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As the largest e-commerce site in China (and after its recent initial public offering, one of the most valuable companies in the world), Alibaba wields great power over which goods are available for sale to Chinese consumers. These sales account for approximately 80 percent of China’s online retail market, which has been valued at around $300 billion. In addition to its massively successful auction-style site Taobao, Alibaba hosts TMall, where approximately 70,000 vendors sell a vast range of branded products. But not every seller on TMall is actually a brand. Rather, TMall is home to a multitude of gray market vendors that access branded goods—especially luxury items—through unofficial channels, then sell them at sharp discounts to luxury-hungry shoppers.

Unlike counterfeit products, gray market goods are the same items that a brand would sell in its stores or through its website. However, rather than moving through the formal supply chain, these products have taken alternative routes to market. In some cases, the manufacturer quietly produces more products than the brand owner orders, then sells the “left-overs” to the gray market to earn more profit for itself. In other cases, products “fall off the truck” during the delivery process from the brand owner to retail outlets. Because gray market vendors can purchase the items at lower costs and do not incur expenses related to advertising or storefront rents, they can sell those products for much lower prices. Although the practice is not illegal in China, brands obviously would prefer that customers have limited access to the gray market, so that obtaining a branded item requires them to purchase from the brand itself.

Previously though, luxury brands have had little luck convincing Alibaba to help them clear gray market vendors out of TMall. More than 50 different sellers posted Burberry products on their TMall site, and more than 60 vendors sold Gucci, whereas neither of those brands had their own stores on the site. These examples are instructive, especially with regard to how brands are reacting to new policies implemented by Alibaba in its attempt to clean up its image and attract more high-end names to its online mall.

Specifically, Alibaba has promised luxury brands that if they open a store on TMall, it will actively work to eliminate gray market vendors of those brands’ products. For those that choose not to open stores, the gray market for their products is free to function broadly. Burberry took the former route and opened its TMall store in April, at which moment all gray market Burberry goods utterly disappeared from TMall. In contrast, Gucci has not opened its own store. Between April and June, the number of gray market vendors of Gucci goods increased from 63 to 69.

The gray market is not limited to luxury goods either. Nike and New Balance shoes are particularly popular gray market items, yet since these brands opened stores on TMall, both have noted increased sales through traditional channels and decreases in the gray market. For Alibaba though, clearing the site of gray market vendors of such mass market products is far more challenging that it is for luxury goods, because many mass market brands allow authorized vendors to sell products for them. Differentiating between an authorized and an unauthorized distributor requires individual analyses, which is likely impossible across the entire site, with its literally tens of thousands of vendors.

Discussion Question:

  1. What is the gray market? What are gray market goods? 
  2. What strategies can luxury brands implement to reduce competition from gray markets?


Source: Kathy Chu and Joanne Chiu, The Wall Street Journal, August 10, 2014