`Gray market' ruling keeps discounts coming

It was 1986, and Cabbage Patch dolls were selling like hotcakes. The dollar was strong and the West German mark weak. So a few clever traders bought the dolls cheap in Germany and resold them in the United States for a profit. A lot of little girls were very happy. So were their parents. But Coleco, the American manufacturer, was less than pleased that the US market for its rotund dolls was being undercut by genuine, but cheaper, German-speaking cousins.

Of course, it could be dolls, or cameras, or watches, or perfume, or just about anything. But in the end it is called the ``gray market.'' On Tuesday, the United States Supreme Court upheld and defined some ambiguous provisions of US Customs Service regulations which for decades have permitted gray-market goods to enter the US from abroad.

Gray-market merchandise is different from ``counterfeit'' goods, since they are genuine, trademarked products that are produced abroad and sold in the US by someone other than the authorized US distributor. Such products are typically intended by the manufacturer (foreign or American) to be sold in markets other than the US, but are shipped back to the US by independent importers and sold in discount stores.

The high court ruling essentially permits an estimated 95 percent of the gray market - also known as ``parallel imports'' - to continue. The effect of the ruling is being heralded by discounters as a potential boon to consumers.

``With more competition, obviously prices aren't going to go up,'' says Robert Stevenson, a spokesman for Kmart Corporation. ``If a product in a US manufacturer's distribution channel is much higher than the world price, it presents an opportunity for arbitrage to sell it back for a lower price and still make a good return.''

Not unlike Wall Street arbitrage, the US gray market has developed because shrewd middlemen have been able to profit from the sometimes slender difference in value between the dollar and other currencies.

In recent years, US discount stores like Kmart, Zayre, and 47th Street Photo in New York thrived when the dollar was strong and many foreign currencies weak. This was done by purchasing genuine brand-name perfumes, soaps, blue jeans, and other items overseas at relatively low prices, shipping them to the US, and selling them for more - but still less than authorized dealers did.

Now the gray market is less pronounced, since the dollar is much weaker than many foreign currencies. The gap is too narrow to allow discounters to whack off a large chunk of the authorized price and still make much money. The reason the ruling is important to companies like Kmart is the principle of ``retailer's pricing freedom,'' Mr. Stevenson says. Currently, only about 1 percent of Kmart's goods are gray-market items. Still, some estimates put the US gray market at $5 billion to $6 billion.

Naturally US subsidiaries of foreign companies and many US companies with foreign subsidiaries hate the ruling. They contend that when products made overseas and intended for foreign markets find their way back to the US, American consumers don't get what they pay for.

When US consumers are disgruntled with a brand-name product meant for overseas customers, it hurts the brand name's image, the companies contend. They also say the discounters take a ``free ride'' when they profit from expensive market development by authorized dealers.

In an effort to stamp out the gray market, a coalition of foreign companies was formed in 1984 including such names as the Swiss watchmaker Cartier and Yves Saint Laurent International. In 1987, several US manufacturers, including Procter & Gamble, Tonka, Johnson & Johnson, and Kenner Products, joined the foreign companies.

While the US version of the gray market has subsided, the strong yen has caused a boom in Japan's gray market, says Robert Weigand, professor of marketing at the University of Illinois, who recently returned from the Far East. Japanese distributors are snapping up Rolex watches and Canon cameras in Hong Kong and New York and selling them cheap in Tokyo and Osaka, he says.