The worldwide grey market for IT hardware is worth £25bn every year, according to research from consultancy KPMG.
The grey market acts as an alternative source of equipment for the channel. And even though it is legal, the research has warned that the market's gaining momentum threatens brand damage and profit erosion for both vendors and resellers.
The KPMG study, sponsored by the Anti-Grey Market Alliance (AGMA), found that grey market sales accounted for up to £3.1bn in lost profit for vendors as dealers and brokers divert products from the legitimate market.
The AGMA was set up by Apple, 3Com, Compaq, Hewlett Packard, Nortel and Xerox in 2001 to counter the practice of products being diverted from authorised distributors and sold cheaply by grey marketeers.
"Grey market activity can be a cloak and dagger affair, involving the secret movement of goods across borders and breach of their distribution and partner agreements with the brand owner, including the abuse of incentive and discount programmes," said KPMG.
But resellers and distributors claim they are being forced to use the grey market to compete. Seventy-one per cent of distributors said they believed it necessary to purchase grey market products to be competitive on pricing and fulfillment.
However, 81 per cent of distributors said that their competitive position would improve if the grey market was eliminated.
"This is a big problem for resellers because it creates a very complex environment to sell in, with price volatility and a lack of quality assurance," said Stanimira Koleva, channel sales director at 3Com.
"There is more risk now because resellers are trying to streamline their businesses."
Simon Welch, marketing manager at Sun Microsystems distributor Clarity, warned that the grey market debilitated reseller investments in vendors.
"All the quality vendors put contractual obligations on accredited resellers, and these people selling on the grey market with no commitment undermine them," he said.
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