Stuart Fuller, director of commercial operations at NetNames, which is a global firm specializing in online brand protection and anticounterfeiting services, said his company’s most recent analysis positions counterfeit as a “global pandemic.” He said the global online market of counterfeit goods increased 15.6 percent in 2014, and he expects it to increase again this year.
Fuller said the total revenue of the counterfeit market is $1.8 trillion globally, “and out of that, we believe that the U.S. economy loses about $225 billion in economic activity to counterfeit goods.” Here, Fuller discusses these trends and how it impacts retailers and brands.
WWD: Can you frame the impact on brands across industries, to illustrate just how ubiquitous this problem is?
Stuart Fuller: With 4.7 billion online consumers predicted by 2020, the explosion of the Internet as a core channel for customer engagement has created huge opportunities for commerce — but also serious and continually evolving threats that cost companies worldwide billions of dollars in revenue every year — to counterfeiting. Globally, the industries most affected are financial services, entertainment, luxury brands, technology, retail/fast-moving consumer goods (FMCG) and pharmaceuticals.
U.S. companies lose some 15 to 20 percent of sales to counterfeit goods. And 55.7 million jobs in the U.S. are dependent on IP- and brand-intensive industries, and within the categories being knocked off, 6.7 percent comprises wearing apparel and accessories, and another 3.1 percent in fake high-style footwear. Here’s how the overall counterfeit market in the U.S. breaks down:
• 40.2% Handbags, wallets
• 28.8% Watches, jewelry
• 8.4% Consumer electronics, parts
• 6.7% Wearing apparel, accessories
• 4.6% Pharmaceuticals, personal care
• 3.1% Footwear
• 2.7% Computers, accessories
• 2.4% Labels, tags
• 1.5% Optical media
• 1.6% Other
WWD: Which countries do most of the growth in counterfeiting originate from? And why is it is concentrated there?
S.F.: With the cheap cost both of labor and materials, and a good prospect of not being caught, much of the counterfeiting comes from the Far East. An estimated 67 percent of counterfeit goods originate from China, with around $24.4 billion in counterfeit goods going from the East Asia-Pacific region to Europe and the U.S. annually. With recession-driven bargain hunters, one in five U.S. and European bargain hunters landed on sites selling counterfeits. Just as for reputable businesses, online channels make it far easier for counterfeiters to access vast numbers of consumers with low overheads, minimal investment and little regulatory control.
Furthermore, in a world where consumers desire big brand names, but want to seek out bargains following the economic crisis, it is all too easy for counterfeiters to step in. An interesting statistic from retailfraud.com noted that for every consumer that buys a lower-cost counterfeit product online, 28 consumers purchase counterfeit products unknowingly.
WWD: How are these products making their way into the market? And how would you describe the key players?
S.F.: In terms of how they get in front of consumers it can be through a number of methods. They can buy items direct from a number of online marketplace Web sites or via physical or virtual resellers. The latter route to market is probably more worrying for consumer protection authorities as it involves the physical transportation and import of the goods. Whilst the authorities have had some success in the seizure of goods in transit — more than $1 billion in 2014 — it is a small drop in the ocean compared to what actually makes it to their final destination. With counterfeiting tied to criminal activity in many instances, the methods used to move goods from the “manufacturer” to the market are often sophisticated and go to great lengths to avoid detection.
WWD: What can brands do to protect themselves?
S.F.: Counterfeiting presents myriad dangers for brands. They directly affect sales volumes, prices, costs, investment and the brand equity of firms. Sales lost to counterfeiters directly translate into lower wages and lost jobs, as well as higher prices for consumers — eroding brand profitability, outside investment and market share. Brands have a responsibility to protect themselves.
Here are just a few recommendations we have:
• Proactively educate your customers on how to identify and avoid fakes.
• Consider appointing a dedicated brand protection manager to raise awareness of counterfeiting both internally and externally, and to liaise with the relevant law enforcement agencies.
• Collaborate with other brands and industry bodies to pool resources, influence and intelligence.
• Use new anticounterfeiting technologies and systems overtly or covertly, including product identification and tracking, as part of a multilayered approach.
• Set up dedicated Web pages to help consumers determine whether a product they have bought is a fake and report where they purchased it.
WWD: Where is counterfeiting going next? How is it changing?
S.F.: It’s clear that counterfeiters will continue to exploit the potential of new technologies and the digital world to further their reach, profitability and anonymity. They quickly adopt, particularly around new fabrication and packaging technologies. In the digital world, the explosion of mobile, social media and new generic top-level domains (gTLDs) is fragmenting the online landscape — exposing brands not just to counterfeiting, but also evolving threats such as phishing, cybersquatting, traffic diversion and other forms of online fraud. Counterfeit sites are increasingly exploiting pay-per-click (PPC) and SEO fraud to attract consumers, using the same methodologies as brand owners to drive lucrative traffic to their content.
Fraudsters are also using social networks, blog entries and review sites to divert consumers to rogue e-commerce Web sites, even creating bogus product reviews to bolster the legitimacy of their products. Live-streaming sites are the fastest-growing online piracy platform, and mobile apps are a fast-growing area of concern for counterfeiting. Copycat apps in legitimate global marketplaces or black market sites can be directly purchased, or lead consumers to purchase counterfeit goods, watch pirated content, and expose their personal information to theft.
Finally, with 3-D printing, the lines between physical and digital counterfeiting may start to blur. The IP losses due to 3-D printer counterfeiting could total $100 billion by 2018. The printers will make it possible to transfer physical objects as digital files, which can then be fabricated layer-by-layer at the point of receipt by anyone with a 3-D printer. In principle, this could empower counterfeiters with an easy way to access new markets and bypass customs.