Burning Question: Many shades of Grey

This issue’s Burning Question was prompted by comments from Stuart Poignand contained in his farewell speech following his departure from Canon, in which he identified the grey market as the biggest challenge facing the photo industry.

Our question elicited the kind of response we’ve only had once before – when we called for input on the subject of 15-cent prints – and a surprisingly broad range of views.

The question we put was: Stuart Poignand (ex-Canon) in his farewell speech identified the grey market as the industry’s biggest challenge. Do you agree, or are other issues more challenging to your business?

This is what came back:

Well, almost

Grey Market is a significant problem, with many issues not seen by the average consumer, retailer or even manufacturer.

Back at the turn of the century (that sounds so ancient…) I had the opportunity to meet Gary DiCamillo, Polaroid CEO, at a PMA New England event. I asked Gary how much of the grey market could be controlled by manufacturers. His immediate and blunt response; “Ninety percent could be controlled in 90 days and there isn’t a single manufacturer that has the guts to do it.”

Grey market comes about in many ways – for some manufacturers it’s like a drug – they’re addicted to it and can’t quit it now – which was DiCamillo’s point; no sales manager wanted to take the sales hit by shutting off the grey market sales, even though they knew that grey market didn’t expand their sales, it only diverted existing sales.

Every company has a certain sales volume target each quarter and they believe they need that volume to make their numbers that quarter. There is a myth that certain cultures think longer term than other cultures. Grey market proves the opposite – by its very nature it steals sales from the channel that created them, punishes that channel for supporting the manufacturer, and rewards those who make no investment in marketing the brand or the category.

In some situations, the manufacturer will intentionally allow just enough additional grey market into a specific country so they don’t have to pay sales bonuses to the locals. In other cases currency fluctuations cause unintended grey market opportunities.

Some companies’ local (in-country) offices are trying to stop it, despite the “wink-wink” approval of their own head office. For example, by creating an inability to get repairs in country. Another example is the inability to get firmware updates. This latter action is a more recent, and much more significant in higher end professional cameras, and something that isn’t well known.

The damage grey market does is in margin compression to the retailer and to the local distribution channel. Who will provide the marketing support if the local distributor (factory-owned or independent) doesn’t have the sales and/or margin needed to sustain in-country sales?

From my perspective, succession planning (or lack of it!) is the biggest problem our industry has today – we aren’t training anyone to take our place.

Margin compression is the second biggest problem – and grey market is just one of the factors that cause margin compression.

Bill McCurry,
McCurry Asociates,
Princeton, New Jersey

Catalyst for competition

Did Stuart mean a challenge for the “industry”, “importer”, “wholesaler” or “retailer”?

There was a time when each type of business generated a profit in a harmonious handshake down the path of manufacturer to consumer. The term “grey” suggests a disrespect to this tradition as one party bypasses the other in an effort to assume the others’ profit.

One could replace the term “grey” with “opportunistic” or “entrepreneurial”. My concern with the question is that it comes from a mindset of one group owning a point of sale over another as some sort of divine right. This view is romantic but nonsense.

You have to respect anyone who finds a successful legal model to run a business.

The Camera House group I am a member of has a strict “no grey importing” policy as it believes in the notion that any short term gains would undermine long term supplier relationships, and/or its business model requires a controlled supplier base from which to earn distribution monies. I support the policy.

I would like to think as retailers we will benefit from the efficiencies brought upon our wholesalers by the competition these entrepreneurial “grey” importer/ retailers bring.

It seems a positive step forward would be for wholesalers to actually stock the product they wholesale. It is the mismanagement of the “Just In Time” approach to stock holds that has created the biggest opportunity for the “grey” importers. In essence they started by filling a void in supply of products in demand and continue to do so. It is more frustrating as a retailer to lose a sale due to stock unavailability than being shopped on price. The price effect on the consumer to a point can be negated by a proactive retailer; inability to supply divided into our costs of doing business is our heaviest burden.

So “grey” isn’t our biggest challenge, as at the end of the day more sources of product should lead to more competition (for example, Canon’s recent reduction in pro lens prices by 30 percent.)

The greatest challenge and onflow from the internet and digital revolution is understanding where my specialty imaging retail store belongs; is it a “destination” or “convenience” business?

Note: This point of view is personal and may not reflect the opinion of Camera House.

Jon Paterson,
The New Camera House,
Lismore, NSW

Weaker A$ will bring relief

Stuart Poignand (ex-Canon) made an excellent farewell speech to the industry in Sydney.

As well as reflecting on the past, he also made an excellent overview of our current industry and its biggest threat. He said:

“What I believe is clear is that those companies who provide real value to the Australian consumer will prosper. It’s not optional, it’s mandatory, because the biggest equaliser of value, and the biggest challenge to the capacity to create value locally is here now. Parallel imports. Both organised and private parallel imports.”

A large part of this problem has been currency. The strong A$ and the weak US$ made purchasing in the US very attractive. The recent reversal in the A$ will soon separate the men from the boys.

As one of the last true independent Australian-owned and operated camera distributors in the industry, we are in a unique position of being able to make clear to our suppliers the importance of supplying us on internationally-competitive terms.

The results can be seen with the Pentax K200D at $699. This is an internationally competitive price. It’s not possible for the consumer to buy it cheaper at B&H.

Of course, it is not always possible to guarantee every product across the range, but we are flexible. In the case of Sigma, we will negotiate and work with our dealers to achieve a competitive price when our consumer has been quoted from a legitimate overseas internet source.

At CRK, we understand the real threat the grey market represents. If the trend continues, industry direct subsidiaries may as well close and supply Australia from Singapore.

As the last of the independent camera distributors, we are not price takers or operating on artificial transfer pricing. We will do our utmost to ensure our dealers are supplied our products – Pentax, Sigma, Hasselblad – on an internationally competitive basis.

In addition, Clem Kennedy as Treasurer of PICA is working very hard to have the $1000 parcel post concession substantially reduced. As an industry, all we are asking for is a level playing field. We have to pay GST, so why shouldn’t the private parallel importer?

We are also taking legal action against two grey importers for falsely comparing artificial retail prices against their grey prices, using our images in breach of copyright, and falsely claiming their goods were covered by an Australian guarantee. Our strong stand is having an effect with one wellknown parallel importer completely dropping Sigma because - “I can’t compete against CRK”.

Malcolm Kennedy,
CR Kennedy & Company Pty Ltd

Internet prices the challenge

After listening to Stuart I was prompted to send an email to a friend of mine which started:

“I was sitting at dinner last night thinking how quickly things can change. One minute we can own the biggest shop or reach the top of the corporate ladder, and the next we can be facing an entirely different situation. Our home life, our work life or our whole industry can change in the blink of an eye.”

I think that the greatest challenge facing our industry is the lack of margin, caused by needing to match internet prices. This is causing many of our outlets to lose hope. As we face this reality of ungrateful customers, wanting all our good advice and then researching the price on the internet, we wonder if it’s worth signing a new lease; buying a new minilab; employing new staff; investing in the industry. It’s not just Australia – the same problem is occuring worldwide.

The mass merchants are using our staples of prints and cameras as loss leaders to attract customers. We can no longer rely on those products to produce the return we require to stay in business.

We need some examples of “local heroes” finding a way to get their customers to remain loyal and pay the extra required to maintain a specialist store. Otherwise it will be hard to justify investing further in the industry. I have noticed that an increasing number of industry stalwarts are looking to diversify outside our traditional photographic base as a way of providing more certainty for the future.

John Ralph,
Erina Camera House, NSW

Look at it this way...

When the bulk of your profits comes from service work and the bulk of that from enlargements printed on a wide format ink jet printer, if you’re offered ink at $50 per 220ml cartridge cheaper than the normal market, why wouldn’t you take it? With the economy the way it is we smaller retailers must look at ways of slashing expenses while maintaining a high level of quality.

Chris Harris,
Bay Park Photos,
Port Macquarie, NSW

Biggish, not biggest

Grey market has always been an issue! But I am not sure it is our biggest issue. Adapting to a changing market is also very challenging. Who are our customers? How do we reach them?

We are all trying to adjust to customers shopping online, and in a lot of cases from a retail perspective it is “to be the cheapest in town” that is a challenge! Maintaining our margins is one of the biggest challenges we all have, and providing levels of service to our customers above their expectations is also a challenge!

At Adeal, we are working each day on how to improve on all the above challenges, but we always have, and we focus on that we can best control.

Grey market has always been there so is it a bigger challenge than 10 years ago? Maybe, but so are all the other challenges.

Mark Cummins,
Adeal Pty Ltd

‘World Wholesale Price’ needed

I wanted to vent some comments that relate to the technology products we now sell and may not be able to sell in the future for reasons that are beyond our control.

This is beyond the issue of grey importing about which the arguments are well know, and the urgency to address them has never been more pressing.

My concern is related to the consequences of free trade. We are in a “free trade” environment that allows a world market for our type of products. If we accept this, then we need the manufacturers to change the way they distribute the products into the world market.

I have no facts to support my argument, but logic says that the manufacturers would move product at a price they believed the market would accept. They have three sources of income: manufacturing, foreign exchange, and differential distribution margins. If this is the case we will always have a problem from grey importing no matter what the local distributor may do to assist the retail channel.

I understand how difficult it is for the local distributor to lower their margins without support from the parent companies. I also appreciate the efforts of the companies like Canon that have acted.

As it stands there will always be a cheaper source somewhere in the world from which a local company can buy products.

I believe that the retailers are now working on the lowest cost model that is possible in the Australian environment. The change that has happened over the last few years has dramatically impacted the profits and sales model of the traditional outlets. I am comfortable with these changes, but I also know there is very little margin to be taken out of the current model.

My proposition is that the manufacturers need to set a world wholesale price and remove the recommended retail price. They need to support the distribution model out of the profits they make at the time of manufacturing. If this cannot be addressed then I can see the time when we will have no or very little local representation from manufacturers. The product will have to be supplied from outside the country and other support will be driven from call centres.

I believe this is less than desirable and will further harm the distribution structure in Australia and many other counties.

The consequential loss of jobs and shopping options will damage the Australian economy.

As I have said, I have no facts to support the “distribution price model”. I also know I can have little effect on the world manufacturers. The point has to be made that a close look at the current model can do no harm and may result in a much healthier environment for retailing in our country. I would love to see the retail industry support such a review and engage with the manufacturers on a world level to address the Grey issue. The loss I believe will not just be to retail, in the longer term it will affect the manufacturers as well.

It is also interesting to note that Canon, Nikon and Olympus have moved their pricing to be much closer to a world mark over the last few weeks. This has already had an affect on sales back to local dealers.

Mark Alderson,
Foto Riesel,
Sydney

It’s about local jobs

The grey market has been an issue in Australia for the last 40 years but with the advent of the internet, a very strong exchange rate and a government which does not wish to collect the GST on products being imported into the country, the issues are getting harder to resist.

It will not be long before the normal photo channel turns to the grey market as its main supplier for hardware. We are all aware of the proliferation of resellers working out of Asia and America. What the public does not understand or want to care about is the fact that they employ no Australians. At the end of the day it will be jobs that will go, so therefore every selfrespecting retailer has to consider the impact of ignoring a lower cost supplier than the current set up in Australia.

As a retailer it is getting harder to ignore the lost sales and the lost goodwill; where more and more of our customers are turning to the internet and overseas as their first point of call. And what hope have we got when respected journalists writing in the Fairfax group openly suggest people try the internet first before wasting their time going to a camera store in Australia!

It seems like specialty retailers are on our own! The suppliers cannot or will not help us, and as more and more customers turn to the internet for information they will get more exposure to offshore resellers.

The government seems to be unconcerned about our plight. Unfortunately with a population of around 20 million and with the very high living standards that both we and our customers expect to have, we cannot in all seriousness compete. I have just returned from China where the wage of somebody working in a retail store is less than 30 dollars a week. I do not know how many of our customers would want to work for that rate.

Richard Robertson,
Ted’s Cameras

The cancer within

Like most passing economic credo’s, market-driven economic rationalism has proven to be a false dawn of improved consumer choice and lower prices.

The changes to Financial Swap Modernisation laws in 2000 in the US Congress were the economic rationalist underpinning for the subsequent catastrophic sub-prime debacle. For “modernisation” read removal of appropriate oversight of key financial instruments. Now everyone worldwide is paying for this US market-driven rationalism in the form of inflated mortgages and punitive borrowing costs for business.

In the photo industry we have seen this before. First in the US in the ‘80s. Then in April 1995 we watched the New Zealand Government amend their import laws to allow complete freedom for people to circumvent trademark ownership and import goods in commercial quantity with almost no oversight. Today the New Zealand photo hardware market is believed to be 50 percent parallel imports. Remaining local importers fight uphill battles to compete. Even the All-Blacks can’t do that! In law introduced in 1996 by the then-new Howard Government, continued use of copyright and trademark ownership to limit parallel imports of CDs was ended. I recall arguing strongly to candidate Howard prior to the ‘96 election, at a State Chamber of Commerce lunch, that such legislation would wipe out independent Australian distributors of international brands. I pointed out that a 5 percent reduction in volume caused by parallel substitution was enough to erase profitability for most importers, such were the slim margins then prevailing. Twelve years later, most of the independent camera distributors are all gone. So have most independent repairers.

Today we see ebay vendors from various offshore centres offering branded goods at “great savings”. Many of them promise openly to amend invoices to below the $1000 tax-free threshold for personal imports. A new breed of local e-tailer, based in Australia, is mixing local supply with overseas purchases. Some of this is GST paid and some allegedly not. Yet government appears to continue to shy away from intervention, using the credo that the market will expose the wrongdoers and bring about new competition. But despite examples provided, nothing happens.

In recent months, as the assigned owners of the Lowepro trademark and copyright in the design of our products, we at Maxwell have seen a growing amount of counterfeit merchandise turning up for warranty claims. These goods have been advertised using photographs of real Lowepro bags, lifted from Lowepro’s website. Even the product descriptions and copy are near-100 percent lifts of our intellectual property.

They certainly do not comply with “fair use” legislation. The actual product delivered are fakes; counterfeit goods. Such goods fail prematurely. This immediately lowers brand confidence, built painstakingly over 40 years. The materials are inferior, the stitching is appallingly substandard, adhesives have been found to contain toxic solvents banned from the factories of true Lowepro product, and the bags don’t protect expensive lenses and cameras as the real product does. Yet to undertake legal action in overseas jurisdictions would cripple most businesses, even internationally strong ones like ours. But locally we are preparing a robust effort to fight back.

Consumers seek our help to solve their problem. They can’t believe there is no government safety net against such practice.

Thanks to economic rationalism we have to spend our money to defend our brand from fake goods, and blatant copyright theft. We have to sit back as others “steal” our IP and trade on our name. Passing-off laws don’t defend purchases from overseas that would be illegal if carried out here. The law has the effect of defending the offender, not the inventor. How screwed up is that logic? The law allows very loose interpretation of what is a local business. Isn’t a “.com.au” website local?

In the camera business a large wellknown US East Coast vendor now is believed to have the single largest share of the ‘Australian’ pro and serious amateur market. Yet it is local subsidiaries and Australian taxpaying Pro dealers who are fund hundreds of thousands of support dollars to the profession for their educational advances, conferences, etc…
But many photographers, who are the first to protest when an overseas photographer comes into Australia and shoots an “Australian” job, appear to have no compunction in supporting non- Australian-taxpaying overseas companies to save a few hundred dollars, who don’t have to charge GST, in preference over the local business that does.

The government response? “It is not economically viable to collect such small sums.” Well, Mr Treasurer, those small sums are adding up. They are over $30M of small sums now, just in the photo imaging industry. And dozens of smaller retailers are closing up or going broke in industries just like ours, every month. ABS retail numbers show the big getting bigger, the independents struggling.

No-one argues that robust competition is not good for improved consumer value. Average selling prices are tumbling. But who is the real winner? Possibly the unintended consequence of the ’96 Australian parallel import legislation is that the supply chain will move offshore entirely, resulting in Australia being relegated as a world player.

The cancer that grew slowly at the start, may eventually devour the industry we have so passionately created over decades.

Economic rationalism has allowed the playing field to be biased in favour of parasitic offshore operators who don’t pay or charge local Australian taxes and operate with impunity in unregulated and unsupervised markets while they can.

John Swainston,
Maxwell International

On the other foot…

As a distributor in Fiji, my company, and others have all been victims of grey market from time to time, with most of the unofficial supply coming from Australia. I find it quite amusing that the squealing is now also coming from Australia!!! Paul Curtis and I have had exchanges of emails on this issue before.

Many brands are now available through multiple distributors as well as the company itself. While the companies themselves may not engage in grey marketing, their distributors certainly do.

I would be interested to know if there are any restrictions placed on distributors from selling offshore, especially into countries where official distributors have been appointed. If there are no such restrictions, then the path to grey marketing is left wide open for the distributors to exploit.

Ikbal Jannif,
Cainnes Jannif,
Fiji