“How to successfully manage the threats of product re-imports and the development of grey markets”

Guest speakers:Marc Abels, Deloitte BelgiumRalf Schwarzendahl, Deloitte United States

Brussels, 22nd / 23rd November 2007

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Agenda

Introduction of Grey Markets

Grey Markets Across Different Regions

Impact of Grey Markets

Factors Causing Grey Markets

Identification of Grey Market Activity

Counter Measures

Business Case

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Introduction of Grey Markets: DefinitionGrey Markets is defined as the legal import of genuine products via non-official trade lines

Grey Market is not:

– Illegal import of genuine products

– Import of counterfeited goods

Grey markets, re-import, parallel import/trade, diversion, arbitrage

Manufacturer Retailer End User

Official Distributor Market A

Grey Activity

Grey Markets Distributor Market B

Grey ActivityAuthorized Channel

20€

80€

15€

Market A

Grey

ActivityMarket B

100€ 100€

30€ 30€

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Introduction of Grey Markets: LegalityIntellectual property and trademark rights are national monopoly rights

– Protection against unlicensed copies or unlawful use of branded names

– Infringement where unlicensed goods are imported into the country as 'parallel imports‘

– Trademark owner controls national markets

Grey Markets became legal in the EU when national barriers to trade were removed

– Free trade principles versus national intellectual property rights

The ‘Grey Market' issue has now extended beyond national rights

– Exhaustion principle: national – regional – international

– Does regional or international exhaustion apply to the exercise of trademark rights when faced with ‘grey market' issues?

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Grey Markets Across Different Regions

Former Soviet Union

7%

Western Europe

27%

Scandinavia

3%

Latin America

17%

Middle East

5%Africa

1%

North America

13%

Pacific

27%

Source: Business Horizons/Strategies for Combating Grey Markets

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Impact of Grey Markets on Each Player

–– Performance– Brand Equity– Distribution

relationships– PLC– ROI for R&D– Operating cost– Customer Satisfaction

+– Capacity control– Segmentation – Market size

Manufacturer–– Liabilities– Customer Satisfaction– Relationships

+– Market size– Performance

“Grey” Retailer–

– Promotions and rebate– Service– Warranty– Product quality – Localisation

+– Product variety– Product availability– Savings

End User

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Impact of Grey Markets on Industry

Source: IW;’; iPod Observer; BBC News

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Factors Causing Grey MarketsPrice difference between local markets

– Grey market behaviour will increase dramatically above a certain threshold of price difference

– Thresholds can be influenced by the brand owner

Transparency and exchange rate stability

Legal context

– Intellectual property rights and trade mark legislation

– Tariffs and other barriers to trade

Geography and culture

Fragmentation of the distribution or consumer base

Costs to serve the Market

Government control

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Identification of Grey Market ActivityTransaction cost relevant to price difference

Multi-phase volume analysis on regional level

Track product movement across regions and to their final destinations

– Leverage link product labelling - market

Purchase behaviour of distributors / retailers

0

100

200

300

400

500

600

700

800

Germany Poland Italy Spain

Avg Distributor Price

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Germany Poland Italy Spain

Fertilizer used per MM of Ha (Tonne)

ss

Sources: Data from client operating on the chemical fertilizer market (http://www.euratlas.com)

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Counter Measures2 pricing options :

Single price: No grey market behavior but huge profit losses

Price corridor: Balance between price differentiation (to capture optimal profit) and harmonization (to avoid grey market behavior)

…and other protective methods used to re-enforce the price corridor strategy include:

Centralized pricing organization and policies

Labeling

Trademark tactics

Customizing products

Inventory policy

Mastering the supply chain via strong strategic relationships

Strive for legal frameworks

IT and business intelligence tools

…

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Agenda

Introduction of Grey Markets

Grey Markets Across Different Regions

Impact of Grey Markets

Factors Causing Grey Markets

Identification of Grey Market Activity

Counter Measures

Business Case

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Company Background

2006 revenues $28.99 B

Total number of employees 60,000 worldwide

Global presence Operating in more than 70 countries worldwide

Electronic & Communication Technologies $ 3.8 B

Coating & Color Technologies $ 6.2 B

Performance Materials $ 6.9 B

Agriculture & Nutrition $ 6.3 B

Safety & Protection $ 5.6 B

Other $ .57 B

Source: 2006 official data – adjusted sales

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Pain PointsParallel trade:

– Represented 7% of the German market and 11% of the Italian market

– Exploited our client’s decentralized price structure. The average distributor price in Germany was €456, in Spain was €417, in Italy was €793, and in Poland was €341

– The main identified source of parallel exports within the EU in 2003 was Spain; however, the accession of Eastern European countries (specifically Poland) into the EU will pose significant challenges in future years

– Estimated to take place on price differentials of approximately €30

To date our client had limited understanding of:

– The value of its product in the different markets

– The impact of price changes in individual countries on other EU states

Initial client reaction Harmonize prices

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Approach

Aim ToolsUnderstand the value propositiondevelopment process:

Levels of value per country

Building/delivering value

Value Maps and SMPs

Pricing scenario evaluations

Increase value through VAS

Process improvement opportunities

Identify optimum pricing levels:

Minimise erosion of margin

Minimise parallel trade

Implementable at low risk

Customized Pricing Models

Adjust price and a series of variables

Evaluate impact

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High Level Plan

Initial EU market

assessment

Build Parallel Trade

Framework

1.First understand what shapes the market & pricing….

Build in-country

Price/VolumeFramework

Build price scenarios

3. … then produce and evaluate a series of options for price changes that can be assessed against a range of factors…

Validate & plan implementation

2. …then analyse & validate in-depth data for key countries…

Confirm country packs

– pricing scenario data

Assess as-is pricing & value

proposition process

4. ..and finally develop an integrated pricing strategy

Pricing Process Analysis

Value Proposition

Analysis

Produce pricing options & recommend-

ations

Identify VP & pricing process improvement opportunities

Build in-country

Financial Framework

Confirm country packs

– pricing process & VP

data

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Pricing Process Analysis – Price/Volume

Rebate and Discount Waterfall for Product XYZ in the German Market

Pricing Process Analysis – Segmentation

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Price/Volume Segmentation Matrix (100g and 500g)

Segment Descriptions

A : Low Volume, High Price – Maintaining margin on low volumes through higher pricing.

B : High Volume High Price – Maintaining high margin through core profit drivers.

C : Low Volume Low Price – Rewarding the smallest customers by volume.

D : High Volume Low Price – Rewarding the biggest customers by volume.

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Price Optimization

Based on the Scenario Evaluation Tool, a price cut in Germany is the option that drives the most value

It is estimated to generate a positive gross profit PV over 2005-2010 of around €1.5 MM driven primarily from growth in domestic volume consumption

Harmonise big four (which was initially our client’s intention) would have resulted in a negative gross profit PV over 2005-2010 of around €9.5 MM

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Pricing Policy & Process

Key Policy Feature RecommendationPO prices (average net-net) per country

Floor prices and reporting variations to the floor price mid-season

Greater control of floor prices within each price band at an EMA level

Control of the price band range

No formal EMA control on price increases

Product XYZ prices can be cut by 2% bya country manager without recourse to pan-European or regional management

Upward and downward price management

EMA profitability versus in-country considerations

The impact on lead countries for single country price decreases is considered as part of the process

The EMA view needs to be more strongly represented in product XYZ price setting discussions

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Extension Beyond Current Framework

Domestic Prices

Domestic Sales

Domestic Revenues

Profit Function

Market Share

Current Framework

Extension

Develop framework to evaluate how current and future legislations (IP, trademarks, government controls) may improve/worsen the effects of grey markets

Legal ContextOther Product-Related Measures

Customer Segment Regions

Determine whether other methods or strategies can be developed (e.g., customized labeling of products per country) to reduce grey market activity

Explore how regional and local price sensitivity of customer segments, and compare it against the macro level at the national/international level

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QUESTIONS & ANSWERS

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Deloitte Consulting LLPOne Prospect StreetSummit, NJ 07901USA

Ralf SchwarzendahlDirector

Tel: + 1 908 673 5251Mobile: + 1 908 673 6251rschwarzendahl@deloitte.com

Member ofDeloitte Touche Tohmatsu

Deloitte Consulting LLPOne Prospect StreetSummit, NJ 07901USA

Ralf SchwarzendahlDirector

Tel: + 1 908 673 5251Mobile: + 1 908 673 6251rschwarzendahl@deloitte.com

Member ofDeloitte Touche Tohmatsu

Deloitte ConsultingBerkenlaan 8c1431 DiegemBelgium

Marc AbelsSenior Manager

Tel: + 32 2 749 5780Mobile: + 32 497 05 10 37maabels@deloitte.com

Member ofDeloitte Touche Tohmatsu

Deloitte ConsultingBerkenlaan 8c1431 DiegemBelgium

Marc AbelsSenior Manager

Tel: + 32 2 749 5780Mobile: + 32 497 05 10 37maabels@deloitte.com

Member ofDeloitte Touche Tohmatsu

Copyright © 2006 Deloitte. All rights reserved.

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