Grey Market Goods and China
In this post we take a closer look at grey market goods and China. First, we will consider what grey market goods are and why brands get so worked up about them and then we will look at how China regulates grey market goods.
1. What are grey market goods, and why do they matter?
Grey market goods are authentic goods sold by unauthorized means. Unauthorized does not necessarily mean illegal: These are genuine products sold through unauthorized or unofficial distribution channels, often bypassing the brand’s intended supply chain. For example, a famous U.S. brand might authorize a party in an emerging market to produce goods for that market and that market only. If those goods find themselves in another market, they will likely be considered gray market goods.
E-commerce has made all manner of grey market goods readily available. If you order personal care products on Amazon for delivery in the United States, you might find that the best deals are for goods clearly destined for random markets, even if the brands are U.S. brands. These products may or may not be exactly the same as you would get at your neighborhood CVS.
The flow of gray market goods can go in any direction; it just depends on price and the demand. For instance, a dress shirt on sale for $30 at a T.J. Maxx in Florida can be sold at double that price in China, given the different marketing strategies applied by the brand in question in the United States and China.
Many years ago, Costco purchased large quantities of Omega Seamaster watches from an authorized reseller in Europe, then resold them in the United States as grey market goods. Because the prices in Europe were so much cheaper than the retail prices in the United States, Costco was able to add its usual markup and still price these watches at a substantial discount. Omega sued, but after a protracted battle, Costco prevailed.
Grey market goods exist because there’s a market for them. They are either cheaper than the goods available through standard channels (e.g., the Omega watches at Costco) or simply unavailable through standard channels (Coke products made in neighboring countries being sold in Russia these days). A reasonable argument can be made that grey market goods are in fact good for many brands, because they increase both brand recognition and product loyalty.
Nonetheless, grey market goods are often decried by original brands for reasons including the following:
1. Grey market goods are often difficult to distinguish from counterfeit goods, which harms the reputation of the brand and the manufacturer.
2. Grey market goods are often customized for the particular market for which they are made, and are unsuitable for use in other markets. This too harms the reputation of the brand and the manufacturer.
3. Grey market goods often have different warranty protection — or none at all — when sold or used outside the market for which they were made. This causes customer frustration and dissatisfaction.
4. Grey market goods sometimes are of lower quality (hence the lower price), which harms the reputation of the brand and the manufacturer.
5. Grey market goods often interfere with the business expectations of the original manufacturer and its licensees.
2. How Does China Regulate Grey Market Goods?
One of the minor mysteries of modern China is how every mall has so many luxury-brand stores that seem never to have anyone shopping inside. I’ve read numerous explanations for this disparity, none of them entirely satisfactory: the shops are loss leaders in an effort to build brand loyalty in China; the shops are highly subsidized by mall owners to bring in other tenants and/or to give them face; all of the shops’ sales are made after hours to keep things discreet; people just aren’t paying attention at the right time.
But one answer for the empty stores, surely, is the enormous size of China’s grey market for luxury goods. Grey market goods exist because there’s a market for them, and that market exists because grey market goods are either cheaper or have better availability. But in China there’s a third driver of the grey market: quality. It’s ironic because in the United States, grey market goods have a strong whiff of caveat emptor; if you buy a product outside the normal channels, you accept the risk that it might be lower quality. But in China, the calculus is flipped: because counterfeiting is still so rampant, the chance of buying a fake is considered to be lower if the goods come from overseas.
Grey market goods in China are sometimes purchased directly by consumers while traveling overseas, or through e-commerce platforms, both foreign and domestic. Baby formula and iPhones have at various times been popular grey market goods in China.
Gray market goods are de facto legal in China, though under some circumstances sellers can run afoul of the law. Brands can also avail themselves of the recordation system with China Customs to help curb the flow of gray market goods into China.
On a certain level, foreign brand owners might not be all that concerned about grey market imports in China – a luxury shoe company gets paid whether its pumps are bought in Shanghai or bought in Las Vegas and then shipped or taken to Shanghai and resold. But for several reasons, there should still be concern.
First, the luxury shoe company may want to be seen as cooperating with the Chinese government on tax and customs issues.
Second, having to deal with so many purchases by Chinese travelers overseas can distort the company’s worldwide marketing and revenue stream.
Third, the reselling of their shoes increases the amount of intermediation between brands and their consumers, which is exactly the opposite of what most consumer goods companies typically want. How can you market to customers when you don’t interact much with them? And how can you control your brand identity when you are not the seller?
3. How Can I Protect Against Grey Market Sales of My Products?
Brand owners can take several practical steps to mitigate the risks posed by grey market goods. First, it’s crucial to have robust, well-drafted contractual clauses with authorized distributors and suppliers that clarify permissible sales territories and clearly prohibit the sale of goods outside those territories. Such contracts should include provisions for auditing distributor activities, allowing brand owners to terminate contracts if they detect unauthorized sales.
Closely monitoring online channels—both at home and abroad—can also pay off, as many grey market products are sold via major e-commerce platforms. Setting up a system to regularly scan these platforms can help detect suspicious sellers or pricing anomalies that hint at off-channel distribution. Once identified, brand owners should act swiftly, sometimes issuing cease-and-desist notices or working with the platforms to remove unauthorized listings.
In China specifically, leveraging local legal tools is key. Brand owners can file records of their trademarks with China Customs, so Customs officials have grounds to seize unauthorized goods at the border. This recordation process, while relatively straightforward, can be highly effective in intercepting inbound shipments of grey market products.
By combining clear contractual language, diligent monitoring, and robust engagement with Chinese Customs and other enforcement agencies, brand owners stand a much better chance of limiting grey market sales and protecting their brand integrity.
Conclusion
Gray market goods are a double-edged sword. They offer consumers greater access and lower prices, but they also pose challenges for manufacturers. In China, the gray market is a significant force, shaped by unique cultural and economic factors.
For foreign brands operating in China, understanding gray market dynamics is critical. Navigating this space requires balancing short-term profits with long-term brand integrity while staying attuned to consumer needs and regulatory expectations.
Whether viewed as an opportunity or a threat, one thing is certain: gray market goods are here to stay.
