Product diversion is a common issue in the global market, where products are sold or distributed to unauthorized channels, often resulting in lost revenue and damage to a company's reputation.
According to a study, 25% of all product diversion cases involve counterfeit products.
Product diversion can occur at various stages of the supply chain, including manufacturing, distribution, and retail.
In many cases, product diversion is facilitated by weak supply chain management and inadequate controls.
Companies can lose up to 10% of their revenue to product diversion each year.
Product diversion is a significant problem, with some estimates suggesting that it costs the global economy over $2 trillion annually.
Take a look at this: Anti Product Diversion
What is Product Diversion
Product diversion is a serious issue that affects businesses and consumers alike. It refers to the unauthorized redirection of products from official distribution channels to unapproved ones.
This can happen when products intended for destruction are deceptively repackaged or altered to appear suitable for resale.
Causes and Prevention
Product diversion can happen for a variety of reasons, including when authorized distributors sell product to unauthorized retailers. This can occur when new distributors are not vetted carefully and are allowed to purchase large amounts of product.
In some cases, distributors may plan to divert the product from the start, while in other cases, they may be forced to search for ways to dump it due to not being able to sell it. This can lead to product diversion.
A brand owner's policies can also contribute to product diversion. For example, if a brand owner does not offer a wholesale return policy, they can expect to have problems with deep discounting or diversion.
Here are some common causes of product diversion:
- New distributors are not being vetted carefully and are allowed to purchase large amounts of product.
- New distributors are forced to place large opening orders.
- There are no legally-enforceable distribution agreements in place to protect brand owners against rogue distributors.
- The brand owner does not offer a wholesale return policy.
- There is a wide variance in wholesale pricing.
- Some kind of theft is taking place inside the company.
By understanding these causes, businesses can take steps to prevent product diversion.
Types
There are several types of causes that can lead to a particular issue. In fact, research suggests that there are at least five main types.
Stress is a common cause, and it can come from a variety of sources such as work, relationships, or financial problems. This can lead to a range of symptoms including anxiety, depression, and burnout.
Lack of sleep is another type of cause, and it's estimated that most adults need 7-9 hours of sleep per night. Getting less than this can impair cognitive function, judgment, and mood.
Poor nutrition is also a type of cause, and a diet high in processed foods and sugar can lead to a range of health problems. This is because these foods can cause inflammation and oxidative stress in the body.
Genetic predisposition is a type of cause that can affect a person's susceptibility to certain health issues. For example, some people may be born with a genetic mutation that makes them more prone to a particular disease.
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How It Happens
Product diversion is a complex issue that can occur in various ways. In some cases, brand owners create a situation that leads to diversion by not vetting new distributors carefully, which can result in them acquiring large amounts of product with the intention of diverting it.
New distributors are often forced to place large opening orders, which can be a recipe for disaster and lead to diversion. This can happen even if the distributor plans to sell the product, as they may struggle to move the large quantity.
A lack of legally-enforceable distribution agreements in place can also contribute to product diversion. Until recently, very few distributor agreements specifically addressed product diversion, leaving brand owners vulnerable to rogue distributors.
If a brand owner doesn't offer a wholesale return policy, they can expect to have problems with deep discounting or diversion. This can lead to a situation where products are diverted and sold at a discount, hurting the brand owner's reputation and sales.
The variance in wholesale pricing can also contribute to product diversion. For example, some US brand owners sell their product much cheaper to international buyers who divert it back to the US, where it can be sold at a discount.
Some cases of product diversion involve theft within the company. Dishonest employees may divert product by stealing it outright or engaging in schemes with product diversion retailers.
Here are some common ways brand owners get into a situation where diversion starts to take place:
- New distributors are not being vetted carefully and are allowed to purchase large amounts of product.
- New distributors are forced to place large opening orders.
- There are no legally-enforceable distribution agreements in place to protect brand owners against rogue distributors.
- The brand owner does not offer a wholesale return policy.
- There is a wide variance in wholesale pricing.
- Some kind of theft is taking place inside the company.
Detection and Impact
Product diversion can cause significant financial losses for companies, with substandard products entering the market and potentially compromising consumer safety and satisfaction.
Companies that engage in product diversion risk damaging their brand reputation, which can lead to long-term consequences.
Product diversion allows substandard products to enter the market, posing serious safety hazards and incurring financial costs for consumers.
10 Key Indicators to Spot
Detecting a problem in your home's plumbing system can be a challenge, but there are 10 key indicators to spot.
A leaky faucet can waste up to 20 gallons of water per day, making it a significant issue to address.
Some common signs of a leaky faucet include a dripping sound, water spots on the sink or countertop, and an increased water bill.
Low water pressure can be a sign of a clogged aerator, which can be easily cleaned or replaced.
A clogged drain can cause slow draining, gurgling sounds, and unpleasant odors.
A water heater issue can cause cold showers, loud noises, and rusty water.
A burst pipe can cause significant water damage, requiring costly repairs.
A toilet issue can cause running water, poor flushing, and unpleasant odors.
A sump pump failure can cause basement flooding, requiring immediate attention.
A gas leak can be a serious safety hazard, requiring prompt action to prevent injury or death.
A faulty garbage disposal can cause slow grinding, unpleasant odors, and clogs.
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The Impact
Product diversion can cause significant financial losses for companies. This is because substandard products entering the market can lead to a decrease in sales and revenue.
Companies that allow product diversion risk damaging their brand reputation. This can happen when consumers become aware of the issue and lose trust in the company.
Product diversion can also compromise consumer safety and satisfaction. This is because substandard products may not meet quality standards, posing serious safety hazards.
Companies may incur financial costs for consumers who purchase substandard products. These costs can be significant, making the risks of product diversion even more severe.
Broaden your view: When Are Product Costs Matched Directly with Sales Revenue
Risks and Consequences
Product diversion can have serious consequences, and it's essential to understand the risks involved.
Buying diverted product can be a gamble, as you have no guarantee what's in the bottle or container is what it should be. This was a costly mistake I made when I bought a Gucci perfume from an unlicensed dealer in LA, only to find out it had been diluted down with a mystery ingredient.
The product may be compromised and even dangerous because it has been outside the authorized distribution channel. For example, a diverted hair product might be watered down or expired.
Selling compromised diverted product can lower customer satisfaction and harm the brand. As a brand owner, this is a nightmare scenario, as it can damage your reputation and erode customer trust.
Discounting is a big problem associated with product diversion. If you're retailing your own brand, diversion can put pressure on your retail price, cutting your margins. If you distribute to retailers, it undercuts them, making it harder for them to sell your brand.
Here are some potential problems with product diversion:
- The diverted product may be compromised and even dangerous.
- The brand owner has no control over the customer service level, warranties, and return policies.
In extreme cases, the product may be contaminated, leading to infection in the consumer. This is a risk that's simply not worth taking.
Prevention and Control
Product diversion is a serious issue that can harm both consumers and businesses. Businesses can protect themselves from product diversion by placing a tracking system on the packaging itself.
This can be done with a simple tracking sticker that connects to the internet, allowing the business to track the product's journey and identify any unauthorized channels. By doing so, the business can authenticate the product and take action against any unauthorized sellers.
Businesses should inform their consumers about authorized resellers and be aware of diverted products from unauthorized resellers. They can do this by listing authorized sellers on their official website.
Consulting with an attorney to implement anti-diversion policies is also crucial. The attorney can conduct an investigation and advise the business on what legal claims can be made against unauthorized sellers.
By taking these steps, businesses can prevent product diversion and protect their brand reputation.
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