internet of Things (IoT). Brands can gain insight into whether their goods are in the right country and on the right shelves. And if they’re not, they can potentially find where the inventory leaks started in the first place.
“If you have a mechanism for keeping track of where things are going, and every distributor and intermediary has to report where things are going and track them, there’s better accountability,” says Kodali.
Blockchain pros and cons
Accountability is precisely where the blockchain comes into play. This technology is a string of chronological data points — or a ledger — of information that’s digitized, made public, and can be tracked in near real-time. Crucially too, it can’t be amended. A pallet of potting soil leaves a warehouse, gets scanned at a port, then again at its next stop, and finally when shelved at a store. Each of those points is marked into the digital ledger, data that a company and even the end-buyer can access.
“Blockchain can support any multiparty system,” says Martha Bennett, vice president and principal analyst at Forrester, with a focus on blockchain technology. “Supply chain is clearly one of those.”
Nestle has used blockchain so buyers can trace coffee beans under its Zoegas brand. Pharmaceutical companies are eyeing the technology to help consumers trace if a cold medication came from a third-party seller or directly from a brand. GE has used a blockchain tool from Skuchain, to help clients track details on parts needed for repairs.
Blockchain technology has also brought more visibility into travel stops for products, according to Deloitte. They cite how digital records used by a shipping company at border crossings and transportation hubs reduce paperwork and the potential for items to get detoured into the gray market.
Walmart has tracked products on a blockchain, from strawberries to dairy items, since 2017. The company has been able to trace sources of products in seconds and handle recalls more surgically so that it doesn’t have to pull an entire line of packaged salads, but just those associated with a specific data point.
All parties, however, need to be involved for blockchain technology to work. Everyone from distributors to the source of origin has to agree to share the data on the same ledger — and trust each other to enter accurate data. That often requires companies to share details about the different tiers of suppliers in their product chain, which many consider private and may not want to disclose. Staying in business with Walmart was worth sharing that information.
“Walmart said you have to input into this system,” says Bennett. “If I’m Walmart, and I say, ‘If you don’t I won’t buy your strawberries,’ that’s a tough position to be in.”
Internet of Things, RFIDs, and other solutions
The Internet of Things (IoT), a class of smart devices that connect to digital networks and communicate with one another, is another solution retailers are using. Brands sometimes couple these with blockchain technology to scan details about a product, in some cases removing the human element entirely.
IoT can help companies track licenses, for example, and limit unauthorized activation of devices made without a brand’s permission from a third-party manufacturer. The technology has also been paired with RFID chips on luxury items, sending data about its origin and path via a radio frequency to an IoT device. There, it can be read at a store, at a port, or even by a consumer. While using IoT technology can be an expensive option, researchers have found its use “inhibits the gray market.”
Silicon Labs’ Custom Part Manufacturing Service allows clients to wirelessly program chips as they’re made — and even have them stamped with their logo. This process helps companies better track those specific chips along their path.
Whatever solutions brands adopt, from RFID tags to Blockchain to some combination of these, visibility into the supply chain can help companies learn better where leaks are occurring so they know where to focus.
“One of the problems in the gray market is you don’t know where leaks are happening,” says Kodali. “If there was more visibility around the details of items, you can help pinpoint from a consumer standpoint certain things such as the age of that item or how long it’d been stored in a facility. And from a brand standpoint, you can reduce leakage.”
