A supplemental distribution channel?: The case of U.S. parallel export channels
Michael, James
Much has been written on gray marketing or parallel marketing channels in the U.S. but little has been done on parallel channels of U.S. exports. An exploratory survey was done of international marketing executives to learn of their experiences with the formation of parallel channels of their products. This study identified how parallel traders sourced their products and what factors led to the formation of parallel channels. Comparisons were made between U.S. parallel export channels from U.S. parallel import channels. While grave problems occur with parallel channels, evidence was presented that suggested that parallel channels can provide export marketers with benefits not found in authorized channels. In this respect, parallel channels can be viewed as a supplemental distribution channel. Policy considerations for U.S. exporters were provided as well as areas for future research.
Since the mid-1980s there has been a growing interest in the international business literature in so-called “gray markets” or what is referred to by some as parallel markets. Gray market goods are products that enter a market in ways not intended by the original manufacturer (Czinkota, Rivoli, and Ronkainen, 1992). Gray market goods are differentiated from black market products because the former often enter the market legally but outside the control of the regular, authorized distribution channels (Czinkota et al., 1992). In effect, a second, or parallel distribution channel, is formed that exists alongside the authorized one set up by the manufacturer, resulting in intra-brand competition. The bulk of attention to gray marketing has been directed at the U.S. market, where gray market sales have been estimated as high as $10 billion annually (A red-letter date, 1988). There is a growing literature on parallel import activities in the American market (see Weigand,1991; Cavusgil and Sikora, 1988), but virtually nothing from the perspective of American exporters who find their goods being exported through unauthorized channels (notable exceptions are Weigand, 1989 and Kalfayan, 1978). This is an unfortunate gap in the literature because U.S. exporters face various foreign legal systems and environments that impact their distribution policies in ways not found in the parallel trade in the U.S. By focusing mostly on the U.S. market, unique problems, opportunities, and distribution policy concerns of the U.S. exporter related to parallel channels have been ignored.
RESEARCH METHOD
A convenience sample was drawn consisting of executives who had participated in an executive development seminar on international marketing. Interviews of 27 middle- and seniorlevel executives were conducted from consumer nondurable ( 14 firms), consumer-durable (6 firms), and industrial-goods companies (7 firms). Industries included: tobacco, pharmaceuticals, food, garment, household appliances such washing machines and refrigerators, medical supplies, hand tools, electrical, publishing, and liquor. Nearly 50 percent of the executives interviewed were from divisions of Fortune-SOO organizations, and every company had export sales of at least one million dollars. Export sales as a percentage of total sales averaged over ten percent. In most cases, the interviews were conducted by telephone, while a few were done face-to-face. Mostly open-ended questions were used to facilitate data collection for this exploratory study. No interview was terminated prematurely and the average length was nearly 45 minutes. Respondents found the subject quite interesting and often provided elaborate answers to the questions. Questions focused around five general areas:
1 ) Executive attitudes toward parallel exports of their products.
2) How their products were sourced for
parallel export channel.
3) Factors causing parallel export channels to form.
4) Problems and opportunities created by parallel export channels.
5) Commonly used strategies to reduce the occurrence of parallel exports.
LEGAL IMPLICATIONS
Major case law dealing with parallel export channels from the United States was the Todhunter-Mitchell & Co., Ltd v. AnheuserBusch Inc. (1974). The Anheuser-Busch Company, the well-known brewer, appointed Bahama Blenders, Ltd. as its exclusive distributor in the Bahamas. Todhunter-Mitchell, a competitor of Bahama Blenders, and based in the Bahamas, purchased supplies of Budweiser beer from Busch’s distributors in New Orleans and Miami. A parallel export channel was formed along side the one set up by Busch. Bahama Blenders complained to Busch that beer was entering the market from an unauthorized or parallel distribution channel established by domestic beer distributors in New Orleans and Miami. Busch exerted pressure on these U.S. distributors to cease shipments to TodhunterMitchell. Todhunter-Mitchell then sued Busch in the United States under the Sherman Act for lost profits. Busch argued unsuccessfully that its action against the plaintiff was “motivated by legitimate marketing considerations relating to quality control and potential oversupply of the product and not for any anti-competitive motive…” (Todhunter-Mitchell v. AnheuserBusch, 1974). The court ruled in favor of the plaintiff because the territorial restrictions imposed by Busch upon the Miami and New Orleans distributors directly affected the flow of commerce out of the United States. The court made it clear that U.S. imports and exports were subject to the provisions of the Sherman Act.
The Anheuser-Busch ruling could have a chilling effect on export distribution policies of major U.S. manufacturers. While manufacturers can appoint exclusive foreign distributors, larger firms may have no legal recourse to protect their agreements against parallel exporters. Some experts maintain, however, that a manufacturer can safely cut off a domestic intermediary whose foreign sales violate the manufacturer’s exclusive foreign agreement. A manufacturer can unilaterally refuse to deal with any buyer, since a refusal is not in restraint of trade (Townsend, 1980). Such action, however, would not have been much help to AnheuserBusch since the domestic intermediaries who were exporting were also major domestic distributors. If the U.S. intermediaries were strictly export trading companies, with no domestic trade on behalf of the manufacturer, then Anheuser-Busch and other large concerns can refuse to deal with them. Smaller manufacturers have greater flexibility enforcing their exclusive foreign distributorship agreements since their effects on domestic commerce is minimal.
By way of contrast, manufacturers in the United States have more legal means to combat parallel imports of their products into the United States than they do with parallel exports. The 1988 U.S. Supreme Court ruling does block the entry of some parallel imports into the United States. Parallel imports “from foreign producers, who are licensed by, but unrelated to the U.S. company could be blocked” (Gray marketing war, 1988). However, only about 5-10 percent of parallel imports are moved into the United States by this channel, and so the overall parallel trade business will not be gravely affected (Marketing News, 1988). Also, cases where an American company registers the foreigner’s mark and acts as an authorized licensee, and in effect becomes the legal trademark owner in the United States, and pays royalties to the owner, can block parallel imports (Weigand, 1991). In all other cases, control of trademarks by their owners are exhausted once ownership of trademark goods change hands (Weigand, 1991; Duhan & Sheffet, 1988).
If the parallel exporter was a U.S.-based export management company (EMC), then it could easily secure products from U.S. domestic distributors (see Pattern 1). One EMC proudly announced in a trade journal its ability to buy whatever products foreign customers requested (Ferrara, 1985). Domestic distributors freely sell to EMCs as they would to any other wholesalers or retailers. This method for sourcing products
PATTERNS OF PARALLEL EXPORTS
Results from the study indicated that parallel traders have a variety of ways to source products, thereby making it difficult for export manufacturers to exercise control over the resale of their products in the international markets. for parallel export channels was mentioned by 67 percent of the firms sampled.
As we saw in the Todhunter-Mitchell & Co. (1974) case, U.S. distributors are capable of selling to foreign markets. The larger domestic distributors frequently employ an export manager who may sell directly to foreign markets (see Pattern 2). Forty-eight (48) percent of the firms surveyed identified their own authorized domestic distributors selling directly to unauthorized distributors in overseas markets. The diverse product assortments carried by distributors offer convenience and value to foreign importers, who wish either to take advantage of one-stop shopping and economies of scale in transportation or else secure a product that they cannot get directly from the manufacturer. Manufacturers were in no position to determine which of their products sold to a domestic distributor may end up in a foreign market or remain in the United States. Given their wide product assortment and their ability to buy direct from manufacturers, large U.S. retail chains also engaged in parallel exporting, having been mentioned by 22 percent of the firms surveyed.
Another common pattern of parallel exports was one where an authorized distributor in a foreign market reexported to a market already covered by the manufacturer (see Pattern 3). For example, an authorized distributor in Dubai may reexport products to neighboring Saudi Arabia, which was already covered by another authorized distributor appointed by the manufacturer. Twenty-two (22) percent of the firms surveyed mentioned this as a source used by parallel traders. A similar situation was one where a foreign licensee, who was under contract to manufacture and market in one given country, exported to markets not specified in the licensing contract, but which were already covered by the licensor. However, only one firm in the survey mentioned this as a source of parallel exports. It is reasonable to assume that foreign licensees would not act any differently from foreign or domestic distributors and, if parallel export opportunities arose, they too would take advantage of it. The low reporting of foreign licensees as a source of parallel exporting may be an artifact of the sample, because not all the manufacturers in the sample had the capability of using licensing as an entry mode. But this low incidence is consistent with reports that show that only 5-10 percent of U.S. parallel imports use this channel (Gray marketing war, 1988).
Only one respondent out of the 27 reported that its foreign-owned subsidiary exported to foreign markets officially covered by a sister company. This behavior was not surprising since corporate headquarters regulate the territorial coverage of its foreign divisions.
Finally, no one mentioned the use of mail order channels as an unauthorized channel, which Weigand (1989) identified as an important source of parallel exports to Japan. Retail consumers can purchase products either by going through catalogs of large, local retailers or going directly to mail order houses in the United States (Weigand, 1989). Mail order channels are probably more appropriate in developed economies than in developing ones, and are more fitting in moving nondurable and durable consumer products than industrial products.
The patterns identified in this study were similar to the ones identified in Weigand’s (1991) study of parallel imports activities in the United States. In both studies, the most common pattern was one where an authorized middleman sold to an unauthorized middleman, who in turn exported to another unauthorized middleman located in a foreign market. There were two important differences. First, in Weigand’s study (1991), the authorized foreign distributor played a critical role in moving goods through parallel channels into the United States. In this study the authorized foreign distributor played a minor role in forming parallel channels. The other difference between the two studies concerned the use of a foreign licensee. A foreign licensee, who has permission to use an American trademark in its country, is no longer permitted to engage in parallel import activities in the United States. Unless there is similar legislation in other export markets, nothing prevents that licensee from exporting to other foreign markets.
FACTORS CONTRIBUTING TO THE RISE OF PARALLEL EXPORTS
It is commonly accepted that price differences between markets cause parallel channels to form. Czinkota et al. (1992) have stressed that currency exchange rate discrepancy is a major cause for gray markets to appear in the United States. Onkvisit and Shaw (1989) stated that “price differential is the only true reason for the gray market to exist” (pg. 205). Cavusgil and Sikora (1988) stress that parallel markets “develop when there are substantial differences in the prevailing prices of the same product between two national markets” (pg. 76). Except for exchange rate differentials, none of these observers have identified other forms of price discrepancies that exist nor have they identified non-price factors that cause parallel channels of U.S. exports to emerge.
Only 22 percent of the respondents in this study noted that changes in exchange rates was a major factor for the appearance of parallel export markets. This is not surprising in light of the fact that many countries now have exchange rates that fluctuate in a narrow band (Eiteman, Stonehill, and Moffett, 1992). According to this study, price discrepancies were more likely to occur within a market because of differences in marketing and administrative expenses between the authorized distributor and the parallel distributor. Seventy (70) percent of the respondents complained of high marketing and administrative expenses of the authorized overseas distributor compared to those of parallel traders. The parallel trader or unauthorized distributor was usually smaller in size, had lower overhead expenses and provided a minimum of marketing functions compared to the authorized distributor. The authorized distributor was frequently involved in extensive promotional and advertising campaigns designed to stimulate sales, and these costs were factored into the authorized distributor’s selling price. The parallel trader, in effect, gets a “freeride” by selling product that was promoted by the authorized distributor. Even though the distribution channel for the parallel trader was usually longer than the authorized channel’s, the additional distribution costs were offset by lower overhead and promotional expenses.
Eleven (11) percent of the respondents mentioned that management policy and standard operating procedures of the domestic division were causes of parallel exports. Policies in the American market can cause price discrepancies to appear between markets. Distressed merchandise that was originally sold in the United States can appear in foreign markets where authorized distributors exist. The domestic division may sell sub-par quality products at deep discounts to U.S. wholesalers, who were able to resale them in outlets that did not interfere with the established distribution network in the United States. In their quest to sell distressed merchandise, these wholesalers may unload products in foreign markets where the manufacturer’s international division had set up distribution. Consequently, second-quality merchandise was sold alongside first quality, much to the detriment of both the authorized foreign distributor and the international division.
An interesting sidenote shows how domestic practices can often backfire on the domestic division. Distressed merchandise sold at a deep discount to overseas markets can easily reappear in the United States through the so-called “UBoat Effect.” The “U-Boat Effect,” sometimes referred to as re-imports, are branded products that are re-exported but are returned to the home market. For example, Merck & Company agreed to sell hypertension drugs at a deep discount because they were destined to Zaire. The drugs never reached its ultimate destination, instead they were diverted back to the U.S. and sold to major drugstores (Bogdanich and Gilman, 1985). Practitioners have distinguished between large and small “U-Boat Effects”. The large “U” refers to a situation where goods are placed on a vessel in a U.S. port and shipped overseas only to stay on board and eventually sent back to the United States. The small “U” covers a situation where goods are delivered to a U.S. pier but never officially leave the United States. On-board bills of lading may even be produced by the steamship company, which the parallel trader can furnish to the manufacturer as proof of export. This diversion of goods is a particular problem for the pharmaceutical industry and is one of the many sources of gray marketing activities in the United States (Bogdanich and Gilman, 1985; Weigand, 1991).
Another policy of the domestic division that often led to parallel exports was the common practice of providing promotional price discounts to distributors in the U.S. market but not to nearby foreign markets. Parallel traders, especially those who service the Caribbean markets, monitor price deals and are quick to take advantage of them when they are not simultaneously offered by the international division. A price discrepancy develops between the U.S. market and the Caribbean markets if the authorized Caribbean distributor was not offered the same promotion by the international division as was given to the U.S. distributor.
Trade restrictions in foreign markets can cause price discrepancies to appear and eventually lead to parallel export channels. The parallel exporter in the United States often provides services that a publicly-owned manufacturer is unable to offer the foreign importer. Price discrepancies may appear when the parallel exporter illegally underinvoiced or misdeclared goods in order to get a lower import duty assessed. The publicly-owned manufacturer is likely to avoid such practices, resulting in a higher duty being assessed on those goods that go through the authorized distribution channel. It was found that in markets where trade restrictions existed, it was not uncommon to find the manufacturer seeking out parallel exporters to perform these very practices as a means to circumvent trade restrictions and increase sales. Another illegal activity related to parallel exports was the case where the parallel channel was smuggling goods into a foreign market. Products that were subject to relatively high import duties or local taxes, which was often the case with tobacco products, were brought into the market via the parallel channel without customs supervision. As a result, large price discrepancies occur between the legally imported goods that were taxed and the smuggled goods that were not.
There is a tendency to think that parallel exports are caused solely by price discrepancies (Onkvisit and Shaw, 1989). This is not always true. In some cases the parallel channel provides economic and marketing benefits that the authorized channel cannot. Surprisingly, 26 percent of the respondents explained that the parallel channel may be more efficient than the authorized one. The parallel channel may offer better credit terms or faster delivery of merchandise than the authorized channel. The authorized foreign distributor may have restrictive credit terms or be unwilling to carry a certain level of inventory to service market needs properly.
PROBLEMS CREATED BY PARALLEL EXPORT CHANNELS
A reduction in sales and profits for the authorized distributor, disruption in manufacturer-distributor relations, and difficulties in maintaining a consistent image, quality, and reputation of a product were common problems associated with parallel channels of U.S. exports. These were similar problems identified by Cavusgil and Sikora (1988) in their study of gray market imports in the United States.
Seventy-eight (78) percent of the respondents mentioned that parallel exports resulted in loss sales to their authorized distributors and 41 percent complained of difficulties in maintaining a proper image and quality of the product. Authorized distributors see their sales and profits reduced by parallel exports since they are not receiving the full benefit of their marketing investment. They make long-term investments in a product by advertising only to see parallel traders come along and benefit too. Parallel traders make no investment at all in promoting and marketing the product; instead they rely strictly on the authorized distributors` efforts.
Manufacturer-distributor relations were often strained by parallel exports. Distributors were frustrated by the appearance of parallel exports in their markets and looked to the manufacturers to reduce or eliminate its occurrence. Yet, there was no reported incident where a distributor terminated a relationship with a manufacturer because of parallel exports. Respondents reported that their distributors usually understood the difficulties in preventing parallel exports, and as long as the manufacturer took action to ameliorate the situation, the relationship between the two remained manageable. A critical issue not addressed in the study was whether the continued appearance of parallel exports results in less marketing efforts on the part of the authorized distributor.
The manufacturer was also subject to lost profits because of parallel exports. Tobacco and food company executives reported that they were forced to buy back old stock from their authorized distributor because parallel exports created an over-stock situation in the market. The most damaging problem reported was the inconsistent quality standards that appeared when product was moved through a parallel channel. The manufacturer often adapts products to foreign market conditions by changing the ingredients or packaging, only to find the parallel channel selling products made to U.S. specifications. In effect, two different products under the same trademark were sold side-by-side in foreign markets. The foreign consumer becomes confused by the different packaging or taste of the parallel product. One dessert manufacturer reported an incident where his product’s consistency was thickened to suit Japanese taste only to find the U.S.-lighter consistency product coming into the market from a parallel channel.
A major jeans manufacturer complained of a situation where intra-brand competition occurred in Japan between its Asian division and U.S.A. division. The authorized channel called for jeans to be made in the Philippines and exported to Japan. The parallel channel originated from large U.S. distributors and retailers who purchased their jeans direct from U.S. factories. While the U.S.A.-made jeans were priced significantly higher than the Filipino-made jeans, the status-conscious Japanese consumer searched for the made-in-the U.S.A. sticker at the retail level. A significant decline in exports from the Philippines occurred, causing a considerable amount of friction between the Asian and U.S. division.
OPPORTUNITIES CREATED BY PARALLEL CHANNELS
There is some evidence to indicate that parallel export channels from the United States can be used to penetrate foreign markets. Weigand (1989) has noted that parallel channels may provide the greatest single opportunity for American consumer goods finding their way into the Japanese market. Consistent with this view, only 18 percent of the respondents said that they would not permit parallel exports of their products under any circumstance; the rest offered various reasons why they would permit and possibly even encourage it! U.S. export manufacturers recognized that parallel channels can be used to increase overall foreign sales and market share. When a final decision on an exclusive distributorship was pending, parallel channels gave the manufacturer an opportunity to evaluate one distributor against another. Parallel channels may also help overcome a weak distributor’s performance at no additional cost to the manufacturer. Sales that go through the parallel channel may expand the manufacturer’s market coverage if the authorized distributor lacks the capability of covering the whole market. This situation maybe more common in developing markets where distributors often lacked the financial and marketing capabilities to effectively push and pull products through the distribution chain. The parallel channel may also identify customers in the foreign market of whom the manufacturer may not be aware.
By far the most interesting opportunity created by parallel channels was when it was used by manufacturers to circumvent trade restrictions. When nontariff barriers exist in the form of quotas or import licenses, the authorized importer had limited sales opportunities. The parallel exporter, who sold to a different importer under a separate quota or license, provided the manufacturer with additional sales outlets. Another situation was reported by a tobacco executive who was instrumental in arranging a parallel channel in a third market to service a country governed by a tobacco monopoly. The tobacco monopoly deliberately limited the volume of tobacco imports going into the market from legitimate foreign sources. The parallel channel that was established smuggled goods into the tobacco monopoly-run market, alongside the authorized channel set up by the tobacco manufacturer. A cigarette executive also explained how his company assigned a sales representative to a Latin American country to overview smuggling activities in order to compensate for the highlyregulated legitimate channel.
STRATEGIES TO COMBAT PARALLEL CHANNELS
Despite these opportunities, manufacturers preferred to curtail parallel exports as a way to gain more control over the marketing of their products. Manufacturers, however, rarely take proactive measures to prevent the emergence of parallel export channels. Nearly every respondent said that they relied on the authorized foreign distributor to detect parallel exports. Few have installed tracking systems specifically designed to monitor parallel exports. Those that have a coding system, for example, to trace product back to the parallel exporter did so for reasons unrelated to the detection of parallel exports. Tracking systems, if they did exist, was originally designed for domestic marketing purposes. The volume of export sales usually did not warrant a separate tracking system.
The review of case law related to parallel exports indicated that large manufacturers have limited means of curtailing parallel exports originating in the United States. Issuing warnings to the domestic distributor engaged in parallel exporting or adjusting export prices could be interpreted as a restraint of trade. Some of the respondents from the Fortune-500 firms made it clear that they avoided such measures for that reason. Nevertheless, the majority of respondents preferred to exert some form of pressure on the parallel exporter or take steps designed to reduce parallel exports. A variety of strategic measures were identified that have proven successful in specific situations to combat parallel exports.
1) Some firms reduced their export price to the authorized foreign distributor as the need arose. When a market was flooded with products from parallel channels, manufacturers had to provide temporary price discounts to the authorized distributors. The problem with this strategy is that what was intended as a stopgap measure becomes a permanent one. Once a discount is provided, taking it away is difficult. Foreign distributors can always find good reasons for maintaining it.
2) One major garment manufacturer faced with parallel exports of its products to a South American country, informed foreign customs officials that goods entering the market from a parallel channel were counterfeit. In fact, these were legitimate goods distributed through parallel channels. The parallel trader refrained from any further parallel exports in order to avoid any complications with customs officials. This strategy may be of little value to other manufacturers because the parallel trader, in this case, was not violating any law. What it does suggest is that parallel traders may prefer to keep a low profile and not draw too much attention to their activities. Whether this strategy could be of help in other instances is an open question.
3) A simple but ingenious strategy was to create a slight packaging change on the authorized exports. To curtail the smuggling of goods from entering the United Kingdom, a tobacco manufacturer initiated a subtle packaging change that differentiated parallel-smuggled merchandise from legitimately-imported merchandise. By changing the color of the bull’s-eye on the label, customs officials were able to identify smuggled goods at the retail level from legitimate-imported goods, and. eventually trace goods back to the parallel source. The change was subtle enough so that consumers did not notice the packaging difference. For manufacturers who find their goods smuggled into a market where it has legitimate exports, this strategy can prove effective as long as they receive the cooperation of foreign customs officials in the tracking of products.
4) Companies recognizing the problems of parallel channels have developed corporate policies that call for the utmost cooperation between the domestic and international divisions. A phone call placed by a senior domestic vice- president to a known domestic distributor engaged in parallel exports can be quite effective. The domestic officer would request that the distributor curb its parallel trading in a market where it was upsetting the manufacturer’s own distribution. This approach may raise antitrust concerns unless diplomatically performed by the large manufacturer.
5) Some manufacturers take drastic action by threatening to cut off supplies to the parallel exporter. This strategy is only effective if the parallel exporter is based overseas, is receiving products from the manufacturer, and is reexporting to a third market. There are no U.S. antitrust concerns raised by this strategy since the action has no impact on U.S. commerce.
6) By far the most effective strategy for curtailing parallel exports is to create some form of product differentiation of the exported product from the domestic-marketed product. Companies inadvertently reduced parallel exports of their products by satisfying foreign market requirements calling for special ingredients and labelling. In the tobacco and food industries, many countries have laws pertaining to reformulation of product and the use of local language on the label. Through the enforcement of these laws, products that go through parallel channels without the necessary adaptations are not permitted entry into the market. Saudi Arabia, for example, has stringent requirements on the nicotine content of cigarettes and health-warning statements on packages. Stringent laws have also been passed pertaining to food. Food and tobacco companies, if they wish to remain in the market, must manufacture specially-formulated products. These specially produced goods will only be shipped directly to the intended market through authorized distribution channels. As long as Saudi custom officials perform sampling checks on each consignment entering the market, parallel exports will be greatly minimized. There are now many other countries that have special requirements on nondurable consumer products.
Whether product differentiation is an effective strategy to reduce the development of parallel channels for consumer durables and industrial goods is somewhat unclear. Some empirical evidence indicates that industrial products lend themselves more to standardized, global strategies than nondurables (Jain, 1989). Samiee and Roth (1992), however, found no empirical evidence to support the claim that industrial products are more likely to be standardized than consumer products. Unfortunately, Samiee and Roth did not separate out the effects of nondurable products from durables, but instead lumped the two together. It is logical to argue that product differentiation is less likely to occur with consumer durables and industrial goods in foreign markets compared with nondurables (Punnett and Ricks, 1992). Jain ( 1989) contends that consumer durables offer greater opportunities for standardization because they don’t appeal to tastes, habits, and culture as much as nondurables do. Preliminary investigation from this study suggests that durables and industrial products were more affected by parallel exports than consumer nondurables. Respondents from the industrial goods sector were resigned to the existence of parallel exports of the products. They felt that there was little they could do to prevent its occurrence. It is common, for example, to find a contractor in the Middle East putting together a project and buying a bundle of products from one U.S. source, rather than buying from the various local authorized distributors. Firms manufacturing consumer durables were also vulnerable to parallel exports. Respondents from the household appliance industry (e.g., washing machines) complained bitterly about parallel exports.
7) Finally, the most effective measure to reduce parallel exports was the passing of foreign laws protecting authorized distributors. Bahrain is one such country where customs officials monitor each consignment to see if the consignee is the authorized distributor. Goods being imported by an unauthorized distributor require the release from the authorized agent. This procedure might work well in small markets but it is out of the question in markets such as the European Community where free trade between members is mandated.
The strategies identified in this study to reduce the adverse effects of parallel exports were similar to, though not as comprehensive as those identified by Cavusgil and Sikora (1988) and Weigand (1991) in their studies of gray market imports into the United States. Our sample of firms did not employ such strategies as dealer development, marketing information systems, lobbying, promotion of authorized dealer, advertising against parallel trade, or dealer termination. Any one export market was not large enough in comparison to the U.S. market to support these strategies. The biggest difference, however, was in the purpose behind product differentiation. American export manufacturers often used differentiation in a reactive way, while manufacturers and dealers in the United States used differentiation in a proactive way. American export manufacturers differentiated their products in response to legal requirements. Parallel channels were then unable to source products with the necessary ingredients or labelling, and in effect were forced out of the market. In the American market, manufacturers and dealers often use differentiation, such as safety, luxury, and functional features, specifically to combat parallel imports (Cavusgil and Sikora, 1988).
CONCLUSION
Marketing success is what initially breeds parallel exports. Export marketers should assess the possibilities of parallel channels being formed for their products and the potential impact they may have on their business in any given market. It has been suggested that products that are exported with U.S. specifications are most vulnerable to parallel exports. This study identified specific forms of price discrepancies that cause parallel exports to occur and recognized some benefits that could accrue to export manufacturers from parallel channels. Recommendations have been made to counter the adverse effects of parallel channels. Cooperation between the domestic and international arms of a company is critical in preventing the emergence of parallel channels. Senior-level executives who have a corporate perspective on their businesses should establish clear policy statements on territorial responsibilities. As we have seen, a lack of cooperation between the domestic and international divisions can just as easily disrupt the former as it does the latter. Export marketers should also be sensitive to some of the opportunities that parallel channels offer them.
The study of U.S. parallel export channels is a new area of inquiry. We have differentiated it from the study of gray marketing activities in the United States. One noted difference is that parallel channels of U.S. exports can supplement the marketing activities of export manufacturers. Also, we have seen that the legal issues related to parallel exports and factors causing U.S. export channels to form are somewhat different from those of U.S. import channels. This study has many limitations. The sample base was much too small to make any generalize statements and perform any kind of hypothesis testing. More rigorous research needs to be done, using either sampling and/or statistical controls. The use of a close-ended questionnaire and a larger sample base containing companies in various kinds of industries would help in testing empirically some of the preliminary findings reached in this study. Future research should focus on identifying which industries are most affected by parallel channels and what types of foreign markets, such as developed or developing, are more prone to parallel channels. An area of tremendous research potential concerns the organizational and behavioral characteristics of the parallel trader. How big are such companies? What is their product mix? What functions do they perform and what benefits do they provide? What questionable activities do they participate in? A study on the comparison of parallel marketing legislation worldwide would be extremely valuable to U.S. exporters. A related area to parallel marketing largely ignored by researchers is the impact that smuggling activities have on international marketing (see Stephens, Boddewyn & Sproul, 1991 and Gillespie & McBride, 1996 for exceptions).
To better explain the phenomenon of parallel marketing, a theoretical base needs to be developed. The use of resource dependency models in organizational theory and network models in marketing hold promise. These theoretical frameworks can help explain the interdependencies between the various entities involved in parallel marketing, and the nature, strengths, and the level of cooperation and satisfaction of these relationships. A model of parallel marketing can eventually emerge from this line of research.
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James Michael
Wagner College
Copyright College of Business Administration. University of Detroit Mercy Spring 1998
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