DIVERSION DEFINED

Product diversion refers to legitimate merchandise that is distributed into markets other than originally intended in violation of a contract, law or regulation. Supply chain partners and distributors exclusive territorial rights are diluted and opportunity costs increase; brand value and cache are eroded and profitability of all channel partners is endangered.

With product diversion, third parties can undercut a company’s price and reap huge profits. Product diversion (also sometimes referred to as "gray market goods" or "parallel distribution") severely disrupts the channels of distribution established and supported by manufacturers and authorized distributors.

Because the products usually cannot be obtained outside of the authorized distribution channels through any legitimate means, diverted products are often acquired by deception and fraud. Discount and warehouse retailers, supermarket chains, and drug stores sometimes handle diverted merchandise so that they can profit from the efforts of the manufacturers and authorized distributors to develop and support the market for their products. The diverters' conduct harms manufacturers, distributors, retailers and, ultimately, consumers.

Product diversion can be domestic and/or international in scope. Resolution requires a diligent and comprehensive market analysis to establish conclusive evidence of the scope and value associated with the scheme.

When U.S. manufacturers set up different pricing for the same products as a way to break into new markets, expanding name recognition outside the United States, they create an opportunity for diverters. Because of tax incentives and other cost savings, American businesses can sell their products to overseas distributors at dramatically lower prices than what distributors based in the United States pay. With product diversion, goods destined for overseas sales are illegally rerouted by a third party back to American markets at prices below the manufacturer’s United State’s wholesale pricing.

All products are targets for diversion (Health and Beauty Aids, pharmaceuticals, electronics, food, technology, etc.). The world of diversion has become computer-based, high tech, on-line and extremely sophisticated. Trails left by today’s most subtle diversion methods may be well hidden.

Doing nothing is equal to condoning diversion and accepting loss of revenues. There is no reason diverters should ever profit via underhanded business maneuvers when methods of prevention are available and effective.