Special report: Grey market products

The grey market in branded confectionary is leaving some in the industry with a sour aftertaste. 

Not to be confused with the black market (stolen or counterfeit), grey-market goods are the genuine article imported from another country and then sold where they were never intended to be. These goods usually fail to meet Canadian packaging and labelling requirements, like being bilingual or providing allergen warnings.

“This has been an issue for as long as I have been in this industry,” says a veteran of the confectionary sector, who didn’t want to be named.

Groupe Beaudry is one of the largest distributors of confectionary brands in Quebec. Its sales reps don’t see the grey market being an issue in cities like Montreal. However, they see a telltale sign of the grey market all over the shelves on visits to c-stores near the Ontario border.

“Some of the confectionary brands don’t have bilingual labels – it’s just English,” says Serge Nadeau, vice-président, projets and développements, Montreal-based Groupe Beaudry.

The Convenience Industry Council of Canada reports that the grey market is growing. 

“The challenge of grey-market products in the confectionary supply chain is becoming more prevalent,” it reports in a pre-Budget submission to the federal government. “There is an increased quantity of non-compliant confectionery and beverage products manufactured in other countries that are being openly imported and then sold in Canada.”

Why the grey market may be on the rise is up for debate. However, c-stores have been dealing with inflation and shrinking margins. And as Nadeau notes, grey-market confectionary “is less than 50% of the regular price. It’s normally coming from containers overseas.”

In other words, a chocolate bar bought from a wholesaler sourced directly from the Canadian manufacturer at $.90 per bar would be just $.45 on the grey market.

Retailers might also be looking to buy branded products in flavours not sold in Canada as a competitive differentiator.

Legal ramifications

The practice of importing and selling genuine branded product is not illegal per se, given free trade agreements, according to legal experts.

However, they say grey-market goods run afoul of the law in other ways.

For instance, retailers can be held liable for contractual interference. In 2020,  Costco was ordered to pay punitive damages after importing from a supplier a high-end jean brand for cheap, despite being made aware a company in Canada had exclusive distribution rights to the brand. 

Distributors and retailers could also find themselves in legal trouble if the grey-market goods don’t adhere to food labelling laws.

“The sale of grey-market goods poses an inherent legal risk for retailers, as there could be false or misleading information on the packaging,” says Monique Couture, partner at law firm Gowling WLG in Ottawa.

In 2018, Mars Canada won a legal case against wholesaler Bemco Cash & Carry for importing Mars, M&Ms, Milky Way and Snickers brands from the U.S. and then selling them at a price lower than what Mars Canada was offering to retailers. It won the case in part because the imported Mars products did not comply with Canadian labelling and packaging law.

In its budget submission, the CICC called the grey market “a significant public safety risk.”

“Many chocolate bars manufactured in Canada are nut-free. The same brand imported from another country might not be nut-free,” it noted. “For Canadians who suffer from food allergies, this is a potentially life-threatening issue.”

There is no quality control assurance with grey market product and puts a c-store at serious risk of product liability.

“You have no idea how long it has been sitting in transport or if it was manufactured in a peanut-free facility,” the industry veteran notes. “If customers get sick from buying confectionary sold at their store, owners need to be able to tell the authorities they bought it from a legitimate, trusted source.”

“In addition to public safety concerns,” adds the CICC’s submission, “importers and distributors are participating in the grey market to avoid remitting taxes and the required duties.”

Next steps

Sara MacIntyre, VP, Western Canada at the CICC, recently met with the Canadian Food Inspection Agency to educate the regulatory body on the issue.

In its submission before the 2023 Budget – that will be tabled on March 28 – the CICC advocates that additional support be made for the Canada Border Services Agency to screen for grey-market products.

“Importers who knowingly supply retailers with illegal products must be held accountable,” the industry group argues. “The best way to eliminate these products from distribution and sale in Canada is at the source of import, where they can be screened, as opposed to penalizing the retailer.”

“Retailer and distributor education is a part of the process, but it cannot be the only check in the system,” the CICC added.

It also recommends that the Canadian government commission a study on the prevalence of grey-market products, including around lost tax revenues, and to make the findings public.