Inside the Gray Market

Along the crowded counters of Bi-Rite Photo in midtown Manhattan, bargain hunters contend not only with the usual bewildering selection of cameras and lenses but also with a choice of prices for the same item. The popular Nikon FE-2 camera, for example, costs either $279.50 or $239.50. What's the difference? Top dollar buys a camera backed by an authorized U.S. Nikon distributor. For the lower price, a buyer gets the same machine but with only Bi-Rite's guarantee.

Welcome to the world of the gray market. Embraced by bargain hunters at the same time that it is cursed by conventional retailers, the gray market thrives by selling brand-name cameras, consumer electronics, personal computers, cars and even excavators without the imprimatur of a manufacturer's authorized distributor. The products do not have either the standard warranty or the higher markup. Unlike black-market trafficking in stolen or counterfeit goods, gray-market trade is perfectly legal and has even been encouraged by the Reagan Administration.

The gray market offers considerable bargains for the wary consumer and has grabbed about a $5.5 billion chunk of the nation's retail trade. This includes $ an estimated 30% of high-quality camera sales. These goods are sold across the country by such giant chains as K mart and Montgomery Ward, as well as by local specialty outlets. Some stores carry both gray-market products and normally discounted goods.

Perhaps the best-known retailer of gray-market goods is New York City's 47 St. Photo, which last year sold about $100 million worth of cameras, personal computers and other products through four stores and a mail-order operation. The cramped and chaotic original outlet is located in mid-Manhattan above a deli and reached by a dingy staircase. The store, though, is stuffed armpit- to-elbow with bargain hunters: pinstripe lawyers who are on their lunch hour, families in from suburban New Jersey, Japanese bankers, white-robed Egyptians, high-decibel hagglers in Spanish, Hebrew and Korean.

Many gray-market retailers, including 47 St. Photo, contend that they are sharing with American consumers the benefits of the dollar's purchasing power abroad. Despite its recent downturn, the dollar is still worth 19% more against many foreign currencies than it averaged from 1980 to 1982. That should mean cheaper imports in the U.S., but many American distributors have decided to pocket the profits rather than lower their prices. Yves Saint Laurent's Opium perfume, for example, has climbed from $135 an oz. in 1980 to $165 an oz. today, although the cost of the perfume to the importer has simultaneously fallen by about 50%.

Enter the gray marketers. They buy their products in Europe, Asia and elsewhere instead of getting them from authorized U.S. distributors. K mart last year spent about $100 million on gray-market imports, including Swiss- made Accutron watches that it sells for less than $100, or about half the manufacturer's suggested price. Says Robert Stevenson, K mart vice president: "There is no reason to pay unreasonable prices to the manufacturer's U.S. distributor when you can obtain exactly the same products at lower cost overseas." Importers have even invaded the market for heavy machinery. Caterpillar excavators imported from France sell in the U.S. for between $85,000 and $215,000, 15% less than an American-made model.

Not all gray-market products are imported. For example, 47 St. Photo offers an American-made IBM PC XT personal-computer package for either $3,125 or $2,295. The higher price buys a machine that comes with IBM's standard 90-day warranty and service. Bottom dollar gets the computer with three months of / protection from 47 St. Photo, not IBM. The retailer obtains the lower-priced IBM machines from authorized dealers who secretly sell their excess inventories. Fearing harm to their products' reputation, IBM and other computermakers have been cracking down on computer dealers who sell to gray marketers, threatening to take away their local franchises. Like most other companies, IBM refuses to honor warranties on products not bought through its regular dealers.

Customers frequently realize that their gray-market goods lack a U.S. warranty only when they have problems and discover that dealers refuse to perform needed repairs. "There are a lot of unhappy buyers out there who found the rainbow was lined with lead," says Rudy Kraft, owner of Autohaus Pompano, a Mercedes dealership in Pompano Beach, Fla. Kraft faces keen competition from gray-market dealers, who are expected to sell more than 80,000 unauthorized Mercedes-Benz cars in the U.S. this year.

Official dealers insist that the gray market unfairly damages their own business. Says Herbert Sax, director of a distributors' lobbying group, the Coalition to Preserve the Integrity of American Trademarks: "Gray marketers take a free ride on the substantial costs that authorized distributors incur in order to promote their products." John Leverett, Nikon's Atlanta-based regional sales manager, complains that "consumers who buy on the gray market blame us" when they purchase goods that ultimately prove defective.

While the Reagan Administration has encouraged competition from gray-market imports by loosening some federal rules that had previously made it difficult to bring the products into the U.S., state and local governments are starting to get tough on the gray market. The New York state legislature in July passed a law that will require shops selling those products to describe their merchandise and warranties accurately. The statute takes effect Nov. 1. Ely Steinfeld of Bi-Rite Photo supports the law, saying, "We never mislead the customer." Savvy shoppers can make big savings in the gray market, but they should watch the deals closely.