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Parallel Trading – While the grey market helps to maintain pricing transparency, it also provides retailers with a big stick to beat their suppliers, says Andrew Catchpole

Mention parallel trading in drinks business circles and the responses tend to range from a gloomy shake of the head to a discrete couple of taps on the nose. All this cloak and dagger reaction is doubly odd considering that parallel trading between parties in different European Union member states is fully legal and something in which the majority of sizeable UK retailers do occasionally engage. Codified by Brussels, it essentially acts as a catalyst for free and level trade, allowing markets to be undercut where significant disparities in prices exist. Why, then, does the practice still elicit images of Del Boy-types plying cargos of cheap booze bought down dodgy continental backstreets and packed into less-than reputable vans?

In part, it’s the reticence of many drinks retailers to admit to the practice. Customers may want cheap Champagne, but they don’t necessarily want to know that their local Drinks ‘r’ Us bought it on the cheap from a warehouse in Romania. And then there is the delicate matter of upsetting the regular agent, producer or other established supplier. Add into this equation the network of largely anonymous middlemen who track surplus stock around Europe (and beyond) and regularly phone in offers to selected buyers at the multiples and this reticence makes more sense. It’s no wonder parallel trading is often referred to as the “grey market”. This is wheeling and dealing that would certainly strike a chord with Only Fools and Horses’ cockney trader Derek Trotter.

A couple of senior buyers, who asked not to be named, passed on contact details of companies that facilitate parallel trade deals. Responses varied in tone, but all added up to “We are not prepared to discuss our business”. Several other companies, including leading importers and prominent retailers such as Moët Hennessy and Oddbins, also declined to comment, not wanting to “contravene the confidentiality of our trading terms”, as one spokeswoman put it. Despite – or perhaps because of – this caution, the issues surrounding parallel trading still raise heated debate in the drinks trade.

Faced with an increasingly fluid market, the producers, and their designated suppliers, have serious reservations. The argument is that once a consignment of wine exits from the “regular” chain of distribution – from producer via agent and distributor to consumer – then there is a lack of control over quality assurance, while local marketing and promotional incentives are undermined and careful pricing strategies upset. Moreover, there is less quality control or comeback for the consumer.

Fair trade?
The retailers respond with a powerful argument that parallel trading is precisely about encouraging fair trade, transparency and level pricing in the market. As is so often the case, both sides contain elements of truth. But contrary to popular belief, parallel trading is not always predicated on price alone, which further muddies the waters.

“We use the possibility of parallel trading more as a threat than a regular way of buying,” reveals Justin Apthorpe, managing director of Majestic Wine Warehouses. “The big problem is finding anything in enough quantity, but if we do see something cheaper on the Continent we can use the threat of parallel trading to beat down the prices of our suppliers.”

Dee Blackstock, central buyer for wines at Waitrose, echoes this position. “If prices are too high without promotional support we will look to buy on the grey market, especially with a category like Champagne,” she says. “I generally prefer to deal with the UK shipper but if our allocation is too small, a shipment delayed, or all of a popular wine allocated to another retailer then I will buy on the grey market because our first priority is not to disappoint our customers.”

Both Apthorpe and Blackstock can cite examples where parallel trading has helped them force the hands of UK agents – and the producers they represent – resulting in a future allocation of a given Champagne or wine. Of course, even with the largest of brands, there is still only a finite volume for the global markets. Blackstock, however, reasons that evidence of parallel trading in the UK proves that allocations can need adjusting.

“A producer understandably wants [his brand] to be seen in certain markets and a broad presence across Europe may look good to the board,” Blackstock reasons. “But if that wine is then making its way back into the UK – sometimes at a higher price – then you have to ask questions about the initial distribution.”

Predictably, few producers or their designated agents see eye-to-eye with these arguments. Andrew Hawes, director of sales at UK agent Mentzendorff, importer of Bollinger Champagne, accepts that parallel trading is “part and parcel” of being in the EU. Like many involved in the UK trade, though, he believes the practice is ultimately harmful for both the brand and the consumer.

“For us a lot of this trade tends to be of Christmas stock sold in the final quarter on promotion, which then reappears and is sold on later in the New Year,” says Hawes, who goes on to confirm, “It is exacerbated by price, but admittedly also the difficulty of getting allocations right.”

Hawes argues, though, that while goods on the grey market may undercut the price of the official channel of import and distribution, there are benefits in sticking to this set-up. “Through support in the market, long-term pricing strategies and a guarantee of goods reaching the customer in pristine condition, the agent adds value that is not purely predicated on price.”

Indeed, grey market goods can end up costing more, thus potentially damaging the reputation of the producer and its product in the eyes of the consumer. The benchmark New Zealand wines of Cloudy Bay are a case in point. Tony Jordan at Domaine Chandon, the arm of the Moët Hennessy group that owns and operates Cloudy Bay, is clear on the point.

“When a brand is very strong and in somewhat limited supply – like Cloudy Bay – it is possible for restaurants and merchants to buy in and then sell the wine at a price higher than regular mark-ups,” says Jordan. He cites countries in Asia, the Caribbean and “occasionally the UK” as being the major grey market players for Cloudy Bay.

“We are not happy with this because the consumers think the winery is always pushing prices higher, when, in fact, it is individual outlets doing their own thing and we have limited means to discourage them,” stresses Jordan.

Both Jordan and Hawes agree that uniformity of pricing across different markets and careful control of allocation are the best way to keep parallel trading to a minimum. Indeed, this has been the trend with many brand owners working towards a levelling of prices – at least in Europe. The consensus is that relative price parity does reduce parallel trading, though it doesn’t stop it altogether, due to the powerful multiples’ occasional (mis)-use of the grey market for allocation-related leverage.

Quality out of control
Hawes’ point about potential lack of quality control for grey market goods also resonates with another Champagne supplier to the UK, namely Billecart-Salmon. This smaller but highly sought-after Champagne house runs a UK office headed up by Colin Palmer. “One of the important points to consider is that Champagnes and wines can have different packaging and even different blends for different markets,” stresses Palmer. “In the case of Billecart-Salmon, the Champagnes (including the non-vintage) are aged for an extra year before release onto the UK market, without a huge difference in price, and this is tailored to market expectation.”

Palmer raises a good point. Fairly recently a case of parallel trading in Billecart-Salmon Champagne led to consumer and wine-writer complaints that some of the wines were unusually green, or young – not a problem if that is the preferred style in the intended market, but potentially damaging to the reputation of the producer in its number-one
foreign market.

While uniformity of pricing, labelling and blend can reduce the impetus to parallel trading, so too can the obstacles of differing blends, labels, packaging and discount or pricing packages aimed at a specific market. Cloudy Bay, Billecart-Salmon and Bollinger, as with most wines destined for the UK, are sold into an extremely price-sensitive and competitive market.

It’s a point Paul Bastard, group buyer at the Co-op, picks up on. “Quite often though, for the bigger players, the smaller quantities on offer, even if at a good price, are not always worthwhile because it takes a lot of work to set up systems and codes for the warehouses and stores to cope with the goods,” he says. By coincidence, he had just been offered quantities of Moët Champagne, Piat d’Or and a lesser-known Australian brand before speaking for this article. “The price was good, but the quantities did not justify buying,” says Bastard.

There is no doubt that wine buyers in the UK market have serious clout. Giants like Tesco, or the low price-pledged, Walmart-owned Asda, have enough market share to enable them to beat down prices through discounts tied into volume sales. Majestic and Waitrose, though smaller multiple retailers, often exercise similar clout with wines that fit the higher aspirational profile of their customers. Ignore the high tax and duty elements – the UK buys wine at some of the cheapest prices in the world.

Bargaining chips
This fact would seem to confirm that, for the large retailers at least, parallel trading is more a means of ensuring that customer demand is satisfied and a potential bargaining chip when dealing with suppliers than purely a pricing issue. This leaves smaller retailers as the most likely beneficiaries of parallel trading – often companies which cannot compete as keenly with the purchasing power of the large multiples in the first place and ones better placed to work with smaller consignments of goods.

One important point to recognise is that parallel trading is usually a last resort and, as such, does not constitute a major upset to the traditional chains of supply and distribution. Reliable figures are, for obvious reasons of commercial secrecy, all-but-impossible to obtain, but volumes are certainly low when compared with the overall market. However, like a marginal party in a hung parliament, the effect of parallel trading can be out of all proportion to the scale of activity. And, while its stated function as a mechanism to bring about price levelling appears to be working, this practice is unlikely to die out while the vagaries of the free market ensure inevitably uneven supply and distribution.  db January 2006

What is Parallel Trading?

Within the European Union (and the broader EEA, including countries such as Norway and Iceland), competition laws designed to underpin free and fair trade have enshrined the rights of EU-based retailers to buy goods from any source within the EU. And, despite various non-EU countries’ restrictions – relating to supplier contracts, importation and trademark of goods – parallel trade is, more often than not, also a legal option between parties operating in EU member states and those in countries outside. Most UK-based buyers have regular contact with middlemen that watch prices and stocks in other markets and who offer deals on goods where surpluses exist.

The ins and outs of Parallel Trading

A producer can include a clause in its contract with an importer stating that goods supplied may be sold only in a designated or agreed market. However, within the EU and UK, competition laws outlaw anti-competitive agreements and abuse of dominant market position, so such restrictions can be difficult to apply.

A trademark registered in the EEA cannot be used by the producer to prevent onward sale in the EEA. However, an EEA-registered trademark may be used to prevent importation of these goods by a third party outside the EEA if the laws of this third party’s country require consent from the producer for its goods to be sold into that market.

If the producer first sells his goods to a party outside of the EEA, then a trademark registered in an EEA country can be used to prevent those goods being sold on into the EEA country. If the potential buyer of these goods is also outside of the EEA, then the legality of the sale will be governed by whether the producer has registered trademarks in the third party buyer’s country and whether that country’s law prevents importation without the producer’s consent.

Other considerations for those involved in parallel trade include ensuring that packaging and labelling meet the legal requirements of the purchasing country and that export and import licensing and customs requirements are met in both countries of export and import.

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