Diverters finding more sophisticated ways to get products to resell at unauthorized discounts

By Hank Schultz contact

- Last updated on GMT

The rapid growth of online sales during the pandemic has worsened the product diversion problem, some observers say. ©Getty Images - MysteryShot
The rapid growth of online sales during the pandemic has worsened the product diversion problem, some observers say. ©Getty Images - MysteryShot

Related tags: online marketing, product diversion

Product diversion, or unauthorized sales at a discount, continues to be a vexing problem in the dietary supplement industry. Observers say the power and reach of the Amazon sales platform has turbocharged the ability of diverters to quickly resell products obtained under false pretenses.

Sigmund Brzostowski is director of sales for longtime supplement brand Yerba Prima, which sells products in the detox, digestive health and fiber cleanse category.  Brzostowski said his company works with a couple of authorized resellers on Amazon, but has had to go after others offering their products at a deep discount.

Sales director: Diverters are ever more sophisticated

Brzostowski said diverters often will attempt to obtain products from a manufacturer at a discount by spinning stories such as being able to place products in health clinic chains or being able to introduce the products to new foreign markets.  He said the diverters are becoming more sophisticated and are making it increasingly difficult to sort out legitimate new business opportunities from those who are just trying to trick a brand into selling them product at a discount.

“They come with legitimate-looking websites and they are getting smarter and smarter with the way they do business,”​ he said.

Brzostowski said he recently put up a post about the issue in a LinkedIn group devoted to the natural products industry and received more than 50 replies in short order from other brands that had had similar experiences.

Brzostowski said it’s worth it to his company to be careful and circumspect in the development of its online business rather than running the risk of a product diversion that could burn bridges with a trusted brick and mortar customer.  Being able to control the presentation and prices of his company’s products is key to keeping everyone in the value chain happy, he said.

“I don’t have to hear a store owner telling me that my pricing on Amazon is out of control and I can’t carry your products any more,”​ he said.

UNPA has monitored issue since at least 2016

United Natural Products Alliance president Loren Israelsen said the problem continues to be an issue within the industry.  UNPA hosted a webinar devoted to the topic several years ago​ in which identified the dangers to brands from this practice including damage to a distribution channel, brand name erosion, selling products that have been tampered with or expired, and customer confusion.

The expert UNPA lined up for the event, Brent Anderson, Packaging Advisor for Nosco, said the size of the problem at that time for brands selling in the $100 million to $250 million range could be as much as $2 million annually.

Since that event in 2016 Israelsen said the problem has continued and, if anything, has grown.

“By all measures it has gotten worse,”​ Israelsen said. “It’s a problem for some direct selling companies and a growing problem for some brands that have a big business overseas.”

“The pandemic I do believe has exacerbated the situation partly because of the growth of online sales overall.  In the best of times Amazon struggles to determine who is a legitimate reseller and who is an unauthorized diverter,”​ he said.

NOW: Diversion a ‘pain point’

Dan Richard, vice president of global sales and marketing at supplement manufacturer NOW, said while diversion is not a huge issue for his company, it still is a ‘pain point.’

In the past few years, we have had at least two ‘international’ distributors use lower costs to do almost all of their business on Amazon in the US.  The customers deceive brands like NOW by claiming to only sell in a foreign market, but end up undercutting the US market by selling at too low prices on Amazon,”​ he said.

“I don’t think this is a large problem, but it is a pain point.  When we find NOW items sold on Amazon, by Amazon, that we did not ship to Amazon it causes a lot of wasted time trying to find the source of the diversion,”​ Richard added.

“We have also had issues before where we find our products on Ebay from unknown sellers, but we don’t pursue this quite as aggressively since Ebay isn’t nearly the size of Amazon.  In the past NOW had full truckloads of our products stolen and we later found all being sold on Amazon for far too low prices by the case.  That’s hard to avoid or blame Amazon, but things like this do happen and harm the overall market,”​ he concluded.

Israelsen: Loss of trust is most damaging part

Israelsen said the situation calls for continued vigilance among brand holders.  While it can be expensive in terms of staff time and can erode margins, the consequences could be even more costly, he said.  Among the most harmful aspects of the practice is not dollars lost, but the loss of trust.  It can take years to build up a relationship with a given retailer which could be harmed by lone episode of diversion.

“It can be confusing for the consumer and maddening for the brand holder, and it has a knock on effect with brick and mortar.  The first line of defense for these retailers when they see this is to go back to the brand holder and accuse them of the diversion.  It creates ill will and harms the relationship between the parties,”​ Israelsen said.

Amazon did not respond to a request for comment in time for publication of this report.

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