The story of Ruslan Kogan, 32, is that of an immigrant, rags-to-riches story that tucks into the Silicon Valley mythos. While Kogan isn’t the only importer of parallel products, he is the most visible – and vocal.
Nearly 10 years ago, Kogan, son of Belarusian migrants, left a safe job to start his parallel import business in his folks’ garage. His light bulb moment was learning an LCD TV wholesaled for a third of retail.
Kogan promoted himself by slapping at sclerotic Australian retailers and the channel. Today, he’s worth north of $350 million, ranks 162nd on the BRW Rich List, and lives in a luxury apartment in Australia’s 16th richest suburb, Melbourne’s Albert Park, says the ATO. (Kogan refused repeated requests to comment for this article, saying through his public relations agency Sling & Stone that he was too busy.)
Ruslan Kogan’s innovation was to massively bypass supply chains to build his own direct links with emerging China exporters, minting his own brands such as the eponymous Kogan as well as Agora.
Kogan hollows-out prices for premium products, such as with Australia’s first sub-$500 netbook (1.6Ghz processor, 1GB RAM) and a $149 Android smartphone. In this issue of CRN, we review his cut-price notebook, a $359 unit with quad-core Intel Pentium N3540 processor. And he parallel imports premium, branded products such as Apple’s iPhone 5 at a small price cut.
Speaking to BRW about his lobbing into the Rich List, Kogan said it’s game-on for disruption of a cozy channel.
“The internet is making it easier than ever for businesses to start and challenge the Goliaths of their industry,” Kogan said. “If I had started Kogan 20 years ago, I would have needed millions of dollars of stock, and showrooms around the country to communicate to the end customer. With the internet, it’s build a website, put a product there and you can instantly talk to the consumer directly.”
The Australian Competition Commission agrees. Although it refused repeated requests to be interviewed for this story, in a statement a spokesman said: “Parallel importing of genuine products is one way for Australian consumers and businesses to buy authentic, well-known branded goods from overseas at cheaper prices.” High prices – the so-called “Australia Tax” – are powering arbitrage in imports, the ACCC says.
An enterprising situation
That’s the consumer space; the enterprise channel is a different beast. While parallel imports and grey markets have always been a factor in the Australian channel, improvement in supply-chain management and rigorous contract enforcement has actually cracked down on the practice, says Avnet Australian vice-president and general manager Darren Adams.
“Every now and then there’s a rogue individual but their ability to parallel import is hindered by the procedures, policies, systems and audits that tend to be higher in the global multinational [distributors],” Adams says. “The supply-chain authenticity is significantly better today than it was 25 years ago.”
Distinct from parallel imports of new and branded equipment, the grey market in used or secondhand equipment isn’t the factor it once was, he says.
“You go back 20 years and the secondhand market for enterprise computers was very buoyant. Back then, a $1 million computer is [the equivalent of] a $50,000 computer today.” These computers could be bought overseas up to 90 percent of their price new, far cheaper than the local product, he says.
“Now the scale is much lower – there’s not as much money in doing it. Customers are inclined to buy new; I’m not saying they don’t buy secondhand because they do, but the amount of money available to make those risks [isn’t there],” adds Adams.
He says Australian resellers are benefiting from a trend for global supply chains, as end customers seek standard solutions sold and supported from Australia but delivered anywhere in the world. In these cases, the items are drop-shipped from the manufacturing point of origin (usually China) or closer to the customer. “They want a supply chain partner that can localise their consumption of IT.”
Avnet has a globalisation team to help resellers manage currency conversions and smooth billing complexity, Adams adds. Avnet also deploys analytics on its systems to weed out suspicious buyers, he says. While he was coy on the specifics, Adams says cash buys from new resellers and those picking up from the warehouse raise red flags. Of the some 3,000 resellers on the distributor’s books, only a handful fall foul each year.
“Typically, it’s not big enterprise systems; typically it’s smaller situations, smaller orders. No one will turn up with a truck to buy a 42U rack that weighs a tonne-and-a-half; typically it’s [orders] for less than $50,000.”
Avnet cuts off resellers found to be parallel importing, he says. “The question is: are they breaking any laws? If you’re breaking the law, you should be dealt with based on the boundaries of laws and guidelines you’ve broken. Unfortunately, there’s a lot of hearsay and anecdotes and opinion that flies around – but you need facts.”
Next: Should parallel import restrictions be abolished?
But 20 years of government competition and productivity reviews have recommended abolishing parallel import restrictions. Choice spokesperson Sarah Agar says parallel imports boost competition and cut prices. “Australians have been slugged with the ‘Australia Tax’ for many years,” she says. “Parallel importation allows Australian consumers to purchase legitimate products [much cheaper]”.
In response to concerns that resellers will lose business, Agar says that’s a factor of international trade: “Just like a company can import its inputs from markets that are cheapest, so should consumers be able to access their products.”
Vendors in the firing line
PCS Australia CEO Syd Borg says the overseas offices of vendors are largely to blame for grey market imports making their way into Australia, as his competitors can buy direct and import by the container for less than he can through authorised Australian suppliers.
“A lot [of vendors] tend to ask for a premium price on their [Australian] products to cover losses in other countries, particularly in Asia, to compete against copies,” Borg says. “The problem we have is that the population and size of the [Australian] market isn’t huge, but Asia is massive and they buy in massive quantities and then get favourable pricing.”
Borg says parallel importation “has gotten worse in the past five years, and maintains that “I won’t play that game … I loyally back the local distributor.”
The growth of parallel imports pushed Borg to diversify into services and new markets, for instance serving education with digital lecterns and 10-finger multi-touch displays straight out of Minority Report.
He says that while most vendors turn a blind eye, HP is “doing their utmost to keep at bay the issue”.
“But it’s such a monster, how can they control it? They can’t. All they can do is assist the channel.”
Distribution Central managing director Nick Verykios says local vendors’ onerous requirements might push resellers to buy offshore.
“These resellers say, I don’t want to be part of the vendor channel, I just want their kit,” says Verykios, adding that Distribution Central didn’t bypass authorised channels.
Verykios says more parallel-sourced goods have started to come from the US and Europe rather than Asia and the Middle East in the past few years. Overseas vendor offices are “fudging” place-of-sale data to ship goods outside their territory and into Australia, he says. And wholesalers such as Distribution Central are being cut out, but not because of parallel imports.
“Absolutely we’re being cut out because of global distribution agreements”, especially when vendors shift authorisation to multinational distributors that resellers don’t want to work with. “But we get brought back in with services,” he says.
Verykios advises resellers tempted by a quick buck to consider, “They’re in for a world of hurt and by encouraging it, look behind your shoulder – how many deals are you getting cut out of?
“It will happen and it’s only a matter of time before you get screwed.”
Breakout: Grey, parallel or drop-ship: what’s actually legal?
Much of the discussion on parallel or ‘grey market’ imports turns on arcane law, specifically s.123 of the Australian Copyright Act (1968) on trademarks. Parallel imports are genuine goods imported by someone other than the licensed supplier.
As the Advisory Council on Intellectual Property says: “A concise and exhaustive definition of parallel imports is … elusive. The problem is that while trade … and brands may be global, trademarks are national and may be owned or used by different people in different countries.”
In everyday parlance, a parallel import is a new good under trademark but unauthorised by the Australian trademark owner for distribution. A grey market good may be secondhand or “refurbished” (the importer might not indicate this).
Drop-shipping occurs when a good ordered from a local reseller is dispatched from a supplier; it may bypass local, authorised channels.
Individuals have long imported products for personal use. Commercial parallel imports were enabled in changes to the Copyright Act in the 1990s covering books and music, followed by software in 2003.
Judgments in Paul’s Retail Pty Ltd v Lonsdale Australia, and Electrolux Home Products Pty Ltd v Delap Impex Kft are instructive for how the trademark owner was able to restrain parallel importers using trademark law.
Government reviews made over 20 years advocated removing parallel import restrictions in order to free competition and better serve consumers.
In April, the Harper competition review was the latest to recommend abolishing parallel import restrictions.
The Australian Competition and Consumer Commission says businesses reselling parallel imports “should ensure they don’t mislead consumers about the origin of the goods, their refund and return rights (consumer guarantees) and comply with the Australian Consumer Law”.
For resellers considering such trade, the ACCC is stern: “Consumers have rights under the consumer guarantees rights against the Australian retailer selling parallel imports (not the local manufacturer). Further, if the product was purchased in Australia, a manufacturer’s warranty that the manufacturer may offer may not apply to goods that have been parallel imported.”
Consumer watchdog Choice says this means if something goes wrong, you’re on the hook; don’t expect the vendor to help you out.
Breakout: No stopping King Kogan despite a stumble
Not content with low-margin electronics, Kogan expanded into consumer goods such as sports (under the Fortis brand), camping (Komodo), women’s and men’s personal products (Estelle, Scharfen), travel (Orbis), babies (bubbli) and pets (Pawever Pets).
He also has a stake in furniture e-tailer, Milan Direct. And he’s recently lined up in his sights the grocery duopoly, launching Kogan Pantry with 600 products from the likes of Colgate and Gillette that is also presumably parallel-imported, promising to halve the weekly shopping bill on a basket of 20 items.
But Kogan has made missteps, such as when his mobile virtual network operator (MVNO) went pear-shaped following the dissolution of ispONE, which was wholesaling Telstra services to Kogan.
Speaking to Good Weekend last year, Kogan’s philosophy crystallised: “The moment you start having relationships with these intermediaries, you become their bitch.”
While he might be the bane of resellers and retailers alike, Kogan has supporters. Speaking at the American Chamber of Commerce in March 2013, former IBM Australia managing director Andrew Stevens, said Kogan’s $149 Agora smartphone was at “a crazy price; but the strategy works”.
“It’s because Ruslan Kogan understands his customers and is obsessive about online retail,” Stevens said.
“Kogan collaborates with customers to identify products to bring to market. Kogan learns what products and niches are hot or emerging and deploys analytics to sniff out gaps that no one else is filling.” In 2010, Kogan launched LivePrice, a private crowdfunding site to cut his risk commissioning new products by inviting consumers to bid on them before they were made. The earlier consumers bid (therefore the greater risk they took) the cheaper the price they received compared to the final retail sticker.
Technology lawyer Kay Lam-MacLeod says there’s a market for Kogans.
“Kogan is No.1 in parallel importing of electronics; he’s done well out of it and I can see why, but people recognise that if you buy something that’s Kogan-branded it won’t be the same specs for the same product you might buy from a different brand,” MacLeod says.
“There’s room and clearly demand for it. And if you buy something that does the job and is half the price, then yay for you.”
* Disclosure: The writer collaborated with Andrew Stevens on his Amcham speech and sits for too many hours a day in a chair bought (at full retail) from Milan Direct. Nate and Ruslan are also connected on LinkedIn, not that it helped to compile this story.
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