For many consumers who would never support illegal counterfeiting or unethical black markets, finding a great deal on a high-end perfume at their local Walmart or Target store is just an exciting score, without any ethical implications. But perfume and cologne producers emphasize that the grey markets that lead to the availability of luxury brands on discount store shelves require some ethical considerations.

Designer fragrance suppliers in the United States sell their brands, like Davidoff, Dolce & Gabbana, or Calvin Klein perfumes, directly to department stores and other high-end retailers. They do not sell to Walmart, CVS, or Target. However, in Europe and Asia, most suppliers sell their wares to distributors and wholesalers, which then supply retail networks, including small perfumeries that tend to be more popular in Europe.

When these distributors and wholesalers cannot move all of the product they receive from the perfume suppliers, they are lured by the promise of the profits they can earn by selling the fragrances to mass retailers in the United States. Thus the perfumes go from U.S. suppliers to international distributors, then back to U.S. mass merchandisers before reaching U.S. consumers. Still, the pricing system generally allows the prices for these products to remain lower than the prices charged by department stores and perfumeries for the luxury brands.

The practice is not illegal, but it does constitute a grey market—that is, a market that falls outside the intended supply chain established by the supplier. The retailers vigorously assert that they have done nothing wrong in procuring the products, and they enjoy the nice bump in sales they can earn from selling a bottle of Hugo Boss perfume for something like $30—less than it would cost at Bloomingdale’s, but a high ticket item for a discount retailer.

For the brands though, the grey market is far more threatening. In particular, when shoppers see a famous luxury brand for sale at Target or Walmart, they may start to perceive the brand as common or conventional, rather than high-end or premium. Such perceptions undercut the pricing structure that luxury brands work so hard to cultivate, in which their limited availability helps support their higher prices.

Accordingly, the brands and their owners increasingly are seeking to shrink or eliminate the grey markets for their products. For example, Procter & Gamble, which owns the rights to Hugo Boss, Gucci, and Dolce & Gabbana perfumes, has threatened to stop selling to distributors that turn around and provide the fragrances they receive to unauthorized retailers. Davidoff perfumes even sued CVS to stop it from selling grey market versions of its Cool Water perfumes in tampered packaging.

 

Discussion Questions:

1. How do luxury perfumes end up in stores like Walmart and Target?
2. Are the premium perfume brands found at Walmart and Target representative of counterfeit, gray market, or black market goods? Justify your answer.
3. Who benefits from this stocking situation? Who loses? Consider the manufacturers, wholesaler/distributors, retailers, and consumers.

Source: Serena Ng, The Wall Street Journal, September 26, 2015