By Angie Navas
In my experience as an accountant, I have worked with companies that face the challenge of competing with unauthorized distributors, with infrastructures of “ unauthorized parallel importation of the same products .” This competition, although not always illegal, is unethical and generates inequality that directly affects finances. Official distributors invest time, money and effort in building a brand, opening markets and complying with legal and tax regulations, while unauthorized distributors take advantage of those same investments without assuming the costs or responsibilities.
Not only is this frustrating, but it also risks the financial sustainability of many companies that do things right. From an accounting perspective, the effects of this unequal competition go beyond revenues: they impact profit margins (mark-up), cash flow and, in some cases, the value of intangible assets such as brand or goodwill.
Moreover, in markets where price elasticity is the main deciding factor, price wars often occur. When an official distributor is forced to match prices with an unfair or parallel competitor, profit margins are quickly eroded, leaving little room to cover operating costs or invest in the business. If this situation continues, it can lead to a general decline in market profitability.
How does this competition affect the Financial Statements?
One of the problems I have identified is the pressure that these unauthorized distributors generate on prices. They offer cheaper products because they do not pay taxes correctly or because they avoid costs that official distributors cannot ignore, regulations and technical control. This forces the official distributors to lower their prices, and in many cases they end up sacrificing their margins in order to remain competitive.
Another important issue is inventory. When sales decline because the market prefers cheaper products, inventory builds up. And it is not just the cost of the product that is affected, but there are also storage costs and, in some cases, losses due to impairment of value. This becomes an accounting adjustment to expense that no one wants to see reflected in their financial statements.
Finally, there is the impact on liquidity. With lower margins and less turnover, companies have less cash to meet important obligations such as their foreign representative, taxes or even the financing of new strategies. Lack of liquidity can become a bigger problem if action is not taken in time.
How can we address this problem?
From my experience, there are several actions that official distributors can take to protect their market position and minimize the financial impact of these competitors:
Monitor profit margins:
Understand that every price adjustment affects margins. I have seen companies lower their prices without measuring the real impact (even dumping), and end up with red numbers because they could not cover their fixed costs or overhead.
Control inventories:
Accumulated inventory is tied up money. Good inventory management helps maintain turnover and avoids additional costs. In addition, periodically reviewing the status of inventory allows you to anticipate losses due to deterioration.
Securing cash flow:
Prioritise liquidity. Encouraging clients to pay faster, negotiating more flexible terms with their representative and reviewing unnecessary expenses are measures that can make a big difference.
Avoid a prolonged price war:
Although it may be necessary to adjust prices in the short term to compete, it is important to focus on strategies that justify a higher price, such as including additional services or promotions that do not depend on a direct price reduction. A price war only benefits the parallel competitor, which operates with lower costs.
Using the legal framework:
In Costa Rica, laws are there to level the playing field, but it is the responsibility of companies to use them. For example, if you detect that a competitor is not declaring real values at customs, does not have formal certificates of origin, or does not pay tariffs, you can file a complaint with the General Directorate of Customs or COPROCOM and the Ministry of Economy. This not only protects your position, but also helps combat informality in the market.
We cannot talk about being the country of “pure life” if we tolerate practices that harm companies that follow the rules. Costa Rica needs a market where everyone plays under the same conditions, and where the effort of those who invest in building something solid and sustainable is valued.
As an accountant, I have seen the impact of these inequalities on our clients' finances. I know it's frustrating, but I also know there are ways to deal with it and move forward. The key is to make strategic decisions, backed by good financial and accounting management.
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