Retailers jump on product diversion bandwagon

Posted on July 25th, 2016

Copyright: stylephotographs / 123RF Stock Photo

If you look back at our posts, you’ll see than Amazon.com isn’t a favorite of AuthorizedStore.com. As a small business, AuthorizedStore.com works hard to level the playing field for its peers when they find themselves competing, often at a great disadvantage, against this mega merchant or other national or worldwide retailers. Amazon.com benefits greatly from the sale of unauthorized goods through its online merchant center. Though many sellers there conduct themselves in an honorable fashion, a significant number of businesses sell diverted, gray market or counterfeit items right under Amazon.com’s nose.

To say, though, that Amazon.com is the only major retailer that has jumped on the product diversion bandwagon and, by extension, supports gray market and fake goods, is wrong. There are other national and worldwide companies, ones you’ll recognize by name, that have been caught red-handed offering items that were diverted outside authorized means of distribution, purchased from unauthorized resellers or are counterfeit.

So, what’s the problem with this? It’s a huge problem, especially for small businesses that can’t compete, especially within the economies of scale, with these major retailers. Small businesses don’t have the financial resources or legal clout to do much more than accept the fact, consider their disadvantage as a badge of courage or take a visible stand against it. As far as AuthorizedStore.com is concerned, small businesses face a mighty uphill battle every day they open their doors.

It’s not just small businesses that suffer, too. Remember Sports Authority? You should? It announced in June 2016 that it would be closing its doors for good after not being able to compete on a level playing field with fellow big-name businesses. People found that Sports Authority’s in-store products could be found for far less, with shipping included, through online retailers. So, if a big-box retailer like Sports Authority falls upon tough times, imagine the struggles faced by Mom & Pop Sporting Goods.

How and where did Sports Authority’s competitors get their products? Furthermore, how were these competitors able to offer significantly lower prices? Good questions. AuthorizedStore.com is thinking that diverted products and gray market distributors, who offered prices at dimes on the dollar, played a significant role. In time, perhaps, we’ll have that proof. For now, though, let’s call it a hunch. Where there’s smoke, there’s fire.

So, who are some of the culprits? Let’s take a look, shall we.

As far back as 2007, as the Making Change at Walmart blog reported citing the Wall Street Journal as its source, Walmart admittedly sold fake high-end Fendi handbags at its Sam’s Club outlets. This remarkable admission by the world’s largest retailer, in terms of sales, settled a lawsuit brought by LVMH Moët Hennessy Louis Vuitton SA, Fendi’s parent company.

These counterfeit Fendi bags — knock-offs of legitimate bags produced by the Italian fashion brand that sell for $900 — went for as little as $525 at Sam’s Club. In the settlement, Sam’s Club agreed to provide refunds for customers, stopped doing business with the supplier and paid an undisclosed amount of money to Fendi.

Fendi, in filing the lawsuit, said that Sam’s Club sold millions of dollars of counterfeit bags and other goods under the company’s label.

It’s doesn’t end there, either. Ever hear of Costco?

In October 2014, bicycle rack maker Yakima, which thought it sold its products only through authorized dealers, found two of its items for sale at a Costco Wholesale store.  It seems Costco obtained the items through an international distributor (often willing players in the dirty product diversion game), in what Yakima called “unscrupulous purchasing activities,” according to bicycleretailer.com

Yakima, whose bike racks can cost anywhere from $125 to $450, identified the unauthorized distributor and took action against the gray market seller. What happened, however, hasn’t been made public.

Costco’s practice of selling diverted products can be further documented. In 2012, bicycle maker Cannondale stopped working with another international distributor after some of its bicycles, which sell for nearly $900, were sold at a Costco in California for $749, bicycleretailer.com reported.

Apparently, buying diverted products is part of Costco’s business model. Richard Galanti, an executive vice-president and chief financial officer at Costco, estimated that 4 percent of the goods in Costco are diverted, according to an April 2011 item in the fly-fishing industry newsletter Angling Trade.  Others, though, say that figure is too low. Angling Trade reported that manufacturers and retailers say it’s more like 12 percent.

Furthermore, Angling Trade reported that such other companies as Packasport Car-top Carriers, Camelbak, Crocs, Janzen, Hurley, Lucky, OshKosh, Rollerblade, NordicTrack, Columbia Sportswear, Oakley, Rossignol, Teva and Trek have all accused Costco of selling diverted products.

And, for your reading dismay, here’s yet another example of a major retailer selling diverted products.

In June 2015, Murad Inc., a skincare brand, sued CVS, one of the largest pharmacy chains in the United States, over unfair business practices. Murad’s lawsuit against CVS focused on the chain’s unauthorized sales of diverted and defaced Murad products in its stores and on its website, CVS.com. Murad stated that CVS had no authorized relationship with Murad, so the pharmacy chain had secretly diverted and sold Murad products from unknown sources.

Here’s another little interesting tidbit. Alexander C. Kaufman of the Huffington Post reported in October 2014 that CVS agreed to pay $225,000 for mislabeling store-brand beauty packages by misrepresenting how much product each package contained. We’re guessing that CVS didn’t learn a lesson as Murad, as part of its lawsuits, alleges that CVS defaced many of its products, by removing hologram protection seals and unique batch codes from Murad products. Murad, much like other skin care companies, tracks its products to eliminate tampering and protect consumers from counterfeit goods and health risks.

Though this lawsuit hasn’t been resolved, it’s further proof that yet another national chain has been accused of selling diverted products.

It’s not uncommon, we believe, to see hair care products, marketed as salon-only goods, end up on store shelves at such national chains as Target or Walgreens. Is this rock-solid proof that these companies engage in buying diverted products from gray market resellers? No, not exactly. But, again, where’s there’s smoke, there’s fire. If these products are supposed to be found only at hair care salons, how did they end up in these national stores? The answer that quickly comes to mind is product diversion.

How can manufacturers fight this scourge, as well as gray market resellers and counterfeit items? For one, they can tighten their controls, employ greater tracking measures and strengthen their channels of distribution. They can also take the expensive legal route, having attorneys file cease-and-desist letters and lawsuits on these unethical whack-a-mole distributors and retailers.

AuthorizedStore.com, an online retailer-vetting service in Tampa, Fla., offers its Seal of Integrity program as another way for ethical manufacturers, as well as distributor and retailers, to fight product diversion, gray market merchants and counterfeiters.

How does AuthorizedStore.com’s Seal of Integrity program work?  Through thorough research, the vigorous vetting process verifies that the manufacturer and its products are genuine, the items follow an authorized distribution network and that consumers can enjoy the backing of the manufacturer’s original warranty. The Seal of Integrity program, which offers its own set of analytics, provides businesses and/or consumers with confidence that they’re buying exactly what’s being sold and the supplier is a legitimate above-board entity that doesn’t engage in product diversion.

AuthorizedStore.com is more than willing to coordinate an introduction effort to its Seal of Integrity program for manufacturers. Doing so will provide a manufacturer with a better understanding of the many benefits of the program and its ability to maximize its return on investment.  The same holds true, too, for distributors.

Manufacturers can also require that distributors and retailers that sell their products subscribe to AuthorizedStore.com’s ethical standards.  Once these entities satisfy the vetting process, they can place a Seal of Integrity on every product page. Is that too much to ask? Hardly. If a manufacturer is truly dedicated to protecting its distribution channels and supporting its distributors and retailers, displaying this visible sign of trust is the best way to serve this purpose.

Consumers, the intended destination of a manufacturer’s products, also play a significant role in helping fight the unscrupulous business methods of product diversion, gray markets and counterfeiting. By choosing to conduct business only with hard-working and honest small businesses, especially those who proudly display AuthorizedStore.com’s Seal of Integrity, a consumer shows a commitment to helping support the backbone of the American economy.

Interested? Contact AuthorizedStore.com today about its Seal of Integrity program.


Retailer Seal of Integrity