‘Gray Market’ Clobbered by Dollar Drop, Retailers Say

In 1985, Trader Joe’s markets were selling bottles of imported Dom Perignon champagne for $33 each--about half the price found at many stores.

How did Trader Joe’s do it? Simple, the chain bought the champagne on the “gray market,” where imported goods--from Porsches to perfumes--were available at low prices that authorized American dealers and retailers often could not match.

“It was stupid to buy from official sources,” said Joe Coulombe, chairman of Trader Joe’s, which used to buy all its French champagne from gray market sources. “We sold millions of dollars of stuff. It was the heyday of the gray market.”

That heyday is long gone, but the business got some badly needed help Tuesday. A U.S. Supreme Court ruling that upholds the legality of the gray market comes at a time when sales of such goods have sharply declined in recent years.

The gray market is made up of foreign-made goods that were never intended to be sold in the United States. Gray marketeers simply bought these goods overseas and sold them to U.S. discount stores, bypassing authorized distributors. Even though the products generally met U.S. regulatory standards, the practice infuriated many manufacturers, retailers and distributors that have had to cut their prices to stay competitive with gray market products.

The gray market, whose sales are estimated at $6 billion annually, thrived in the early and mid-1980s, when the value of the dollar was relatively high against many foreign currencies. As a result, gray market dealers could purchase Japanese-made Nikon cameras, German BMWs or French champagne overseas at prices way below those charged by American wholesalers and distributors.

These products were brought back to the United States and resold at bargain prices. Consumers could find $200 Seiko watches selling for $120 on the gray market. Gray market Mercedes were priced at $8,000 less than those found at an authorized dealership.

But the recent decline in the value of the dollar has taken the steam out of the gray market. And sales of gray market cameras, autos and other imported goods have fallen off, many retailers say.

Market Dried Up

“In the past several years, the number of gray market autos brought to the U.S. has diminished considerably,” said Martha McKinley, spokeswoman for Porsche Cars North America. “The advantage for doing so is gone.”

“The gray market dealers are not in business,” said Coulombe, who said he bought his last gray market shipment last December. “The whole market has dried up, it’s just gone dormant.”

Jack Williams, owner of the Hooper Camera Stores chain based in North Hollywood, said he has not sold gray market cameras in many years. “There is not much more of a price difference any more. I don’t think there are too many people involved in it any more--there’s no advantage to it.”

Sales of gray market stereo product used to hurt business at Auto Stereo Warehouse in West Los Angeles, which stuck to authorized distributors, said owner Herb Greenberg. “To a degree it was taking a bite,” Greenberg said. “But I don’t find it adversely affecting us now.”

The decline of the dollar, Greenberg said, “has stemmed the tide of gray market products.”

May Eventually Help

Still, gray market products can be found on sale at many places. “You go to the swap meet and you will find them,” said Duane LeCesne, general manager of Century Mobile Electronics in Lynwood of gray market car stereos. “These guys come by with the stuff, but I’m not interested installing it.”

And supporters of the gray market see the Supreme Court decision helping out in the long run, especially if the value of the dollar begins to rise again. “The dollar has been real strong against the French franc recently, Coulombe said. “The Supreme Court decision could not come at a greater time for gray marketeers.”

The decision might also serve to keep price increases in check, said attorney William C. Kinzler, who represented gray market importers during past efforts to outlaw the practice. “Distributors will have have to think twice before raising prices,” he said.

Supreme Court ruling preserves ‘gray market.’ Part I, Page 1.