“How to successfully manage the threats of product re-imports and the development of grey markets”
Guest speakers:Marc Abels, Deloitte BelgiumRalf Schwarzendahl, Deloitte United States
Brussels, 22nd / 23rd November 2007
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Agenda
Introduction of Grey Markets
Grey Markets Across Different Regions
Impact of Grey Markets
Factors Causing Grey Markets
Identification of Grey Market Activity
Counter Measures
Business Case
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Introduction of Grey Markets: DefinitionGrey Markets is defined as the legal import of genuine products via non-official trade lines
Grey Market is not:
– Illegal import of genuine products
– Import of counterfeited goods
Grey markets, re-import, parallel import/trade, diversion, arbitrage
Manufacturer Retailer End User
Official Distributor Market A
Grey Activity
Grey Markets Distributor Market B
Grey ActivityAuthorized Channel
20€
80€
15€
Market A
Grey
ActivityMarket B
100€ 100€
30€ 30€
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Introduction of Grey Markets: LegalityIntellectual property and trademark rights are national monopoly rights
– Protection against unlicensed copies or unlawful use of branded names
– Infringement where unlicensed goods are imported into the country as 'parallel imports‘
– Trademark owner controls national markets
Grey Markets became legal in the EU when national barriers to trade were removed
– Free trade principles versus national intellectual property rights
The ‘Grey Market' issue has now extended beyond national rights
– Exhaustion principle: national – regional – international
– Does regional or international exhaustion apply to the exercise of trademark rights when faced with ‘grey market' issues?
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Grey Markets Across Different Regions
Former Soviet Union
7%
Western Europe
27%
Scandinavia
3%
Latin America
17%
Middle East
5%Africa
1%
North America
13%
Pacific
27%
Source: Business Horizons/Strategies for Combating Grey Markets
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Impact of Grey Markets on Each Player
–– Performance– Brand Equity– Distribution
relationships– PLC– ROI for R&D– Operating cost– Customer Satisfaction
+– Capacity control– Segmentation – Market size
Manufacturer–– Liabilities– Customer Satisfaction– Relationships
+– Market size– Performance
“Grey” Retailer–
– Promotions and rebate– Service– Warranty– Product quality – Localisation
+– Product variety– Product availability– Savings
End User
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Factors Causing Grey MarketsPrice difference between local markets
– Grey market behaviour will increase dramatically above a certain threshold of price difference
– Thresholds can be influenced by the brand owner
Transparency and exchange rate stability
Legal context
– Intellectual property rights and trade mark legislation
– Tariffs and other barriers to trade
Geography and culture
Fragmentation of the distribution or consumer base
Costs to serve the Market
Government control
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Identification of Grey Market ActivityTransaction cost relevant to price difference
Multi-phase volume analysis on regional level
Track product movement across regions and to their final destinations
– Leverage link product labelling - market
Purchase behaviour of distributors / retailers
0
100
200
300
400
500
600
700
800
Germany Poland Italy Spain
Avg Distributor Price
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Germany Poland Italy Spain
Fertilizer used per MM of Ha (Tonne)
ss
Sources: Data from client operating on the chemical fertilizer market (http://www.euratlas.com)
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Counter Measures2 pricing options :
Single price: No grey market behavior but huge profit losses
Price corridor: Balance between price differentiation (to capture optimal profit) and harmonization (to avoid grey market behavior)
…and other protective methods used to re-enforce the price corridor strategy include:
Centralized pricing organization and policies
Labeling
Trademark tactics
Customizing products
Inventory policy
Mastering the supply chain via strong strategic relationships
Strive for legal frameworks
IT and business intelligence tools
…
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Agenda
Introduction of Grey Markets
Grey Markets Across Different Regions
Impact of Grey Markets
Factors Causing Grey Markets
Identification of Grey Market Activity
Counter Measures
Business Case
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Company Background
2006 revenues $28.99 B
Total number of employees 60,000 worldwide
Global presence Operating in more than 70 countries worldwide
Electronic & Communication Technologies $ 3.8 B
Coating & Color Technologies $ 6.2 B
Performance Materials $ 6.9 B
Agriculture & Nutrition $ 6.3 B
Safety & Protection $ 5.6 B
Other $ .57 B
Source: 2006 official data – adjusted sales
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Pain PointsParallel trade:
– Represented 7% of the German market and 11% of the Italian market
– Exploited our client’s decentralized price structure. The average distributor price in Germany was €456, in Spain was €417, in Italy was €793, and in Poland was €341
– The main identified source of parallel exports within the EU in 2003 was Spain; however, the accession of Eastern European countries (specifically Poland) into the EU will pose significant challenges in future years
– Estimated to take place on price differentials of approximately €30
To date our client had limited understanding of:
– The value of its product in the different markets
– The impact of price changes in individual countries on other EU states
Initial client reaction Harmonize prices
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Approach
Aim ToolsUnderstand the value propositiondevelopment process:
Levels of value per country
Building/delivering value
Value Maps and SMPs
Pricing scenario evaluations
Increase value through VAS
Process improvement opportunities
Identify optimum pricing levels:
Minimise erosion of margin
Minimise parallel trade
Implementable at low risk
Customized Pricing Models
Adjust price and a series of variables
Evaluate impact
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High Level Plan
Initial EU market
assessment
Build Parallel Trade
Framework
1.First understand what shapes the market & pricing….
Build in-country
Price/VolumeFramework
Build price scenarios
3. … then produce and evaluate a series of options for price changes that can be assessed against a range of factors…
Validate & plan implementation
2. …then analyse & validate in-depth data for key countries…
Confirm country packs
– pricing scenario data
Assess as-is pricing & value
proposition process
4. ..and finally develop an integrated pricing strategy
Pricing Process Analysis
Value Proposition
Analysis
Produce pricing options & recommend-
ations
Identify VP & pricing process improvement opportunities
Build in-country
Financial Framework
Confirm country packs
– pricing process & VP
data
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Pricing Process Analysis – Price/Volume
Rebate and Discount Waterfall for Product XYZ in the German Market
Pricing Process Analysis – Segmentation
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Price/Volume Segmentation Matrix (100g and 500g)
Segment Descriptions
A : Low Volume, High Price – Maintaining margin on low volumes through higher pricing.
B : High Volume High Price – Maintaining high margin through core profit drivers.
C : Low Volume Low Price – Rewarding the smallest customers by volume.
D : High Volume Low Price – Rewarding the biggest customers by volume.
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Price Optimization
Based on the Scenario Evaluation Tool, a price cut in Germany is the option that drives the most value
It is estimated to generate a positive gross profit PV over 2005-2010 of around €1.5 MM driven primarily from growth in domestic volume consumption
Harmonise big four (which was initially our client’s intention) would have resulted in a negative gross profit PV over 2005-2010 of around €9.5 MM
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Pricing Policy & Process
Key Policy Feature RecommendationPO prices (average net-net) per country
Floor prices and reporting variations to the floor price mid-season
Greater control of floor prices within each price band at an EMA level
Control of the price band range
No formal EMA control on price increases
Product XYZ prices can be cut by 2% bya country manager without recourse to pan-European or regional management
Upward and downward price management
EMA profitability versus in-country considerations
The impact on lead countries for single country price decreases is considered as part of the process
The EMA view needs to be more strongly represented in product XYZ price setting discussions
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Extension Beyond Current Framework
Domestic Prices
Domestic Sales
Domestic Revenues
Profit Function
Market Share
Current Framework
Extension
Develop framework to evaluate how current and future legislations (IP, trademarks, government controls) may improve/worsen the effects of grey markets
Legal ContextOther Product-Related Measures
Customer Segment Regions
Determine whether other methods or strategies can be developed (e.g., customized labeling of products per country) to reduce grey market activity
Explore how regional and local price sensitivity of customer segments, and compare it against the macro level at the national/international level
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Deloitte Consulting LLPOne Prospect StreetSummit, NJ 07901USA
Ralf SchwarzendahlDirector
Tel: + 1 908 673 5251Mobile: + 1 908 673 [email protected]
Member ofDeloitte Touche Tohmatsu
Deloitte Consulting LLPOne Prospect StreetSummit, NJ 07901USA
Ralf SchwarzendahlDirector
Tel: + 1 908 673 5251Mobile: + 1 908 673 [email protected]
Member ofDeloitte Touche Tohmatsu
Deloitte ConsultingBerkenlaan 8c1431 DiegemBelgium
Marc AbelsSenior Manager
Tel: + 32 2 749 5780Mobile: + 32 497 05 10 [email protected]
Member ofDeloitte Touche Tohmatsu
Deloitte ConsultingBerkenlaan 8c1431 DiegemBelgium
Marc AbelsSenior Manager
Tel: + 32 2 749 5780Mobile: + 32 497 05 10 [email protected]
Member ofDeloitte Touche Tohmatsu
Copyright © 2006 Deloitte. All rights reserved.
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