Grey area

The trading of professional products on the grey market has a greater impact on salons and spas than many people realise. Eve Oxberry investigates

If you’ve ever been offered cut-price professional products by a distributor you don’t know, or wondered how an eBay seller manages to get hold of the brands you stock so cheaply, the chances are you’ve come into contact with the grey market.

Once you scratch the surface it’s a huge issue for the beauty industry, and impacts the integrity of professional brands and the pricing structures and profits of everyone selling them. The grey market covers that confusing territory between the “white market”, where goods are sold through authorised channels, and the stolen or counterfeit products sold on the black market. It’s rife in the fashion, fragrance and electronics markets and is an ever-growing issue for beauty and nails.

Grey market product can include parallel imports, which are products made for a different geographical market and brought into Europe without the permission of the brand owner. This practice is illegal but often hard to trace to the source. Other sectors of the grey market involve product that is legal for sale in the EU but is being traded by unauthorised wholesalers or retailers. This is harder to stop as these traders are protected by European free trade laws.

Grey market traders can cause headaches for the manufacturers and suppliers by undercutting their prices or damaging their brand reputation by selling old or damaged stock. For salons and therapists, it can also impact trade but it can have more serious repercussions if you’re ever tempted to buy stock from these bargain traders.

Growing problem
According to the Insider survey in our September issue, 31% of beauty salons, 53% of spas and 19% of nail salons have been approached by unofficial distributors trying to sell them stock. “It’s a bigger problem among students and mobile techs and therapists but I’ve been approached as a salon owner,” says Lyndsay Harrold, who owns Tough as Nails salon in Gwynedd, Wales, and is also an educator for distributor Louella Belle. “We all have Facebook pages for our salons and I do get the odd message, saying ‘I can get you this brand much cheaper’.”

The recently launched Nail Industry Association has placed tackling unauthorised distribution high on its list of goals and its co-founder Belinda Price agrees that action needs to start at education level. “It starts right back in college when they start looking at what’s on eBay and dabbling in different products, mixing and matching,” she says. “We’re encouraging educators to teach about this from the very first days at college.”

Buyer beware
What many people don’t consider is that buying from unauthorised sources can invalidate your insurance, and it was just such a case that first alerted distributor Nail Harmony to parallel importing of its Gelish products. “A year ago a customer rang and said ‘will you do some fake invoices for us because I need to show my insurer that I’ve bought your product through genuine sources’,” says director Jason Smedley. “It set alarm bells ringing, so I looked around and saw there was a lot of Gelish product from the US being sold. This particular salon was buying online; eBay and Amazon are the main problem sites.”

Most brands now employ full-time staff or consultants purely to search online for unauthorised sales. Like many pro brands, Nail Harmony has set up a VeRO, or verified rights owner, account on eBay, which allows the company to end listings that infringe its intellectual property rights. Amazon operates a similar system.

“Some techs don’t realise that product being offered to them isn’t legit. Others know but buy it just to save a few pennies,” says Smedley. “It costs £1.67 to do a normal Gelish manicure and I worked out it costs around £1.37 to do it with illegally imported product, so for the sake of 30p a treatment you’re risking invalidating your insurance and being totally liable if there is a problem.”

Fake Bake United boss Sandra Vaughan had a similar experience shortly after she began distributing the self tan products in the UK, and says many distributors are still unaware of the extent of the problem. “The owner of a big salon group came to me for help after she’d bought product online and the bottles broke in transit,” she says. “Product made for the UK is packaged slightly differently to handle the shipping process and she’d been sent US product, so when it broke it left her with unsellable stock, and she had no comeback as the seller was unregulated.”

Ingredients used in products can vary depending on the geographical region they are intended for, with some ingredients approved for legal sale in the US but not in the EU, for example, leaving the end-seller open to prosecution.

Supply and demand
So where is all this unauthorised product coming from? According to Elemis managing director Sean Harrington, the blame lies within the industry. “The brands say the problem is coming from outside but it’s not,” he says. “Distributors are forced to buy into purchase targets to keep their distributor agreements, so they buy more stock than they can sell legitimately.”

In Fake Bake’s early days, Vaughan says she had problems with a French distributor. “They were only meant to sell in France but brought it into the UK,” she says. “You have to be really careful who you supply. Some European distributors buy £5,000 of product and sell £2,000 legitimately and £3,000 into the grey market and there’s nothing you can do about it because of free trade laws. Over the years we’ve not gone in to Europe as much as we could’ve because we’re protecting our UK stockists.”

Harrington says some less scrupulous brands deliberately select distributors that sell on the grey market because it allows them to sell more but keep the grey market sales at arm’s length. “If you want to control product it takes good cash flow because you have to buy it back and control your own clearance,” he adds. Vaughan agrees, saying, “If you sell to clearance houses you can’t control how long it takes them to sell it on. Beauty products have a shelf life and if consumers buy old product it affects brand reputation.”

Salon sales
Harrington says grey market traders often approach salon groups and ask them to buy more than they need from their official distributor. “They’ll pay wholesale  price plus 10%, or offer to clear any inventory the salon can’t sell.” He says Elemis has more problems with salons selling its products into, rather than buying them from, the grey market. “We’re not seeing many salons buying cheap from unauthorised sources because prices don’t get down that low. The discount is on the retail value, not wholesale,” he adds.

Like many large brands, Elemis uses a source code machine that gives each product an individual number. “So if it pops up somewhere I don’t want to see it, I can trace it back,” says Harrington. “Last year I closed down 50 accounts and bought back £200,000 worth of stock.”

All cosmetic products must legally carry batch codes to signify, among other things, the geographical region they were made for and Steve Baker, an expert in brand protection, says their removal is a key way to spot dodgy product. “Look out for batch codes being removed, because as a salon you have to be able to show where you bought the product from, otherwise it’s you at fault, and Trading Standards are pretty tough on that.”

Baker and his co-director George Clyde set up set up their consultancy, Intellectual Property Management Services, after 20 years working for Trading Standards, and now investigate black and grey market sales on behalf of brands. “The first thing I ask any company we start working with is ‘have you got your brand registered with customs watch?’,” he says. “Get your brand on their list and they’ll look out for it. If we register a brand, customs sometimes send a sample to us, and if we confirm it’s unauthorised they impound it and it’ll never get into the country.”

Market forces
Baker has seen the problem of grey market product grow considerably in recent years. “When I started out, it just used to be in street markets and stores but the internet changed everything,” he says. “eBay and Amazon cause the most problems, but now a lot of people are selling through Facebook because they can approach people directly and avoid detection more easily.”

He adds that cuts in Government funding have also exacerbated the problem. “Enforcement bodies have smaller budgets now so they demand so much more evidence from brands before they’ll act,” he says. Exchange rates also make a huge difference to the extent of the problem, according to Vaughan, who says she sees far more parallel importing when the pound is strong.

However, Harrington says that brands themselves also need to take more responsibility for solving the issue. “I do a stock exchange every 12 weeks for salons, so they can swap any slow-moving stock for fast moving,” he says. “I understand that small brands can’t afford to do that, but in that case they need to put people in place to help salons sell it. So many brands take responsibility for the sell in but not the sell through.”

Smedley says he is not worried about salons selling on product. “On Facebook there’s a group called Harmony Lovers Buy It/Sell It, where you can swap colours if you have some that aren’t selling, and I have no problem with that; the importing is the real issue,” he says.

Harrold advises salons to speak to suppliers about deals and discounts before being tempted to trade on the grey market. “It’s often no cheaper to buy from these sources because to avoid taxes if buying from overseas, you have to buy small amounts, so the postage adds up,” she says. “I always encourage my students to form relationships with some good suppliers because that’s what the industry is about. You can get deals and you also get support if something does.”