The world is never black and white. Various shades of gray creep into all facets of our existence. Some aspects of these shades and hues keep life interesting, but on the retail landscape, gray markets cause untold headaches for both manufacturers and retailers. For brands, the size of the gray market is directly proportional to the demand for their products. There are currently nearly 80,000 Apple products on eBay, and the story behind that number is the brand's strength. If you search for Burton on the online auctioneer you get 3,844 items. While this may pale in comparison to Apple, it seems a bit more noteworthy after searching for K2 Snowboards; which results in 61 items. Burton is a behemoth in our industry – the undisputed heavy weight, and defending that title is never easy. When you're the 800-pound gorilla in the room, you're in everyone's sights, and they all want to take you down or make a buck. This is true of competitors, industry pundits, and consumers that believe large companies have sold out and lost their soul. It's also true of the company's dealers that want to improve their bottom line by riding on the strength of the brand.

Burton defines gray marketing as "when a Burton Authorized Dealer purchases goods from Burton with the sole intention to sell it via unauthorized distribution channels, including but not limited to mail-order catalogs, online retailers, wholesale retailers etc." Gray marketing avenues are also, by definition, very gray. They take many shapes and sizes, and manufacturers in all industries have to keep on their toes to keep up with gray marketers wiley efforts. It's like playing whack-a-mole on a five-acre board. In December of 2007, Burton implemented several new measures to prevent gray marketing throughout its distribution networks in North America, Europe and Japan to protect its brand integrity, and these policies were put to the test almost immediately when a slew of product showed up in Costcos around the West and on Overstock.com.

Transworld Business recently spent some time chatting with Clark Gundlach, Executive Vice President and General Manager, Burton Snowboards, about the company's response to the Costco fiasco, it's efforts to manage gray markets, especially in emerging regions like Russia and China, and ways to more effectively manage the distribution channel.

Clark Gundlach, Executive Vice President and General Manager, Burton Snowboards
Photo: Jeff CurtesD

Transworld Business:
How did you guys find those boards that were in Costco and on Overstock.com back in December?

Clark Gundlach:
Aw, dude, let me tell you – it wasn't hard. The Costco thing really surprised us.

TWB:
That was down in Southern Cal right?

CG:
Costco has several regional buying offices and it was purchased out of the Northwest and distributed all the way to Denver locations. There was some in California. The bulk of it was in Utah, Idaho and Oregon and Washington. We got a panic phone call from one of our reps – 'Hey, there's Customs in a Costco here.' 'Are you kidding me? How'd that happen? Go in there and buy some of the product!' So, step one – we immediately tried to identify the source, then we realized within a day, that this was more widespread then we hoped for. Costcos here, Costcos there, so we sent our sales force out on a mission to identify where they are, and immediately told our sales organization to go in there and buy all the product right now – pay full retail, get it out of there. We cannot have our product in Costco.

TWB:
What was it selling for?

CG:
I think Customs were selling for $400. (MSRP $499) These were in season boards. So we go in and we buy what we think were all of them. And then all of a sudden more show up and then they show up on Costco.com. So we go back in to the retail stores and buy out all of the retail product again. And then myself personally and a couple people internally go on to Costco.com and buy all the Burton product at retail. It's a major six-figure number that we spent to clean that up.

TWB:
Can you give me a number of boards/figures?

CG:
I could if I knew it, I can tell you its hundreds of boards. There were some bindings and I believe some boots that were only on Costco.com. And the thing is, we're also on the phone with Costco going 'hey guys, what are we doing? Can we just arrange to buy all the stuff out from you, rather than tracking it down?' And let's just say they were uncooperative.

TWB:
And they were within their rights because they acquired the product legitimately?

CG:
Yep. So we do what we do when we trace product, and we trace it to a Southern California retailer.

TWB:
It was one?

CG:
It was actually two of our authorized dealers, and we immediately terminated those dealerships. In the meantime, we've got a few other things going on with that but I'm not at liberty to speak to it.

TWB:
You couldn't share who that was?

CG:
I really can't. I wish I could, I'd love to print it. The biggest challenge is that the biggest source for gray market products is retailers. They have an opportunity to profit, I'm not just saying in snowboarding, I'm saying in anything. The biggest challenge for any manufacturer is to identify sources and control their distribution and as long as you've got a strong brand it's a strong challenge. Whether its Louie Vuitton or anything that's in demand.

We sell a lot of product and there are a lot of individuals out there with product. In our dealer agreements, our dealers are prohibited from selling anywhere outside of their store locations without written consent from Burton and that includes every auction site. Not just eBay. And the hardest part for us is it's a full time job policing the Internet channel.

TWB:
Do you actually have someone with that job description?

CG:
We have resources in both our legal and our sales departments that part of their job description and role is to go in and police that. One of the hardest things about eBay is that it gets really tough to identify who is one of our authorized dealers and who is not. If we get into a situation that looks suspicious we may just purchase product and try and trace it from that resource, but we have a relationship with eBay as well. We work diligently to control our distribution, and believe me we speak to a lot of our authorized dealers who may or may not be aware of their signed dealer agreement with us. It surprises a lot of our dealers and I think a lot of them just do it until they get caught. There's a lot of ways on eBay to do things on the sly to make it grayer.

TWB:
Is your dealer agreement one strike and you're out?

CG:
We have a no tolerance policy. If we find an authorized dealer that is trans-shipping or reselling our product we will terminate.

TWB:
What about out of season product, do you work with retailers that are trying to sell on an eBay store they've got to move excess product?

CG:
No. Even our authorized online retailers are prohibited from selling through auction sites. It's constant, managing that channel is virtually a full time job.

TWB:
I heard you have professional investigative companies to look into this?

CG:
We use them if we need them. They're a resource for us. If we need help identifying a situation globally, they're one phone call away.

TWB:
What's your take on what gray marketing does to a brand?

CG:
The biggest thing that the gray marketing channel does to a brand is to really hinder profitability for the company and for the retailer, and I think even more importantly it really has an effect on the brand's presence and the presence of mind in the consumer. Think about this. You're in another country and you buy a gray market product, you're not getting a lot of what a brand can offer. Say for example, warranty service. You might not even be getting product that comes with all the customer service that a brand can offer. You're buying product that's outside of authorized distribution. So you take a risk.

TWB:
From a consumer standpoint, would you guys know if I bought a board in this channel? Say I buy a board and snap it and send it back, are you going to know how it was sold?

CG:
Yeah, we'd ask you for the proof of purchase. We stand behind all our product for sure, but we stand behind product that's purchased through authorized distribution. Somebody that buys a product through some unauthorized distributor and has no proof of purchase, that's a problem that's going to challenge him to get any warranty service.

TWB:
Is this tracking done with serial numbers?

CG:
With serial numbers for us, there's a couple things. Just like any other product, if you've got an issue with a particular product on the manufacturing side, a serial number helps you identify the source; the time you built it, where you built it, etc. The other component to serial numbers is to give us the ability to trace products back to where we sell them. Say for example, we send BC Surf & Sport in Denver product; we've got a log of those serial numbers so if one of those boards ends up somewhere we can actually trace that. Let's say for example that board ends up in Beijing, China along with a hundred other boards at an unauthorized retailer, we have sources that will send us all those serial numbers and then we we'll go into our system and trace that product.

TWB:
How does Burton work with retailers if they wind up with overstock at the end of the season?

CG:
They didn't buy them with the intent to sell them through another channel. He bought that product for what he felt his needs were for that particular season at his authorized business. We always go to our dealers at preseason and say 'buy what you feel you can sell.' If they run into a situation where something happens in their marketplace, we don't have a crystal ball and he doesn't either. They buy looking in the rear view mirror, 'here's what I sold last year, here's what I think I'll do this year,' and that's exactly what we want them to do. For as long as I've been here at Burton, and I've been here a long time, I've always got the situation where someone runs into an unusual issue where things don't sell. Maybe their store's remodeling and doesn't open on time, or there's no snow, in those situations, we have good relationships with our dealers, and we generally help them find solutions. But I don't want to say for every retailer out there that has a situation, we don't go in and say we're going to help you out. What I'm saying is those situations happen. We always go out there and tell our dealers to buy what they think they can sell. We're not out there to encourage them to carry over. We don't want that as much as they don't. It really comes down to planning and how well the retailers are planning.

TWB:
I've been hearing from retailers that overstock is generated partly by poor management of the distribution chain by manufacturers and a lot of brands are signing too many shops in a saturated market, selling too much product. Would you agree with that?

CG:
I can't speak for the other brands, but I can speak for Burton. We sell in the winter sports channel. That's our channel of business. Where winter sports are being sold, that's where we are.

TWB:
Have you seen SIA's numbers that show that nearly 40,000 new boards were sold on eBay last season?

CG:
I'm just starting to see some of the preliminary data. I think it's really hard to define what's happening on eBay. We know that the Internet is a growing channel and we know that all manufacturers are really going to focus on change management and how they're managing that channel. But if you click on Porsche on eBay, I'll bet there will be over 2,000 Porsches (there was actually 16,039), so that means that eBay is the largest dealer of Porsches in the world. Does this really have a negative impact on the brand image? No, I don't think so. I just think the Internet channel is a real channel and it's really up to the brands and the manufacturers, not just snowboarding, not just Burton, to continue to develop and update their strategies about how they manage online channels and not really look at it as a threat, but look at it as an opportunity to manage their brand. You know as well as I do that eBay and the Internet is a constantly evolving channel. It's growing and it's not going to stop growing.

TWB:
What channel do you see as the biggest problem in gray marketing?

CG:
Really, there are two sides of the gray marketing issue, there's unauthorized distribution and the Internet channel. Those are the two animals. It hasn't changed that much really. One of the things that is most important for us, probably for many brands, is emerging markets. It's important for us to maintain brand integrity and distribution there. We've been around for a long time and we went through the gray market period in Japan, and we really learned more and more about gray marketing through our experience there, and we can apply that to all our emerging markets. The Japanese distribution has evolved and matured, it was a huge, huge issue for us and many other snowsports manufacturers. We're very focused on controlling gray marketing in emerging markets.

TWB:
Isn't that partly a function of poor distribution channels? People couldn't get the product so other people were stepping in to fill that void?

CG:
Some of it. Just like anywhere else we have authorized dealers and distributors there. If demand is outstripping supply, then they're going to try and fill that void.

TWB:
In those cases are the prices on the gray market below what licensed distributors are selling them for, or are they actually higher?

CG:
It depends on where they're sourcing product. If it's a particular retailer who doesn't have an authorized dealership and they're in the same neighborhood as an authorized dealer, he may try to purchase product in another market and bring it in to his shop and offer it at a more aggressive price to attract business. It can vary, but the primary function that we see is to control our distribution and protect our authorized dealers, so we have to control our distribution in those markets.

TWB:
How do you see this gray channel developing in emerging markets? Obviously, people are going to continue to do it, how do you combat that?

CG:
I think as long as there's demand, there will be opportunity for a gray marketer somewhere in the world and it's our responsibility to manage that and find the sources and shut it down as quickly as we can.

TWB:
I guess that it's kind of a good thing that you're seeing this then since it means the demand's there?

CG:
Ultimately, it is a good thing. If you didn't have any demand for your product, gray marketing wouldn't be an issue. That is a good thing. As long as there's demand it will be there and it's up to us to prevent it from happening.

TWB:
Anything you'd like to add?

CG:
This July, all of our North American dealers will be required to sign a new dealer agreement that includes additional, strengthened language regarding gray marketing. It outlines exactly what types of re-selling will be considered a violation of their dealer agreement and the consequences that will result. Our goal with this new dealer agreement was to make it very clear that we have zero tolerance for gray marketing and will terminate dealers who violate the agreement.

The following is from a statement that Burton sent us:

Results of Burton's actions against gray marketers
• Burton has instituted a new dealer agreement in North American that outlines specific criteria that constitutes as gray marketing and the consequences that will result if a dealer violates the rules.
• Burton directly informed all of its North American dealers on the seriousness of this issue and how it will enforce its policies against gray marketing.
• The company is in discussion with professional investigative companies to track down gray marketers.
• Burton encourages its authorized dealer network to report any suspected gray marketers.
• Products found in unauthorized global distribution channels are traced back to the authorized dealerships outside of that market, and Burton reserves the right to terminate the dealer who violated its agreement.
• Burton's new policies were put to the test in the 07/08 season when unauthorized products were uncovered in the U.S.-based Costco chain and at discount online retailer Overstock.com. In addition, unauthorized European dealers were found with product that originated in the U.S. Burton acted immediately to discover the sources of these sales and terminated two U.S. accounts.
• Burton spent hundreds of thousands of dollars to purchase snowboards back from Costco at its own expense.
• Burton had discussions with Overstock.com who agreed to pull the gray marketed boards from its website.
• Several dealers in California were involved with selling product to Costco and Overstock.com, and these dealer agreements with Burton were permanently terminated.

Stay tuned to Transworld Business’s print magazine for an in-depth analysis of the effects of gray marketing on the snow, skate, and surf industries.