Consumer Discretionary

Why Walter White Was The Best Student Philip Kotler Never Had!! (And How To Combat Grey Market Exports)

<p>I was once part of a panel session on the topic of&nbsp;&ldquo;Challenges faced by Indian Exporters&rdquo;<strong>.</strong>&nbsp;During the discussion, one of the panelists, a manufacturer of Indian snacks, pointed out the &lsquo;menace&rsquo; of merchant exporters in perpetrating grey market. Other empathetic panelists soon joined the chorus and pointed out &lsquo;instances&rsquo; when their products were also dumped by unscrupulous traders causing massive damage to their brands.</p><p>As the format goes, if panelists identify a problem, they ought to suggest solutions too. And after 15 minutes, the question was flipped to me -&nbsp;<em>"Mr. Mehrotra, in all your years of experience, how would you recommend fighting the Grey market in exports?"</em></p><p>I don&rsquo;t remember verbatim what I said for the next 5 minutes but it went something on the following lines:</p><p>&ldquo;In Hindu mythology, there is a mention of<strong>&nbsp;</strong>SAMUDRA MANTHAN (churning of the ocean). The legend goes that the great milky ocean had&nbsp;<em>Amrut</em>&nbsp;(Elixir of life)&nbsp;residing at the bottom. Gods couldn&rsquo;t churn the ocean alone, so they allied with demons on the premise of equally sharing the nectar of immortality. As the churning began, a lot of valuables, divine objects emerged out of the ocean and were duly shared. However, the churning also released&nbsp;Halahala&nbsp;(deadly poison). It&rsquo;s said the poison was so powerful that it could have laid to waste the entire creation. Lord Shiva saved the day by consuming the poison. Then emerged the elusive pot filled with the elixir. Gods managed to trick the demons to take the entire thing for themselves to become invincible and immortal.</p><p>So, why am I telling this story?</p><p><strong>The milky ocean is like global trade.</strong>&nbsp;When the churning happens, it throws up both&nbsp;<strong>opportunities (Elixir) &amp; challenges (Poison)&nbsp;</strong>for brand owners and traders alike. I&rsquo;m no one to suggest who is the god or demon in this story but the bottom line remains that there is plenty for everyone to share.</p><p>I do concede that there are innumerable instances of Indian products/brands ending up in regulated markets in contravention to local compliances. Stories of consignment rejections of Indian agri-products on foreign soil are aplenty. US FDA&rsquo;s Red list is peppered with Indian packaged food brands imported through the grey market. You talk to any leading distributor in the US, EU, or Australia and they shall have a juicy story of how they once had to &lsquo;dispose&rsquo; of some cargo sourced from an Indian merchant exporter due to regulatory reasons. No wonder, merchant exporters end up as villains in our story.</p><p>What many people don&rsquo;t realize is that merchant exporters also have a role to play in global trade. The marginal MSME manufacturers can&rsquo;t always go scouting overseas markets for their products. Most don&rsquo;t even know how to export, prepare documentation, hedge currency risks, and most importantly, provide customer service. For others, international markets are not even a priority. Objectively speaking, merchant exporters turn up as messiah for several such faceless manufacturers. Hard numbers also seem to vindicate them. Merchant exporters account for 35% of all Indian exports ~ that&rsquo;s $ 100 Billion/annum!!&nbsp;In South Korea and Japan, the breed of merchant exporters is a venerated lot - known to create new economic opportunities. Many markets (most notably, Australia) consider &lsquo;parallel imports&rsquo; as means to free trade &ndash; a fair chance to bring down prices for consumers. Section 122A of the Trade Mark Act of Australia even protects parallel importers against trademark owners!</p><p>While I don&rsquo;t condone unscrupulous acts committed by a few merchant exporters that sully the name of India in international markets, I&rsquo;m also not willing to paint the entire community with the same brush. Perspective is important. And we seem to be missing that in our conversation. If there&rsquo;s genuinely no difference in the product and no federal laws are flouted, tell me why should a consumer pay a higher price? Ask yourself - if you could easily purchase a can of PEPSI made in Thailand for ₹30 in your neighborhood store, would you pay ₹45 for the one made in India? I wouldn&rsquo;t.</p><p>Grey market, the world over, exists for only two reasons:</p><p><strong>1.&nbsp;Product has a strong demand outside the country of origin (<em><u>Amrut</u></em><u>&nbsp;&ndash; the Elixir</u>)</strong></p><p><strong>2.&nbsp;Significant price arbitrage exists between legit &amp; grey market goods (<em><u>Halahala</u></em><u>&nbsp;&ndash; the poison</u>) </strong>Allow me to explain the dynamics of this trade using the precedent of one Mr. Walter White of&nbsp;<em>Breaking Bad&nbsp;</em>fame. In Season 5 Episode 5 he says,&nbsp;<strong>I&rsquo;m neither in the meth business nor the money business. I&rsquo;m in the empire business.</strong>&nbsp;To me, that one statement is a chilling reminder of what brand owners should endeavor to achieve every time they step out in international markets. Grey market will always undercut on price. So, critically ask yourself two questions before you expand overseas: &nbsp;</p><p><strong>1.&nbsp;What&rsquo;s your endgame? (Topline / Bottomline / MS% / Acquisition / PR)</strong></p><p><strong>2.&nbsp;What is the differentiated proposition you can offer on a sustainable basis?</strong></p><p>Let&rsquo;s revisit my earlier PEPSI argument - I was not willing to shell out 50% premium but if Indian PEPSI could offer a better deal, say, fresher product / higher net weight / better shelf-life /omnipresence/ packaging in local language / new flavors or some targeted promotion, I&rsquo;ll happily pay ₹ 35. That&rsquo;s called charging a &ldquo;reasonable&rdquo; premium for the &ldquo;value&rdquo; on offer. A&nbsp;guy who walks into an Audi showroom never expects to pay a Toyota price. If you can offer a distinct proposition, you deserve a higher price. If not, you are better off following neo-classical economics.</p><p>A marketer&rsquo;s prime responsibility is to get the<strong>&nbsp;</strong>product, price, place and promotion&nbsp;matrix right from day 1. Poor&nbsp;Philip Kotler even popularized the term, 4Ps for our convenience! However, for some reason, the power of Pricing is lost on us when it comes to fighting the grey market. While we want to debate complex MARKETING solutions, we forget that striving to offer lower prices for better or the same product has always been one of mankind&rsquo;s perpetual endeavors. Every innovation creates temporary monopolies, allowing abnormal profits that would soon be eaten into by rivals or imitators and in our case, merchant exporters. These temporary monopolies are necessary incentives for firms to innovate. Mobile phone manufacturers try to assemble their phones in India so that they can save import duties and pass on the price benefit to customers. Players in commodity space try to export maximum loads before quota restrictions kick-in. FMCG companies are known to play the grammage game to ace competitive pricing when entering new markets. White goods makers offer extended warranties &amp; after-sales service to lower the cost of acquisition for their customers!</p><p>When Walter White sold his first batch, he wasn&rsquo;t exactly setting the price. That&rsquo;s what happens when you enter any new market these days. You follow the competition even if it means making less than ideal margins. Learn to walk before you start to run!</p><p>In Season 4 Episode 6, Walter White makes the most iconic statement of our times:&nbsp;I am not in danger. I am the danger. I&rsquo;m the one who knocks.&nbsp;The Brand owners should learn to &lsquo;knock<u>&rsquo;</u>. It&rsquo;s the grey market that should fear you and not the other way around. Walter White&rsquo;s USP was his signature blue-colored, 99.1% pure meth (PRODUCT)&nbsp;which made him indispensable to both trade and end-consumer. He displayed tactical &amp; strategic bent of mind to choose Tuco Salamanca and later Gustavo Fring as business partners to build a distribution network&nbsp;(PLACE)&nbsp;that stretched beyond New Mexico to cover much of Southwestern US and even overseas. He built a personal brand, &ldquo;Heisenberg&rdquo;&nbsp;(PROMOTION)&nbsp;and let people know who was pulling the strings for &ldquo;Blue Sky&rdquo; meth when he eliminates Gus Fring. In nutshell, he set up the market, circling back to his prophecy in Season 2 Episode 7 -&nbsp;Corner the market, then raise the Price.</p><p>If people can&rsquo;t buy your legit product, having a great brand is worse than useless. Grey market should &lsquo;never&rsquo; have distribution prowess at par with the brand owners. Think how can you beat them at their game by reinventing the RTM or by upselling? For well-distributed quality products, premium pricing always falls in place. Ask UBER, GOOGLE or TAOBAO. They will tell you that 'free' is indeed a business model.&nbsp;Although for a limited time only.&rdquo;</p>
KR Expert - Suyash Mehrotra

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