Editor's note: This article first appeared in First Impressions, a trade magazine exclusively for dental sales professionals. It's an important topic for the entire profession and industry, which is why Dentalcompare is posting it here.
This is no zebra we’re dealing with. Gray market products continue to be sneaked to dentists through seemingly legitimate distribution channels, often eluding efforts on the part of dealers and manufacturers to purge them from the dental industry. These products are earmarked for sale outside of the United States, and then rerouted by unauthorized dealers and sold domestically at attractively lower rates. Whether or not the situation is improving, it’s clear to both parties that they must address it as aggressively as possible.
The gray market is one of the biggest issues facing legitimate distributors and dentists, notes Gary Rosenberg, president, Darby Dental Supply (Jericho, N.Y.). "The situation certainly isn’t getting noticeably better," he says. "It seems the same products that have been available from the gray market distributors remain abundantly available today. In addition, new, unauthorized distributors are opening up each year, generating even more gray goods product demand." To make matters worse, several predominant gray market distributors exhibit frequently at high-traffic dental meetings, he points out. "They flaunt their gray goods products at very low prices right in front of the entire industry – manufacturers, distributors and dentists."
Rick Cacciatore, president and owner of Iowa Dental (Grimes, Iowa), has seen the gray market evolve through both the manufacturers’ perspective and that of a distributor. "I worked for 20 years in manufacturing, followed by 15 in distribution," he says. And, as far as he’s concerned, the gray market has presented a problem for as long as he has worked in the industry. "Twenty years ago, it was accepted practice to purchase gray market products," he says.
Today, Cacciatore believes that more manufacturers recognize the need to police the gray market, which is a definite step in the right direction. Still, he would like to see them take further steps, such as international price parity. In addition, manufacturers can impose more stringent guidelines on their dealers, he notes. "Now manufacturers are adding clauses to their distributor agreements, saying that if they purchase [their] products off the gray market, they risk losing that line," he says.
Guidelines or no, the gray market has tempted many a decent distributor. "Put yourself in the shoes of a small, independent distributor or someone who has tried to start his or her own distributorship," says Lori Paulson, managing director of the American Dental Cooperative (ADC) and United Dental Dealers Inc. (UDD) (Nashville, Tenn.). "A small distributor calls on a dental office that wants 3M products, and the distributor doesn’t carry that line. It may carry five other lines, but not 3M. So, the dental customer must decide whether to buy this line of products from a larger distributor, or select a substitute product at a lower price point." Of course, this means a lower margin for the distributor, she adds. In the end, a good number of smaller distributors turn to the gray market as a viable means of staying in business.
"I think the question is, why is the gray market more prevalent in the dental industry than the medical industry?" she continues. "I believe it’s because of the selective arrangements between manufacturers and distributors in the dental industry. It forces behavior changes. No one likes to tell a [dental] customer, ‘No, I don’t carry that product.’" Fewer options are leading more small distributors to resort to other avenues, she points out.
To a point, some manufacturers agree. "The gray market represents a dangerous and losing situation for all parties – dentists, dealers, and manufacturers," says John O’Neill, vice president of sales, GC America (Alsip, Ill.). "The dentists can jeopardize the quality of their work by buying questionable products from unreliable sources. In addition to lost sales revenues, both the dealer and the manufacturer can lose their reputations for fair market value, and consistent delivery of high quality branded products. And, while some manufacturers are taking steps to address the issue, it’s no easy task, he notes. "We have taken steps to combat the gray market, but [it’s still] a concern and difficult to completely defeat." In fact, GC America recently brought suit against AR Dental in the United States District Court for the Eastern District of New York, as well as King’s Two Dental Supply in the United States District Court for the Central District of California. In each case, the defendant entered into a consent judgment enjoining its sale, distribution or importation of unauthorized GC America products, according to O’Neill. On one hand, "these suits have demonstrated that these actions are wrong, and that the illegal importation of GC branded products can be stopped," he says. At the same time, manufacturers can’t sue everyone, he adds.
Safety at stake
Gray market dealers typically target the most popular products with the greatest market share. "These are primarily the products that are available in large quantities," says Rosenberg. "Gray market dealers are looking for a fast nickel, rather than a slow dime. They want to turn these products over quickly."
"Gray market dealers sell products in ‘as-is’ condition," adds Michael Bocian, vice president of sales and marketing, Darby Dental. There are no product guarantees and no returns, he notes.
"Unauthorized distributors usually don’t have the ability, nor do they care, to notify the end-user when a recall occurs," says Rosenberg. And while this should be of utmost concern to dentists, they generally don’t realize they are purchasing gray goods from an unauthorized dealer, he points out. "The ability to track shipments by lot number when a recall takes place requires a significant investment on the part of the distributor. Gray good distributors rarely invest in protecting their customers."
"And, of course, there are dangers when that link is broken and the dentists can’t guarantee their products to their patients," adds Bocian.
Indeed, there are no guarantees on the quality of gray market products, notes O’Neill. "These products may come from countries with different specifications than those in the United States," he says. "Many times, gray market dealers take outdated products that have been sitting [in other countries] for years." The storage environment may have been compromised (e.g., by excessive heat) and the shelf life may have expired long ago, he points out.
"Gray goods distributors are looking to make a fast sale and a fast profit, and they cannot accomplish this if they are forced to follow the proper handling and storage requirements that an authorized vendor must maintain," says Rosenberg. "Nor do they invest in quality control to ensure the integrity of the product is maintained." Most products require specific handling instructions and special climate control, he explains. "When unauthorized dealers purchase gray market goods, they usually don’t know or care about following handling instructions, which unknowingly puts the dentist’s and patient’s safety at risk."
The solution?
As dismal a picture as the gray market presents, experts agree there are steps to be taken on the part of distributors and manufacturers to address the issue. For one, by altering their packaging, manufacturers can make it more difficult for gray market vendors to move products, says Cacciatore. "After 3M merged with the German company ESPE Dental, it began color coding its packaging differently in Germany vs. the United States," he says. "They also changed the names of products intended for sale in Germany vs. the States.
"For a while Dentsply stamped ‘intended for U.S. sales only’ on its packaging," he continues. This packaging distinction can make a big difference, he notes. "If a dentist picks it up and it says it should only be sold in the United Kingdom, that should raise a red flag." That said, gray market vendors will go to great lengths to alter a manufacturer’s packaging, he adds.
Rosenberg agrees that manufacturers should dramatically change the packaging and labeling on products intended for use outside of the U.S. marketplace. There are several other steps they can take as well to help eliminate the gray market, he says, including the following:
- Monitor packages intended for shipment outside of the United States market to ensure they are not rerouted back into the country.
- Utilize such technologies as radio frequency identification (RFID) on shipments intended for customers and affiliated manufacturers located outside of the United States, to ensure they reach the intended party.
- Randomly check shipments to all customers to ensure they are headed to the proper destination.
- Order products from well-known gray marketers in the United States and review the lot numbers, to determine from whom the product was purchased.
Meanwhile, distributors need to steer clear of gray marketers. "We have to remain legitimate and not participate in the gray market," says Cacciatore. "This is a cut-and-dry issue for me. It’s unethical and I would never do anything to jeopardize my line."
Indeed, battling the gray market may require a team effort. Distributors need to have a candid discussion with their dental customers, suggests O’Neill. "They should tell their customers to ask their [distributors whether] they are authorized dealers of a [particular] product," he says. "If not, they should be asking where [the dealer] got this product." In addition, distributor reps should communicate with, and educate, their dental customers to make them aware of the gray market dangers. "They also should alert their manufacturer partners when they learn that a distributor is selling a product for an extremely low price," he states. "Then the manufacturer can investigate, possibly buy the suspect product for traceability, and take necessary actions. Manufacturers and dealers have to work together to eliminate the problem of gray market. This is a team effort."
Distributors recognize the validity of educating their dental customers, although they note that dentists might regard such conversations as self-serving. "It’s absolutely necessary and important to have this conversation, and it’s one we have almost every day," says Bocian. "But, in the current economic climate, it can be difficult to convince dentists that they should be spending more."
And, whether or not distributors agree they play a role in combating the gray market, some strongly believe manufacturers should be taking the lead. "Exporting is the primary cause of the gray goods marketplace into the United States, due to the lower pricing offered to most foreign countries," says Rosenberg. "I don’t have a problem with the reasons for the lower pricing in foreign countries. However, I do have a problem with the manufacturers not protecting the distribution of their products to ensure they actually leave the United States and are not rerouted at the freight forwarding facilities to U.S. distributors. This is where RFID technology could help."
Conclusion: What’s next?
What is the next step, then? The Dental Trade Alliance (Arlington, Va.), wonders just that. "We have established a task force to [study] the gray market," says the group’s CEO, Gary Price. "We will conduct an extensive evaluation of the status of the problem and address whether the DTA should provide a formal response to the issue. We want to make it clear to distributors, manufacturers and the dental community that legal materials are not only being shipped across the border, but they also have been adulterated in some fashion (repackaged, improperly stored, etc.). We are working to identify recommendations for change.
"Dentists need to understand, this is not just an issue of purchasing products over the Internet," Price continues. "It’s not a price issue, but a safety issue. And, distributors need to communicate to their customers that they are safer buying products from someone with whom they have a relationship – even if it means making an alternative product selection."
For now, though, the gray market continues to muddy distribution channels. "The gray market is still out there," says Cacciatore. "It may have slowed down [recently], but it’s still available to those who are looking for it."