12-Volt: Transshipping & Gray Market Goods

A look at the problem – and some solutions

Transshipping goods and the existence of a gray market are controversial topics in the aftermarket car electronics business. It proves convoluted when you peel back the layers of the onion in open discussion. Many industry folks paint both topics as the same thing or with a broad brush that blames Internet sales, when they are different scenarios for different stakeholders.

To clarify the difference between terminology:

Transshipping is defined as the shipment of goods to an intermediate destination, then to yet another destination that is unauthorized. In the case of aftermarket car electronics, it often means a large quantity of product shipped to an authorized dealer, then elsewhere and sold to consumers through that unauthorized secondary point of shipment.

Gray Market is defined as the trade of a commodity through distribution channels that, while legal, are unofficial, unauthorized, or unintended by the original manufacturer. In the case of aftermarket car electronics, gray market goods are often intended for another country and omit the same scrutiny of import duty or tax. Thus, they are sold with either lower cost for the consumer or more margin to the seller, either of which makes it hard for ‘legally imported and taxed goods’ to be competitive.
We reached out to several manufacturers and retailers for their thoughts on the topics. To be fair, some chose to decline comment and others wanted to remain unnamed. We made every effort to acquire positive suggestions and proactive approaches, rather than engage in finger-pointing or blame. After all, regardless of anyone’s particular feelings, transshipping and gray market goods are not going to disappear tomorrow. Instead, see how retailers or manufacturers deal with it to be part of a solution or part of perpetuating the problem.

Mike Dixon of Audio Logic in Hollywood, Fla., has been in business 32 years and is a retailer for brands like Audison, Hertz, Kenwood and JL Audio. Dixon says he can afford to walk a few customers who are shoppers of transshipped goods looking for a similar deal. “When I encounter the Internet shopper who has suggested purchasing what we know to be transshipped goods, I can confidently provide a counterpoint of why it is better to buy from me than another source,” explains Dixon.
Derek Pace of Certified Sounds in Wailuku, Hawaii, has 10 years as a store owner and, being located in a completely different part of the country, has very different market density than Dixon. Still, Pace is an authorized dealer for several well-known brands like JL Audio, Focal and Alpine and does well against the challenge of competition from transshippers. “Sure, transshipped goods are out there, but out on an island where shipping broken or damaged goods back and forth to the Mainland it means my added value as an authorized retailer helps bridge the gap. We’re selling service, expertise and peace of mind,” remarks Pace.
A number of other independent retailers we contacted had limited comment or nothing constructive to say. This indicates that they may be more affected by transshipped goods than their capacity to proactively deal with it in their stores. In a recent Dealerscope issue, we published a story on independent retailers being more proactive with online visibility in organic searches. That, interestingly, correlates with many of the retailers who aren’t complaining as much about it. “When you have visibility online and you’re a solution provider, you tend to attract the customers who see value in what you offer,” commented Mitch Schaffer of 1sixty8 Media, who is providing many retailers with that important online search visibility.
Another, somewhat larger retailer who wished to remain unnamed does authorized sales both online and in brick-and-mortar locations. This retailer commented, “To a degree, nearly every brand we sell has some transshipped goods in the marketplace. How effective brands are at limiting transshipping varies greatly.” It was a consensus among all retailers that the more popular the brand name, the more likely it is a target for transshipping. How the retailers themselves address issues in their specific markets and with their clientele is the differentiator of just how much of a thorn in their side it really is.
Overwhelmingly, independent retailers in the U.S. felt that gray market goods were far less of a problem for them than transshipped goods originated from a U.S. destination and resold unauthorized. The transshipping culprits seem to be from online sales or through distribution, or from an authorized retailer attempting to dishonestly inflate their purchase volumes.
It’s no secret that many unauthorized online retailers who sell transshipped goods acquire those products from retailers authorized to purchase from the manufacturer. Who is really part of the problem in that case? The retailer wishing to remain unnamed in this piece added, “Most retail dealer agreements explicitly prohibit transshipping. Retailers who want to sell those brands should honor the agreement. It’s that simple. Those that don’t shouldn’t be dealers any longer.” Audio Logic’s Dixon adds, “The manufacturers that really do care are already doing what they can. Just about any product that is desired can be acquired in authorized or unauthorized manners. It’s the law of supply and demand.”

While we contacted many manufacturers for comment, understandably few responded. It’s a hot-button topic that promotes discussion, but some feel it’s not a productive one. Two manufacturers who did respond were MiTek Electronics & Communications (manufacturers of MTX Audio) and Rockford Corporation (manufacturers of Rockford Fosgate). Both are veteran mobile audio manufacturers whose name brands are well known.
Bob Fields, vice president of Teaming & Strategic Alliances at MiTek, suggests that retailers can defend themselves against the painful effects of transshipping by recognizing and doing business with the manufacturers who actually do something about it. “Retailers must hold their manufacturing partners accountable for allowing transshipping and, thereby, price erosion issues. If they don’t then they are also part of the problem,” he stated.
At CES 2013, in a bold move to proactively deal with the issue, MTX removed resellers or distributors from their supply chain, instead moving to a factory-direct relationship with its dealers. Industry trends suggest eliminating layers of distribution can help eliminate the largest risk of transshipping: saturated supply channels. Fields says two MTX programs, Affiliate Dealer (who stocks no inventory) and Advantage Dealer (who carries inventory), offer requisite margins for their respective commitments. However, both programs have transshipping termination clauses.
Rockford’s director of sales, Dan McLeod, discussed a program for top-tier products. “The Power Certified Dealer Program is designed to protect against transshipping and online sales of Rockford Fosgate Power Series products with a separate and enforceable Dealer Agreement which states that any transshipping or Internet sales of Power Series products will result in immediate termination and loss of any accrued program funds.” Under the program, McLeod says retailers can benefit from better margins and additional marketing support from Rockford. He said they’ve had a few cases of enforcement that resulted in termination, but it’s helped to heavily reduce Power Series products offered online and enable more robust margins on in-store sales for active dealers in the program.
Audio Logic’s Mike Dixon added, “I recently sat in on a dealer roundtable with a big-name manufacturer. I was the only retailer with an in-store policy to address transshipped goods for sale online! If it is such a big deal, why not have a store policy governing it?” Certainly Dixon and other retailers understand it’s a two-way street. Be proactive, not reactive.

It’s About Partnerships
Manufacturer and retailer relationships that are successful are really business partnerships. The Internet does not necessarily equal transshipping, at least not initially. When retailers wish to limit their purchases to on-demand products easily obtained through local distribution, it limits their ability to immediately close customers in the store because they lack inventory. Similarly, if they overbuy inventory with no sensible plan if inventory turn, then transshipping begins. In the latter situation, a great rep who steers the retailer to a sensible inventory buying plan can be another valued business partner.
When manufacturers grow to a certain annual dollar volume and look for ways to maintain profit in declining margins or aggressively grow revenue, looking the other way on transshipped goods or simply not having the manpower to chase down every instance of transshipping is also a reality that drives the problem. The truth is that there is not one silver-bullet answer or solution. The reality is that reevaluating one’s business objectives and partnerships is something that should be done annually – and together. After a period of time, if you’re not growing together with manufacturers in a healthy way, maybe that’s a sign to revise your businesses plans and partnerships.

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  • rheiblim

    It is so interesting to read this post as it could have been posted (if there was an Internet) in the 1970s, 1980s, or 1990s meaning this issue has been with all of consumer electronics all these years and it has many roots including overforecasting, overbuilding, overassorting, etc. There are solutions and also interesting to note that those who do best on this involve all the stakeholders together.