Counterfeiting of luxury brands


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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

  2. 2. TABLE OF CONTENTSCONTENT PAGEIntroduction 1Scale of counterfeiting 2Key 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 6Challenges 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 9Conclusion 11AppendicesAppendix 1: Key reasons of counterfeiting growth 12Appendix 2: Summary table of supply and demand drivers 13Appendix 3: Extra costs related to combating counterfeiting 14Appendix 4: Summary of principal potential effects of counterfeiting 15References 16
  3. 3. 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.INTRODUCTIONFirms spend their resources and time in building their brands over the period of years to haveprominent positions in consumers‟ minds and to build the desired image equivalent to thebrand 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. Wherebrands have been facing the challenges due to a troubling phenomenon: the „democratizationof luxury‟ (Kennedy) since the last decade, the practice of counterfeiting strong luxury brandgoods is another major problem. One of the main problems that luxury brands are facing intoday‟s globalized world is of counterfeit goods (Hilton et al 2004). Counterfeiting hasbecome a significant economic phenomenon (Bian and Moutinho 2009; Hamm 2009), and isreferred as „the crime of the 21st century‟ (ACG Report 2003), „world‟s premier criminalenterprises‟ 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, formerChief, FBI Organized Crime Division warned saying that counterfeiting will become thecrime of the 21st century is considered as one of the oldest crimes. The counterfeiting ofluxury products – sector in which counterfeiting is widespread (Hilton et al 2004) - is alongstanding problem itself. But in today‟s world, brand names of leading luxury goodsmanufacturers that has been synonymous with sophistication, elegance and style is facing asignificant threat from counterfeits and cheap knock-offs – counterfeits are called by many 1
  4. 4. names like imitation, fake, bogus, copy and overrun, which are little different inmeanings, but there is not much difference in creating similar problems for genuine-itemmanufacturers (Yoo and Lee 2005).SCALE OF COUNTERFEITINGAccording to Bosworth and Yang (2002), counterfeiting has become a global problem ofenormous magnitude. The phenomenon of product counterfeiting – the illegal practice ofmanufacturing 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 threatsince the 1970s, albeit it had existed since long (Harvey and Ronkainen 1985). Presently themarkets are flooded with fake products; the presence of counterfeit goods in the world markethas 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 beenestimated that counterfeits account for 6 to 8 percent of world trade (Frasca 2009; Wilcox etal 2008), and ten percent according to Yoo and Lee (2009). World Customs Organization2004 report confirmed that global market for such goods exceeded $600 billion andaccounted for 7 percent of the world trade approximately (Wilcox et al 2008), Asia being themarket 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-itemsby $15 billion to $50 billion, and $250 billion if pirated goods are included out of whichknock-offs account for $9 billion (Commuri 2009). According to Sridhar (2007), “while theworld 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 luxurygoods sector due to counterfeiting, despite the commendable efforts of luxury brandmarketers (Wilcox et al 2008). Fashion related items are leading in this menace. Counterfeitproducts seized by U.S. Customs in 2002 which account for 18 percent of the $98 millionwere fashion related items (Hilton et al 2004). 30 million dollars in estimation are lostannually by French luxury goods industry (Bamossy and Scammon 1985).Out of the total, only designer jeans counterfeits account for 10 percent of the market. CalvinKlein‟s counterfeited jeans accounted for $20 million in sales in 1981 compared to $250 2
  5. 5. of sales of original jeans (Grossman and Shapiro 1988). Levi jeans incur 15 milliondollar in losses every year. Cartier Inc. reported the presence of 40,000 copies of its watchescompared to 50,000 originals that were produced by the original brand itself (Grossman andShapiro 1988) and reported losses of 15 million dollars per year. Fake designer sunglassesand designer watches account for about 25 percent share and over 25 percent sharerespectively of U.S. market (Bamossy and Scammon 1985).The increase in counterfeiting sales is also due to advent and subsequent rapid developmentof internet; internet has provided sellers and buyers of counterfeited products with additional,powerful and easily accessible channels. Organization for Economic Cooperation andDevelopment (OECD) noted that significant share of counterfeit products‟ sales isattributable to the internet (International Trademark Association (INTA) 2009). The keyfactors 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 picturesof original products – which have made it simpler for counterfeiters to sell their products.KEY REASONS OF COUNTERFEITING GROWTHVarious 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 counterfeitingwhich include the economy of the countries; legal authorities; consumers; and manufacturersof luxury brand goods and counterfeiters as well; both demand and supply side investigationsneed to be carried out (Exhibit 1). The main reasons of counterfeiting growth are summarizedin Appendix 1 and 2. 3
  6. 6.’ SITUATION AND LEGAL AUTHORITIESVarious reasons identified by Sridhar (2007) include high illiteracy rate level; low purchasingpower; increasing unemployment rate; ineffective law enforcement; and nexus betweencounterfeiters and law enforcers The problem of counterfeiting emerged mainly due toemerging 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 andYang 2002). It is also growing due to weak legal infrastructure and corruptible publicofficials (Green and Smith 2002); and countries which have low-cost producing facilities andpoor IP enforcement, and are close to large markets play significant role in drivingcounterfeiting activity (Bosworth and Yang 2002). As suggested by Clark (2006), one of theexamples is China where there are noted loopholes and flaws in its copyright and intellectualproperty legislation, and due to ineffective law enforcement and absence of serious penaltiescounterfeiters continue to sell illegal goods in the market. However, to date no serious actionshave been taken to prevent this (Phau and Teah 2009). 4
  7. 7. – THE DEMAND SIDEThe above mentioned reasons for growth of luxury goods counterfeiting might not be the corereasons but the certain aspects which provide the added advantage to the main players of thecounterfeiting phenomenon – manufacturers and buyers of luxury goods counterfeits. Themore the demand of counterfeits would be, the more counterfeits would be produced by thecriminals who indulge in this tax-free business. “Since demand is always the key driver of amarket, various researchers have argued that consumer demand for counterfeits is one of theleading 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 ofconsumers who wish to buy latest luxury branded products but cannot afford the originalluxury goods (Phau and Teah 2009).Counterfeits are purchased more when brand equity starts to signify an image instead of theactual tangible attributes of the product. When consumers start giving more value to theinsignia of a brand on the product instead of the other product attributes, they tend to buymore low-price low-quality counterfeits instead of originals (Gentry et al 2001; Ang et al2001). The more successful the brand name would be, the more likely it is to havecounterfeits (Nia and Zaichkowsky 2000; Eisend and Schuchert-Guler 2006).Moreover, high power distance in various cultures also leads to high demand for counterfeitsof 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 isconcentrated in hands of few elites and consumption of counterfeits of luxury goods helpremaining 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 statusconsumption is directly proportional to the purchase intentions of counterfeits of luxurybrands. According to Hamm (2009), the collectivist desire to belong to a certain grouppresents reasons for growing counterfeit purchases, and only the three aspects of Chinesecollectivist culture „Liwu‟, „Guanxi‟ and „Reciprocity‟ (Exhibit 2) negatively influence thepurchase decisions of luxury goods counterfeits. Singapore is another example where peopleare judged solely in materialistic terms and as branded goods are very highly priced inSingapore, people tend to buy counterfeits of brands to be socially accepted. 5
  8. 8. – LEGITIMATE AND COUNTERFEITERSFrom the manufacturers‟ perspective, counterfeits of luxury brands do not require mucheffort to be sold, nor do they require much money to be manufactured. The amount of moneyand time original luxury brand owners spend in establishing brand equity is huge (Commuri2009), which these counterfeit goods manufacturers do not have to incur. Secondly, theincrease in goods that are worth counterfeiting with the ease of imitating brands due toadvancements in technology (Phau and Teah 2009; Gentry et al 2001), and highly fragmentedchannels of distribution are some of the reasons for the catalytic growth of counterfeiting asis also suggested by Bamossy and Scammon (1985) and Hilton et al (2004). Bosworth andYang (2002) also identified over production of goods under license as a source or reason ofcounterfeiting.Furthermore, the premiums charged from the consumer by the legitimate manufacturers ofluxury goods are generally very high from what manufacturers of counterfeits charge to their 6
  9. 9. These companies attract counterfeiters because they command purchase pricesthat vastly exceed their base manufacturing costs (Gordon 2002). Consumers, who buyproducts on the basis of functional attributes of the product, seem to value more on the pricethan rest of the factors. Ang et al (2001) in their study of counterfeits found out thatconsumers considered the prices of these luxury products to be too high despite the excellentproduction quality and other benefits associated with them. Also, the study conducted by Yooand Lee (2005) showed that when price information about the brand was provided to therespondents, the preference for genuine item diminished. But from the luxury brands‟perspective, price plays a crucial role in communicating and preserving exclusivity andprestige – as these are the important aspects of luxury brands – “as well as keeping the brandout of mass consumption” (Kwak and Sojka 2010; Commuri 2009). Gucci in 1980s expandedits output and made its products widely accessible in many stores which tarnished its imagedue to non-exclusivity of the products, and then came the counterfeits which damaged thebrand even more. It had to withdraw its products from the markets in 1990s.CHALLENGES IT POSES FOR BRAND-CUSTOMER RELATIONSHIPCounterfeiting not only reduces sales of original goods but it also adversely affects the brandequity and consumer confidence and it hurts channel loyalty (McCaughey), which directly orindirectly affects the brand-customer relationship. Legitimate manufacturers have to incurcosts of protecting the brand and enforcing intellectual property rights (Appendix 3); andcosts associated with legal remedies (Frasca 2009). Counterfeit products negatively affect theprocess of innovation, reduce the sales share of legitimate businesses, damage the brandreputation, and undermine the ability of luxury brands to benefit from the breakthroughproducts. 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 beingvictim of deceptive counterfeiting or they strictly restrict themselves to the originals, they areat loss. The buyers of original luxury goods are affected when they buy fake goods due todeceptive counterfeiting (Exhibit 3) as well as when others buy counterfeited luxury goodsthrough non-deceptive counterfeiting. “Whether counterfeits are of subpar or equivalent 7
  10. 10. and whether consumers purchase them willingly or unwittingly, counterfeits appear tounanimously imperil the equity of the genuine item” (Commuri 2009). If the counterfeit didnot fulfil expectations of the consumer who bought the product not knowing that it was acounterfeit, 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 al2004) – though initially do not damage the brand‟s reputation because of the obviousdifference in the quality, but it raises serious concern for the legitimate manufacturers todistinguish the originals from counterfeits to avoid non-deceptive counterfeiting. 8
  11. 11. products affect the brand equity by diminishing the symbolic value of originalluxury goods and as there might not be a noticeable difference in the quality since thosecounterfeits are low-priced alternatives of much expensive original luxury goods, it wouldeventually result in the erosion of genuine luxury brand equity (Commuri 2009; Phau andTeah 2009; Grossman and Sahpiro 1988; Bamossy and Scammon 1985) as well as itdecreases the luxury perception associated with the brand (Hamm 2009). The presence ofcounterfeits reduces the willingness of a number of potential buyers to buy the originalproducts when they expect to be deceived, though actual deception takes place on a verysmall scale relatively (Exhibit 4). The five perceived value attributes of a luxury brandmentioned by Hamm (2009) – conspicuousness, uniqueness, quality, hedonism and selfextension – are all negatively affected by the presence of counterfeits in the long-term, if notin the short run. It still affects some customers of the same brand who buy originals, evenwhen counterfeiters claim that all of their customers know that they are buying counterfeitedgoods. Bosworth and Yang (2002) suggests that counterfeiting disables legitimatemanufacturers 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 ofcounterfeits would not have led them to buy originals. These illicit goods take the marketshare of original luxury brands and undermine innovation affecting the economic growthnegatively. 9
  12. 12. 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 theavailability of counterfeits”. Surprisingly, most of the respondents in their study felt thatavailability of counterfeit goods actually had a positive impact on the brand equity fororiginal goods buyers. Even Yoo and Lee (2009), in their „fashion brand counterfeit‟ studyconducted 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‟ mindschanging their buying preferences, when their attitudes towards it serve as a social-adjustivefunction. They found out that it may not only have adverse effects in terms of lost sales, but italso negatively affects the brand equity in the long-run.Since the special characteristic of luxury brands are prestige and rarity (Nia and Zaichkowsky2000), 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 ofluxury brand management. An important element of luxury brands is „exclusivity‟ which isnegatively affected by the presence of counterfeit items (Commuri 2009); exclusivity isundermined by the counterfeits (Hamm 2009). By damaging the brand‟s exclusive image, itruins the prestigious brand-consumer relationship which in some cases takes years todevelop. On the other hand, Staake et al (2009) suggested that due to excessive presence ofcounterfeits, luxury brands companies may witness the increase in brand awareness leadingto additional demand due to network effects (Staake et al 2009).In preserving brand-customer relationships, understanding what effects does counterfeitinghave on genuine-item consumers is a vital first step as the primary constituency of luxurybrand managers are genuine-item consumers; thus they should be a decisive preoccupation(Commuri 2009). The study conducted by Hamm (2009) suggested that manufacturers needto pay attention to the factors generating the demand of counterfeits to curtail the negativeeffects due to counterfeits, and identified „advertisement‟ as the right messenger. To reducenon-deceptive counterfeiting, necessary actions should be taken to make it simple for buyersof original goods to distinguish between the originals and counterfeits. Changes in thepackaging and the products itself can be made to achieve the objective. 10
  13. 13. which is growing by enormous magnitude, poses threats to luxury brands; thecustomer loses interest in the brand that is widely counterfeited. The growth in the supply ofluxury 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 beingdeveloping countries provide favouring conditions for counterfeiting business.The longstanding problem of counterfeiting poses challenges for legitimate manufacturers ofluxury brands in developing brand equity and maximising benefits from the resources utilizedin developing brands. The presence of counterfeits not only affects the potential customers ofbrands negatively, but it also makes it arduous for legitimate manufacturers to retain theirexisting 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. 11
  14. 14. Appendix 1: KEY REASONS OF COUNTERFEITING GROWTH COUNTRIES’ GOVERNMENTS/LEGAL CONSUMERS OF MANUFACTURERSSITUATIONS/ECONOMIES AUTHORITIES COUNTERFEITS Emerging economies  Weak legal  More demand Luxury brand owners Low literacy level infrastructure from consumers’ Low purchasing power  Corruptible public side  Over production of Low consumerism officials  Acceptance is goods under level  Nexus between counterfeit goods license High unemployment counterfeiters and is more  Attract rate law enforcers  More value given counterfeiters Low risk for large  Slow judiciary to insignia of the because of profits process brand premiums charged Low probability to get  Loopholes in laws  High power from consumers caught and its enforcement distance cultures Counterfeit Low conviction rates  Collectivist manufacturers Less penalty if get cultures caught  Consumers value  Counterfeits are more on the price easy to sell when buying for  Low manufacturing functional benefits costs  Find prices of  Fast-paced luxury goods to be technological too high advancements  Lack of  Increase in goods counterfeiting that are worth morality counterfeiting  Through  Presence of highly counterfeits fragmented consumers can distribution acquire the same channels lifestyle depicted by high-fashion brands  Do not view counterfeits as second-rate products 12
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