Shadow Hierarchy: How Grey Market Sales Really Work
Hi, I'm Emmanuel. I work with brands ranging from small health brands to billion dollar camera companies, helping them remove the most stubborn of unauthorized sellers. I'll be glad to guide you on your journey as you clean up your marketplace, once and for all.
What is the Shadow Hierarchy?
Everybody knows about the counterfeit and knockoff market. Many articles are written and laws passed to prevent this black market. However, less known, and perhaps just as big a problem is the Gray Market associated with consumer goods.
The Gray Market works the "gray" area of the law. It is not technically illegal, but it is unethical due to unauthorized sales of authentic goods. Most major companies have terms and policies in their Distributor Agreements which make clear who and where an authorized distributor can sell to. The goal is to keep the brand's products in the correct hands so it is not resold below MAP prices and brand integrity remains intact.
But wherever profits exist, business is made. Using parallel imports, anonymous LLCs, and a wide variety of illicit techniques, sellers get their hands on authentic goods and resell them online or in physical stores at a hefty profit that is usually below the Minimum Advertised Price.
It is important to understand that Grey Market Sellers have been in business for decades. The more successful they are, the more savvy they are at acquiring products and protecting their sources. They often work in groups, develop very strong relationships, and share secrets on how to operate in the shadows and protect their interests.
The key to stopping Grey Market sales is to prevent the seller from acquiring the product in the first place. Cease & Desist letters, trademark infringement complaints, lawsuits etc. will not work on the largest and most experience of Grey Market traffickers. They are not rookies and they have contingency plans in place for everything. They've been known to go toe to toe with large brands such as Canon and Olympus in the court room.
Types of Gray Market Sellers
In general, the largest Gray Market sellers are parallel importers. They purchase high-ticket items in large quantity from wholesalers with deep contact lists. The largest get deals that nobody else can get from established and normally trustworthy distributors / exporters in countries such as China, India, Singapore, or UAE.
This article is not about these types of Grey Marketers. We will instead focus on Domestic Gray Marketers. These sellers are more common for small to medium sized brands. The smaller the brand, the more likely the Grey Market sellers are acquiring the product either directly from the brand or from a distributor or wholesaler. These will be the easiest to identify and stop in it's tracks. This is found most often in Apparel, Shoes, or Travel.
For medium to large sized brands, there is a more insidious hierarchy that often involves rings of people, multiple addresses, and companies. You will find this type of hierarchy most often in Health and Beauty, Consumer Electronics, and Kiosk/MLM brands.
How Grey Marketers Appear to Operate
Seller purchases product through an authorized or unauthorized channel (brand, distributor, retailer, friend or family).
Seller ignores distribution agreement or MAP pricing agreement by selling the product on Amazon or another major marketplace.
Seller masks identity behind multiple names and keeps opening new accounts after receiving Cease & Desist letters.
Once seller is identified and threated with legal action, unauthorized sales stop.
Now, for many sellers this is true and this is the extent of their enterprise. But what about the people making 6, 7, and even 8 figures a month through unauthorized sales channels? Are these sellers really becoming millionaires with such a basic and obvious business model?
And why does your brand keep playing Whack-a-Mole despite cutting off the supply?
This is an example of what is likely going on:
A wealthy financier starts an e-commerce business and hires multiple employees that he/she can trust. These are likely to be people they have worked with in the past, have strong family ties, are intelligent, and have a reputation for being comfortable working the grey areas of the law.
They go to work creating LLC's with random and vague "salesy" names such as "Best Deals Inc" or "Great Value Corp". These are created using a Registered Agent name and address so it is difficult to trace.
The employees hire dozens of warehouse/logistics employees that are usually unaware of what’s really going on.
Quality websites are made giving a strong professional legitimacy to the company. This will be important when they approach brands to source products from.
Next "Account Managers" or "Sales Associates" are either hired or setup as Independent Contractors. These are middleman. Officially, their job is to approach brands and distributors and become approved to sell their products online. If they are able to do this, it is a major victory for the company. They no longer have to walk the grey line.
But since this is unlikely, their real job is to LIE to companies about selling the product in brick and mortar stores or kiosks. They then turn around and sell the product to the Grey Marketing company who then sells it online.
For the sophisticated companies, this is too large a legal risk. They have likely been sued before for violating distribution agreements where they promised not to sell the goods online. What they do instead is recruit "ringers" or "patsies".
Once a brand is identified as being easy to acquire product from at distributor pricing, Account Managers begin looking for friends, family, or trustworthy individuals in the community to create a business and acquire the goods from the brand.
This is as easy as renting out a Kiosk or Retail Merchandising Unit at a mall month-to-month and telling the brand they would like to sell their product there. In exchange, the Ringers are well-compensated and receive monthly requests for new orders from the grey marketing company.
The middleman now takes the product and sells it at wholesale price to the established eCommerce business. The business begins selling the product behind dozens of established Amazon accounts they possess. If one is suspended, they have dozens more to switch to, and Amazon seller lawyers on call to reinstate the accounts.
Since the middleman is often an Independent Contractor with his/her own LLC, there is another line of separation between the main Grey Market sellers and the source of the product.
Now, when the brands or enforcement companies test buy the product from one of these Amazon accounts, it points them to the Ringer via the serial number. The Amazon account receives Cease & Desist notices but ignores them since they can afford Amazon lawyers to combat account suspension (often using the same lawyers that claim to remove unauthorized sellers).
The brands and their lawyers begin sending legal threats to the ringer who can’t stop selling the product since it is not in his possession, nor is the Amazon account it is sold from.
Since many of these ringers are low-income, they are technically judgement proof if they are sued, and the only legally viable option is Breach of Contract, which is civil, not criminal, and can be wiped easily with a bankruptcy.
Regardless, most of these cases are lost since they cannot prove the ringer is the owner of the Amazon account (since they are not), and the ringer can just claim the Amazon account is a random reseller who received his product through one of many means. And to top it all off, there are state jurisdiction questions that can get the case dismissed immediately.
Worst of all, the brands, their lawyers, and the enforcement companies think they nailed the problem and, as soon as the ringer’s supply runs dry, they can move on to the next violator, not realizing the true hierarchy. They are unknowingly chasing the same seller, thinking there are multiple sellers.
Now that the original ringer has been caught, the middlemen recruit new ringers who begin purchasing from the same brand, and the process repeats itself. If the original ringer is smart, they will start recruiting their own ringers and now we have a new middleman to add to the mix and one more layer to the pyramid to cloud the money trail. Quite a game of whack-a-mole, huh? And for the Amazon brand, a very expensive game.
Brand Alignment is aware of these unethical practices and we start off all our investigations by drawing out the potential hierarchy of identified violators. We focus on targeting the head, instead of the arms and legs, bleeding their supply dry. Now, not all violators have this type of complexity, but it is often the largest violators who take the most money from brands that have these types of enterprises. The Pareto Principle is always in effect: 80% of unauthorized sellers will have simple enterprises, but the 20% that have complex enterprises will take 80% of sales and merchandise.
Smart Violators Require Smart Brand Protection. And that is what Brand Alignment is all about.
Co-Founder of Brand Alignment
About the Author
Emmanuel is among the world's leading cybersecurity experts in online grey market monitoring and removal. With a focus on proactive brand protection, he advises some of the most recognizable global brands in prevention and removal.
One of the four Co-Founders of Brand Alignment, Emmanuel has led the charge in the removal of nearly $10 million in unauthorized inventory from Amazon alone in the last year.
For questions about how Emmanuel can help your marketplace, he can be reached directly at [email protected]
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The first step in removing unauthorized sellers is spotting them on your listings and that is exactly what the Brand Alignment Monitoring Dashboard will do for you. With price updates every 3 hours and inventory totals for every seller on every listing, you will get the most complete picture possible of your brand on every major online marketplace.
Of course, the most important step in removing unauthorized sellers is prevention and enforcement. This is where Brand Alignment is leagues above the competition.
- 1Clear over 80% of unauthorized sellers: Brand Alignment will make a custom strategy for your brand to ensure the highest rates of removal
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Will Enforcement Solutions Work for My Brand?
In short, the answer is Yes.
We have had our 80%-90%+ enforcement rates in every single industry we have worked in. That includes the following:
- Consumer Electronics
- Apparel and Shoes
- Health & Beauty
- Sports & Outdoors
- Mobile Phone Accessories
- And More
As you are already aware, each industry has their own bells and whistles. Please contact us if you have any specific questions about enforcement in your industry.
Are There Any Risks Involved With Enforcement?
Brand Alignment gives the brand the option of using their own personal cease & desist letters or the option to customize Brand Alignment's proven high performance Cease & Desist letters. These letters were crafted by Intellectual Property lawyers with a full focus on minimizing liability.
Any infringement complaints filed by Brand Alignment are done with the utmost care and transparency. We do not file counterfeit complaints without test buys and approval from the brand. Our trademark complaints are done with caution and all bases covered.
Finally, in this world, anybody can sue anybody for anything. But it does not mean it will stand up in court. There is nothing we can do to prevent frivolous lawsuits from disgruntled sellers. However, we do everything we can to prepare you to have any case against you quickly dismissed. After two years in business, we are proud to say that neither us or any of our brands have had any legal issues of any kind related to our service.
Brand Alignment vs The Competition
If you are new to shopping for a brand protection provider, it might be confusing to tell the difference between companies. It might sound like everybody offers the same type of monitoring and enforcement. This could not be further from the truth.
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Frequently Asked Questions
How Long Does It Take to Get Started?
Our on-boarding period takes between 1-2 weeks depending on the amount of custom work required.
I Have More of a Counterfeit Problem Than a Grey Market Problem. Can You Help?
Currently, our specialty is grey market sales. If you are dealing primarily with counterfeits or knockoffs, we recommend speaking to a IP Takedown service instead. If you are interested in both, our services compliment IP Takedown software very well.
Do You Work With Third Party Vendors or Only Directly With Brands?
In the past we worked with 3rd party vendors, however due to liability concerns we now only work directly with brands. We do offer a referral commission so please feel free to contact us if a brand you work with needs help with brand protection.
What Are Your Enforcement Rates on Other Marketplaces Besides Amazon?
We do not offer removal guarantees for other marketplaces, however it is not uncommon to see removal rates on Walmart or Rakuten in the range of 50%-90%
My Grey Market Problem Extends Outside the USA. What Can You Offer?
We LOVE investigating international grey market trade. Contact us about the countries you would like to monitor and enforce, and we will be glad to help.
I Had a Bad Experience With My Last Brand Protection Provider, Why Will You Be Any Different?
We understand your concerns. We are aware of many unhappy brands who have worked in the past with our competitors.
We can talk all day about how we are different, but instead we would like to show you with our Brand Alignment Enforcement Guarantee. Contact us to learn more.
P.S.: Due to the constant changing nature of online marketplaces, our Enforcement Guarantee is a limited time offer.
Please contact us now to ensure you are locked in with your guarantee.
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