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In today’s world, where luxury brand owners are spending millions to effectively attract the affluent people towards their brands, these brands are facing a momentous threat from counterfeit goods manufacturers. The growth rate of counterfeiting has been epochal during the last two decades, posing challenges for the governments, genuine-item manufacturers and consumers as well. This paper identifies the scale with which counterfeiting is growing, the key reasons of its growth and the challenges that it poses for brand-customer relationships.

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COUNTERFEITING OF LUXURY BRANDS

http://brandingtodominate.blogspot.com/

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TABLE OF CONTENTS

CONTENT PAGE

Introduction 1

Scale of counterfeiting 2

Key reasons of counterfeiting growth 3

Exhibit 1: General descriptions of the phenomenon 4

Countries‟ situation and legal authorities 4

Consumers – the demand side 5

Exhibit 2: Social behaviour patterns for goods in Chinese society 6

Manufacturers – Legitimate and Counterfeiters 6

Challenges it poses for brand customer relationship 7

Exhibit 3: Deceptive and non-deceptive counterfeiting 8

Exhibit 4: Dynamic effects of deception in the primary market 9

Conclusion 11

Appendices

Appendix 1: Key reasons of counterfeiting growth 12

Appendix 2: Summary table of supply and demand drivers 13

Appendix 3: Extra costs related to combating counterfeiting 14

Appendix 4: Summary of principal potential effects of counterfeiting 15

References 16

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Abstract: In today’s world, where luxury brand owners are spending

millions to effectively attract the affluent people towards their brands, these

brands are facing a momentous threat from counterfeit goods

manufacturers. The growth rate of counterfeiting has been epochal during

the last two decades, posing challenges for the governments, genuine-item

manufacturers and consumers as well. This paper identifies the scale with

which counterfeiting is growing, the key reasons of its growth and the

challenges that it poses for brand-customer relationships.

INTRODUCTION

Firms spend their resources and time in building their brands over the period of years to have

prominent positions in consumers‟ minds and to build the desired image equivalent to the

brand identity. For luxury brand owners, brands are the most valuable – though intangible –

assets of the firms; a brand without the brand itself is just another product nowadays. Where

brands have been facing the challenges due to a troubling phenomenon: the „democratization

of luxury‟ (Kennedy) since the last decade, the practice of counterfeiting strong luxury brand

goods is another major problem. One of the main problems that luxury brands are facing in

today‟s globalized world is of counterfeit goods (Hilton et al 2004). Counterfeiting has

become a significant economic phenomenon (Bian and Moutinho 2009; Hamm 2009), and is

referred as „the crime of the 21st century‟ (ACG Report 2003), „world‟s premier criminal

enterprises‟ and „sophisticated network of criminals‟ (Gordon 2002), „organized crime‟

(McCaughey), and „threat to legal marketers of brands‟ (Perez et al 2010).

Counterfeiting - global problem of enormous magnitude – about which James Moody, former

Chief, FBI Organized Crime Division warned saying that counterfeiting will become the

crime of the 21st century is considered as one of the oldest crimes. The counterfeiting of

luxury products – sector in which counterfeiting is widespread (Hilton et al 2004) - is a

longstanding problem itself. But in today‟s world, brand names of leading luxury goods

manufacturers that has been synonymous with sophistication, elegance and style is facing a

significant threat from counterfeits and cheap knock-offs – counterfeits are called by many

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different names like imitation, fake, bogus, copy and overrun, which are little different in

meanings, but there is not much difference in creating similar problems for genuine-item

manufacturers (Yoo and Lee 2005).

SCALE OF COUNTERFEITING

According to Bosworth and Yang (2002), counterfeiting has become a global problem of

enormous magnitude. The phenomenon of product counterfeiting – the illegal practice of

manufacturing goods impersonating other branded goods and sold as registered legal goods

(Staake et al 2009) – had been considered by original goods manufacturers as a serious threat

since the 1970s, albeit it had existed since long (Harvey and Ronkainen 1985). Presently the

markets are flooded with fake products; the presence of counterfeit goods in the world market

has grown over 10,000 percent in the past two decades (Frasca 2009; MarkMonitor® 2009)

and by 1100 percent between 1984 and 1994 (Bian and Moutinho 2009). Recently it has been

estimated that counterfeits account for 6 to 8 percent of world trade (Frasca 2009; Wilcox et

al 2008), and ten percent according to Yoo and Lee (2009). World Customs Organization

2004 report confirmed that global market for such goods exceeded $600 billion and

accounted for 7 percent of the world trade approximately (Wilcox et al 2008), Asia being the

market that incurred more than one-third of the losses due to counterfeiting (Ang et al 2001).

Other figures by Commuri (2009) suggest that counterfeits reduce the sales of genuine-items

by $15 billion to $50 billion, and $250 billion if pirated goods are included out of which

knock-offs account for $9 billion (Commuri 2009). According to Sridhar (2007), “while the

world is growing by three to four percent, counterfeits are growing by 150 percent”.

International Chamber of Commerce in 2004 reported loss of $12 billion every year in luxury

goods sector due to counterfeiting, despite the commendable efforts of luxury brand

marketers (Wilcox et al 2008). Fashion related items are leading in this menace. Counterfeit

products seized by U.S. Customs in 2002 which account for 18 percent of the $98 million

were fashion related items (Hilton et al 2004). 30 million dollars in estimation are lost

annually by French luxury goods industry (Bamossy and Scammon 1985).

Out of the total, only designer jeans counterfeits account for 10 percent of the market. Calvin

Klein‟s counterfeited jeans accounted for $20 million in sales in 1981 compared to $250

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million of sales of original jeans (Grossman and Shapiro 1988). Levi jeans incur 15 million

dollar in losses every year. Cartier Inc. reported the presence of 40,000 copies of its watches

compared to 50,000 originals that were produced by the original brand itself (Grossman and

Shapiro 1988) and reported losses of 15 million dollars per year. Fake designer sunglasses

and designer watches account for about 25 percent share and over 25 percent share

respectively of U.S. market (Bamossy and Scammon 1985).

The increase in counterfeiting sales is also due to advent and subsequent rapid development

of internet; internet has provided sellers and buyers of counterfeited products with additional,

powerful and easily accessible channels. Organization for Economic Cooperation and

Development (OECD) noted that significant share of counterfeit products‟ sales is

attributable to the internet (International Trademark Association (INTA) 2009). The key

factors identified by INTA (2009) include the world wide reach of internet; online payments;

anonymity gained from operating via internet; easier to deceive buyers by showing pictures

of original products – which have made it simpler for counterfeiters to sell their products.

KEY REASONS OF COUNTERFEITING GROWTH

Various authors claim various reasons for growth and expansion in its magnitude and scope.

There are few key players which are playing a significant role in the growth of counterfeiting

which include the economy of the countries; legal authorities; consumers; and manufacturers

of luxury brand goods and counterfeiters as well; both demand and supply side investigations

need to be carried out (Exhibit 1). The main reasons of counterfeiting growth are summarized

in Appendix 1 and 2.

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COUNTRIES’ SITUATION AND LEGAL AUTHORITIES

Various reasons identified by Sridhar (2007) include high illiteracy rate level; low purchasing

power; increasing unemployment rate; ineffective law enforcement; and nexus between

counterfeiters and law enforcers The problem of counterfeiting emerged mainly due to

emerging economies where there is little risk for large profits, low probability to get caught,

low conviction rates and less penalty if convicted (Sridhar 2007; Frasca 2009; Bosworth and

Yang 2002). It is also growing due to weak legal infrastructure and corruptible public

officials (Green and Smith 2002); and countries which have low-cost producing facilities and

poor IP enforcement, and are close to large markets play significant role in driving

counterfeiting activity (Bosworth and Yang 2002). As suggested by Clark (2006), one of the

examples is China where there are noted loopholes and flaws in its copyright and intellectual

property legislation, and due to ineffective law enforcement and absence of serious penalties

counterfeiters continue to sell illegal goods in the market. However, to date no serious actions

have been taken to prevent this (Phau and Teah 2009).

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CONSUMERS – THE DEMAND SIDE

The above mentioned reasons for growth of luxury goods counterfeiting might not be the core

reasons but the certain aspects which provide the added advantage to the main players of the

counterfeiting phenomenon – manufacturers and buyers of luxury goods counterfeits. The

more the demand of counterfeits would be, the more counterfeits would be produced by the

criminals who indulge in this tax-free business. “Since demand is always the key driver of a

market, various researchers have argued that consumer demand for counterfeits is one of the

leading causes of the existence and upsurge in growth of the counterfeiting phenomenon”

(Bamossy and Scammon 1985). The driver for increasing demand is the aspiring attitude of

consumers who wish to buy latest luxury branded products but cannot afford the original

luxury goods (Phau and Teah 2009).

Counterfeits are purchased more when brand equity starts to signify an image instead of the

actual tangible attributes of the product. When consumers start giving more value to the

insignia of a brand on the product instead of the other product attributes, they tend to buy

more low-price low-quality counterfeits instead of originals (Gentry et al 2001; Ang et al

2001). The more successful the brand name would be, the more likely it is to have

counterfeits (Nia and Zaichkowsky 2000; Eisend and Schuchert-Guler 2006).

Moreover, high power distance in various cultures also leads to high demand for counterfeits

of luxury goods; one prominent example is Mexico as it is rated very high on Hofstede‟s

„Power Distance‟ Index. Mexican societies is one of those societies where wealth is

concentrated in hands of few elites and consumption of counterfeits of luxury goods help

remaining people to construct a fake identity which help them to become socially acceptable.

Similarly, the results of a study of how social factors influence the Chinese consumers‟

purchase intentions of counterfeits, conducted by Phau and Teah (2009), reflect that status

consumption is directly proportional to the purchase intentions of counterfeits of luxury

brands. According to Hamm (2009), the collectivist desire to belong to a certain group

presents reasons for growing counterfeit purchases, and only the three aspects of Chinese

collectivist culture „Liwu‟, „Guanxi‟ and „Reciprocity‟ (Exhibit 2) negatively influence the

purchase decisions of luxury goods counterfeits. Singapore is another example where people

are judged solely in materialistic terms and as branded goods are very highly priced in

Singapore, people tend to buy counterfeits of brands to be socially accepted.

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MANUFACTURERS – LEGITIMATE AND COUNTERFEITERS

From the manufacturers‟ perspective, counterfeits of luxury brands do not require much

effort to be sold, nor do they require much money to be manufactured. The amount of money

and time original luxury brand owners spend in establishing brand equity is huge (Commuri

2009), which these counterfeit goods manufacturers do not have to incur. Secondly, the

increase in goods that are worth counterfeiting with the ease of imitating brands due to

advancements in technology (Phau and Teah 2009; Gentry et al 2001), and highly fragmented

channels of distribution are some of the reasons for the catalytic growth of counterfeiting as

is also suggested by Bamossy and Scammon (1985) and Hilton et al (2004). Bosworth and

Yang (2002) also identified over production of goods under license as a source or reason of

counterfeiting.

Furthermore, the premiums charged from the consumer by the legitimate manufacturers of

luxury goods are generally very high from what manufacturers of counterfeits charge to their

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customers. These companies attract counterfeiters because they command purchase prices

that vastly exceed their base manufacturing costs (Gordon 2002). Consumers, who buy

products on the basis of functional attributes of the product, seem to value more on the price

than rest of the factors. Ang et al (2001) in their study of counterfeits found out that

consumers considered the prices of these luxury products to be too high despite the excellent

production quality and other benefits associated with them. Also, the study conducted by Yoo

and Lee (2005) showed that when price information about the brand was provided to the

respondents, the preference for genuine item diminished. But from the luxury brands‟

perspective, price plays a crucial role in communicating and preserving exclusivity and

prestige – as these are the important aspects of luxury brands – “as well as keeping the brand

out of mass consumption” (Kwak and Sojka 2010; Commuri 2009). Gucci in 1980s expanded

its output and made its products widely accessible in many stores which tarnished its image

due to non-exclusivity of the products, and then came the counterfeits which damaged the

brand even more. It had to withdraw its products from the markets in 1990s.

CHALLENGES IT POSES FOR BRAND-CUSTOMER RELATIONSHIP

Counterfeiting not only reduces sales of original goods but it also adversely affects the brand

equity and consumer confidence and it hurts channel loyalty (McCaughey), which directly or

indirectly affects the brand-customer relationship. Legitimate manufacturers have to incur

costs of protecting the brand and enforcing intellectual property rights (Appendix 3); and

costs associated with legal remedies (Frasca 2009). Counterfeit products negatively affect the

process of innovation, reduce the sales share of legitimate businesses, damage the brand

reputation, and undermine the ability of luxury brands to benefit from the breakthrough

products. The general effects counterfeiting has on various entities as identified by OECD

(2008) are summed up in Appendix 4.

As far as challenges that counterfeiting poses for brand customer relationship are concerned,

it is a two-edged sword for genuine-item consumers – even if they buy counterfeits being

victim of deceptive counterfeiting or they strictly restrict themselves to the originals, they are

at loss. The buyers of original luxury goods are affected when they buy fake goods due to

deceptive counterfeiting (Exhibit 3) as well as when others buy counterfeited luxury goods

through non-deceptive counterfeiting. “Whether counterfeits are of subpar or equivalent

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quality and whether consumers purchase them willingly or unwittingly, counterfeits appear to

unanimously imperil the equity of the genuine item” (Commuri 2009). If the counterfeit did

not fulfil expectations of the consumer who bought the product not knowing that it was a

counterfeit, he or she would blame the original luxury brand owner for the poor quality.

Even, „vanity‟ counterfeits – products of low intrinsic and low perceived quality (Hilton et al

2004) – though initially do not damage the brand‟s reputation because of the obvious

difference in the quality, but it raises serious concern for the legitimate manufacturers to

distinguish the originals from counterfeits to avoid non-deceptive counterfeiting.

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Counterfeit products affect the brand equity by diminishing the symbolic value of original

luxury goods and as there might not be a noticeable difference in the quality since those

counterfeits are low-priced alternatives of much expensive original luxury goods, it would

eventually result in the erosion of genuine luxury brand equity (Commuri 2009; Phau and

Teah 2009; Grossman and Sahpiro 1988; Bamossy and Scammon 1985) as well as it

decreases the luxury perception associated with the brand (Hamm 2009). The presence of

counterfeits reduces the willingness of a number of potential buyers to buy the original

products when they expect to be deceived, though actual deception takes place on a very

small scale relatively (Exhibit 4). The five perceived value attributes of a luxury brand

mentioned by Hamm (2009) – conspicuousness, uniqueness, quality, hedonism and self

extension – are all negatively affected by the presence of counterfeits in the long-term, if not

in the short run. It still affects some customers of the same brand who buy originals, even

when counterfeiters claim that all of their customers know that they are buying counterfeited

goods. Bosworth and Yang (2002) suggests that counterfeiting disables legitimate

manufacturers to take maximum benefit by shifting demand from them to counterfeiters.

Majority of the respondents in Nia and Zaichkowsky (2000) study felt that less presence of

counterfeits would not have led them to buy originals. These illicit goods take the market

share of original luxury brands and undermine innovation affecting the economic growth

negatively.

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On the contrary, according to the study conducted by Nia and Zaichkowsky (2000), “value,

satisfaction and status of original luxury brand name products are not decreased by the

availability of counterfeits”. Surprisingly, most of the respondents in their study felt that

availability of counterfeit goods actually had a positive impact on the brand equity for

original goods buyers. Even Yoo and Lee (2009), in their „fashion brand counterfeit‟ study

conducted in South Korea reached to the similar conclusion. On the other hand, Wilcox et al

(2008) suggested that counterfeits negatively influence the genuine-item consumers‟ minds

changing their buying preferences, when their attitudes towards it serve as a social-adjustive

function. They found out that it may not only have adverse effects in terms of lost sales, but it

also negatively affects the brand equity in the long-run.

Since the special characteristic of luxury brands are prestige and rarity (Nia and Zaichkowsky

2000), and luxury brands are supposed to be widely popular but not widely accessible

(Commuri 2009), counterfeiters make use of such disparity and break an important rule of

luxury brand management. An important element of luxury brands is „exclusivity‟ which is

negatively affected by the presence of counterfeit items (Commuri 2009); exclusivity is

undermined by the counterfeits (Hamm 2009). By damaging the brand‟s exclusive image, it

ruins the prestigious brand-consumer relationship which in some cases takes years to

develop. On the other hand, Staake et al (2009) suggested that due to excessive presence of

counterfeits, luxury brands companies may witness the increase in brand awareness leading

to additional demand due to network effects (Staake et al 2009).

In preserving brand-customer relationships, understanding what effects does counterfeiting

have on genuine-item consumers is a vital first step as the primary constituency of luxury

brand managers are genuine-item consumers; thus they should be a decisive preoccupation

(Commuri 2009). The study conducted by Hamm (2009) suggested that manufacturers need

to pay attention to the factors generating the demand of counterfeits to curtail the negative

effects due to counterfeits, and identified „advertisement‟ as the right messenger. To reduce

non-deceptive counterfeiting, necessary actions should be taken to make it simple for buyers

of original goods to distinguish between the originals and counterfeits. Changes in the

packaging and the products itself can be made to achieve the objective.

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CONCLUSION

Counterfeiting which is growing by enormous magnitude, poses threats to luxury brands; the

customer loses interest in the brand that is widely counterfeited. The growth in the supply of

luxury goods‟ counterfeits is due to the high demand of those counterfeits from consumers‟

side; counterfeits‟ consumers gain the same brand experience in some aspects in lesser price.

Counterfeits are manufactured and consumed in all economies – emerging economies being

developing countries provide favouring conditions for counterfeiting business.

The longstanding problem of counterfeiting poses challenges for legitimate manufacturers of

luxury brands in developing brand equity and maximising benefits from the resources utilized

in developing brands. The presence of counterfeits not only affects the potential customers of

brands negatively, but it also makes it arduous for legitimate manufacturers to retain their

existing customers. The losses incurred due to counterfeiting businesses are enormous.

Counterfeits undermine the phenomenon of innovation and negatively affect the brands,

economies, consumers of legitimate goods, as well as general public.

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Appendix 1: KEY REASONS OF COUNTERFEITING GROWTH

COUNTRIES’

SITUATIONS/ECONOMIES

GOVERNMENTS/LEGAL

AUTHORITIES

CONSUMERS OF

COUNTERFEITS

MANUFACTURERS

Emerging economies Low literacy level Low purchasing power Low consumerism

level High unemployment

rate Low risk for large

profits Low probability to get

caught Low conviction rates Less penalty if get

caught

Weak legal infrastructure

Corruptible public officials

Nexus between counterfeiters and law enforcers

Slow judiciary process

Loopholes in laws and its enforcement

More demand from consumers’ side

Acceptance is counterfeit goods is more

More value given to insignia of the brand

High power distance cultures

Collectivist cultures

Consumers value more on the price when buying for functional benefits

Find prices of luxury goods to be too high

Lack of counterfeiting morality

Through counterfeits consumers can acquire the same lifestyle depicted by high-fashion brands

Do not view counterfeits as second-rate products

Luxury brand owners

Over production of goods under license

Attract counterfeiters because of premiums charged from consumers

Counterfeit

manufacturers

Counterfeits are easy to sell

Low manufacturing costs

Fast-paced technological advancements

Increase in goods that are worth counterfeiting

Presence of highly fragmented distribution channels

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Appendix 2: SUMMARY TABLE OF SUPPLY AND DEMAND DRIVERS FOR COUNTERFEITS

Source: OECD (2008)

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Appendix 3: EXTRA COSTS RELATED TO COMBATING COUNTERFEITING

Source: OECD 2008

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Appendix 4: SUMMARY OF PRINCIPAL POTENTIAL EFFECTS OF COUNTERFEITING

Source: OECD (2008)

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