Magazine article Business Credit

Diversion = Loss of Profits and Product Integrity

Magazine article Business Credit

Diversion = Loss of Profits and Product Integrity

Article excerpt

The consensus of all of the speakers and the attendees at the Loss Prevention Department's 1997 Diversion Symposium (May 20 - 23 in La Jolla, CA) was that diversion does mean a loss of profits and product integrity. Among the speakers were Lawrence C. Aaronson, the former president and CEO of Interstate Cigar, and vendors presenting various goods and services for combating diversion.

According to Reginald Montgomery, president of R.J. Montgomery Associates, Ramsey, NJ, "Product diversion refers to products sold by a manufacturer that are destined for markets other than originally intended - in violation of a contract, law or regulation. Because of tax incentives and other cost savings, American businesses can sell their products to overseas distributors at dramatically lower prices than distributors based in the United States. By diverting products, third parties can undercut a company's price and reap huge profits. In a product diversion scheme, goods destined for overseas sales are illegally rerouted by a third party to the American markets - at prices below the manufacturer's U.S. wholesale pricing."

The Diversion Symposium began with Aaronson's speech, entitled "The Good, The Bad, And The Ugly." According to Aaronson, Interstate Cigar invented diversion by taking advantage of regional deals offered by cigar manufacturers. Aaronson said that diversion decreases profit per unit sales, wastes manufacturers' promotional dollars, and decreases advertising and marketing effectiveness. He said: ". . .if you don't know where your merchandise is, it destroys your spot advertising."

Aaronson claimed that diverters do nothing morally wrong, and then went on to explain how he used "faces" - front men and front companies - to trick manufacturers into thinking that they were selling products for export, when in fact the products were really being purchased for distribution by Aaronson's domestic companies. Aaronson also said that if he fronted money to a face and the face disappeared with the money, later the face would disappear for good.

Aaronson said that diversion exists because manufacturers allow it to exist. He said that you can't stop it but he gave the following advice on how to decrease diversion:

* Sell no full size or scanable samples.

* Limit duty free sales to the amount of merchandise the store could reasonably sell.

* Ship no American labeled goods overseas.

After Aaronson's session detailed the enormous scope of the problems of diversion, it was the vendors' turn to offer their expertise to help the manufacturers combat the problem.

Mike McGovern of Nocopi Technologies, Inc., Wayne, PA, showed how his company's covert and overt marking techniques helps stop diverters and counterfeiters in their tracks. Their covert marking systems enable manufacturers to track the distribution path of their products to any unauthorized distributor or retailer. Not much more can be said about Nocopi's products, because of their secretive nature, but the attendees who have used the Nocopi products offered testimonials about their effectiveness.

Reginald Montgomery, president of R.J. Montgomery Associates, related how his firm specialized in showing its clients who diverts their products, where the products go, and how the products are diverted. Montgomery, who has more than 25 years of law enforcement and investigative experience, said that " . . .ignoring "grey market" activity is equivalent 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. …

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