Uncontrolled immigration?

Coca-Cola’s problems with grey imports of Vanilla Coke, which has yet to be officially launched in the UK, have again brought to the fore the fraught topic of grey imports. Retailers say they bring better value to UK consumers, but brand owners see them as a threat to their marketing strategies. By David Benady

When Levi-Strauss won a landmark legal battle in November 2001 to stop Tesco selling Levi’s jeans imported on the cheap from outside Europe, it seemed that the issue of “grey-market” trading had been resolved. But as Coca-Cola has recently found out, this is a problem that just won’t go away.

The soft drinks giant has been forced to bring forward the UK launch of Vanilla Coke after discovering that the product – imported from Canada via the grey market – is being unofficially sold through independent retailers in London and the South-east. Coca-Cola originally told the trade that Vanilla Coke – the most significant extension to the brand since the New Coke fiasco in 1985 – would be launched in the UK in June.

It is understood that the launch date has been brought forward to April because the spread of unofficial imports threatens to pre-empt the company and loosen its control over the introduction of the brand (MW last week).

Coca-Cola was unable to confirm whether Vanilla Coke was being distributed in the UK with the company’s authorisation. In a statement about grey-market trading in general, communications director Martin Norris says: “Our chief concern on this issue is the safety of consumers. Products that are not labelled for the UK market can present a risk to consumers, particularly those with specific health conditions such as diabetes. In addition, it is worth noting that retailers may be unwittingly breaking the law by selling mis-labelled imported products.”

Marketing Week has discovered that Vanilla Coke has been distributed in the UK since Christmas through wholesaler Dhamechi, which has sold it to confectioners, tobacconists and newsagents across London from a depot in Wembley. Dhamechi has obtained stocks of the product from a wholesaler in Canada – where it was launched last summer – and brought it to the UK. It sells to independent retailers at &£2.65 (plus VAT) for 12 cans. The labelling is in both English and French and the cans are slightly larger than is standard in the UK, at 355ml rather than 330ml.

An insider at Dhamechi says that, although the issue has not been discussed with anyone from the soft drinks giant, Coca-Cola representatives are aware that the wholesaler is selling the product, and have even bought some themselves. “It is selling extremely well. There have been a lot of repeat purchases. From Coke’s point of view, we have done the market research for them,” says the insider.

A high proportion of top-brand soft drinks – including Coca-Cola and Pepsi-Cola – on sale in UK independent stores are sourced from overseas. A source says that grey imports account for 20 per cent of Red Bull sales by volume in some UK regions, and the company employs special investigators to identify the product. Much of the Coke and Pepsi found in independent stores in the UK comes from Germany and France and from outside the European Economic Area (EEA: EU countries plus Norway, Iceland and Lichtenstein), especially from Slovakia and the Czech Republic.

Much of this stock is bought from overseas wholesalers, although it is thought that brand owners themselves sometimes initiate grey trading, selling excess stock to traders who then bring it into the UK and distribute it on the cheap. So Kit-Kat bars are brought in from Greece and sold in the UK, either undercutting UK prices or delivering a higher margin to the retailer.

Once it’s sold, it isn’t yours

The EU’s 1989 Trade Mark Directive (which became law in the UK in 1994) states that brands “exhaust” their power to dictate distribution of their products once they have been sold within the EEA. But it says that, if goods are sourced outside Europe, the brand owner must give permission for them to be sold.

Brand owners say that all grey imports – from the EEA and beyond – threaten to undermine their price structures in different markets and devalue their brands, which are often built around premium pricing. They pull back from demanding the abandonment of the EEA single market, but do not want it extended globally.

Many of the grey-market cans of soft drinks sold in the UK do not have packaging in English – an infringement of labelling rules. But Canadian cans of Vanilla Coke, or “Coke Vanille” as it is also known, have English text, so provided Coca-Cola does not object, there seems to be no problem with the unofficial imports. Globally, Coca-Cola is not losing out, since it still receives the revenue for the products it sells. But the presence of overseas product makes it harder for Coca-Cola Great Britain & Ireland to meet its own sales targets.

The issue of grey-market goods brings difficulties for marketers and makes the task of building global brands that much harder. But retailers are fighting to have the regulations overturned, so they can source their branded goods from anywhere in the world.

“We want to go back to the position before 1989, and we have the Government on our side,” says Gary Lux, a spokesman for the Parallel Traders’ Association, which represents retailers and wholesalers involved in the grey market. He claims that the ban on grey sourcing from outside the EEA is anomalous and was introduced accidentally. He adds: “Our position is that it is unfair for British consumers to have to pay inflated prices for goods over those consumers who live outside the EU. It is another example of ‘Rip-off Britain’.”

He says that the Department of Trade and Industry supports changing the directive, as do seven other European countries; but France is opposed to it. France is home to some of the most frequently grey-traded brands, such as perfumes and high-fashion goods. Italy – another designer brand centre – and Spain also oppose change.

But British Brands Group spokesman John Noble says parallel trading is comparatively new in the UK: “Before 1994, there wasn’t as much grey trading in the UK as there is now because the pound wasn’t nearly as strong.” He contests the idea that a global grey market would necessarily make prices cheaper in the UK, claiming that retailers often fail to pass on the savings to consumers, preferring to pocket the difference through inflated margins and higher profits.

It fell off the back of un camion

Tesco was accused of such profiteering last autumn, over grey imports of Fairy Liquid brought in from Europe on the cheap and sold in some UK stores at full price. Tesco says it does pass price reductions on to consumers, and that it was due to drop the price the day after it was discovered selling the detergent at full price by a newspaper reporter. A Tesco spokesman accuses brand owners of spreading misinformation. “This story was spread by the brand owners, such as Procter & Gamble.”

Tesco says that manufacturers make it difficult for the chain to buy large quantities of goods abroad, meaning that economies of scale are hard to achieve.

A P&G spokeswoman says: “We talked to Tesco at the time. It is no longer a problem.”

One of the biggest problems for grey traders is the issue of labelling. Retailers say it would be easy for brand owners to label their products in multiple languages, but they often prefer not to, as a way of making parallel trading more difficult. Consumers Association policy officer Phil Evans says the CA supports changing European rules and making grey trading a global affair. He says: “If you are talking about food labelling, then the clearer the label the better. But in the grand scheme of things, as long as you know what the product is, the answer is not to ban the trade.” So if it says Coke on the can, consumers will know what the product contains, even if the information is written in Russian. He says the benefits of parallel trading outweigh the disadvantages of labelling in foreign languages. This may seem a surprising position, given that the CA has campaigned for years on labelling – even insisting that orange juice cannot be called “pure” as this is tautology.

They taste things differently there

Another problem for brand owners is that the make-up of products varies between markets. Chocolate made for the UK tends to be sweeter than that sold in Europe – in hot countries, it contains chemicals to stop it melting and it tastes different. So grey-traded food and drink brands may taste different from national versions, undermining brand owners’ ability to guarantee consistency of delivery.

In addition, brand owners need to be able to vary prices temporarily in particular countries, for instance to respond to a rival promotion or to kickstart a relaunch. Despite seemingly encouraging grey trading on occasion, by offloading excess stock to independent wholesalers, brand owners want to ensure they control the flow and pricing of their goods around the globe, allowing them to charge more in some countries than in others.

Retailers have been clever at positioning themselves as consumer champions in the grey trading debate, although their prime concern is commercial. Both sides try to portray the issue as a fight for the rights of ordinary citizens, either to low prices or to consistent, safe products.

Meanwhile, the official launch of Vanilla Coke is getting closer, but many of Coca-Cola’s most eager consumers will have had the opportunity to try the new variant before they have even seen the advertising.

Additional reporting by Branwell Johnson

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