Exposing E-Commerce Counterfeits—A Threat to Retailers and Brands

April 3, 2018

When you think of someone selling counterfeit goods,

you might picture a vendor hawking knockoff watches on the streets of New York’s Chinatown or someone selling fake “designer” purses at a flea market. The significantly lower price of these items typically lets buyers know that their purchase is a poor imitation of the real thing. But what happens when you find a deal online with the same brand name and a remarkably similar package and design? Would you ever suspect a product that’s just a few bucks cheaper than usual on a major e-commerce marketplace, such as Amazon, eBay or Walmart wasn’t the real deal?

Turns out that’s exactly how the world of counterfeit goods is growing. A number of third-party sellers are trying to pull the wool over digital consumers’ eyes and pass off counterfeit items as the real thing. A recent undercover investigation by the U.S. Government Accountability Office (GAO) found that 40 percent of items purchased from third-party sellers on five popular e-commerce sites (ranging from cosmetics to sneakers to electronics) ended up being counterfeit. What’s fueling this rise in counterfeit ecommerce? And what’s at stake for retailers and brands caught in the crosshairs of this fraud? Retail News Insider set out to investigate.

 

THE SETUP

Both the GAO report and Daymon’s Chief Sourcing Officer Vipon Kumar point to shifting global supply chains and the explosion of e-commerce as key factors driving the increase of counterfeit goods being passed off as authentic via online marketplaces.

“The Western hemisphere has been the breeding grounds for this phenomenon,” says Kumar. “In 2008 and 2009, people lost finances but did not lose the desire to buy things. At the same time Amazon was building infrastructure in the United States that changed the dynamic of selling from business-to-consumer to consumer-to-consumer. That’s when this started. People from China and Hong Kong can now sell directly on these websites, and the velocity of this international trade has moved beyond the regulatory framework and structure we have in the U.S.”

The GAO report echoes the idea that the U.S. government has faced challenges in stemming the tide of counterfeit goods entering the country. It notes that the type of goods being shipped has diversified greatly and many are now being sent in smaller packages via the postal service or other home delivery carriers. This has stretched the resources of the U.S. Border and Customs Patrol thin and limited its ability to capture counterfeit goods before they arrive in the hands of consumers.

 

THE SOURCING PERSPECTIVE

Even if all shipments could be checked in transit, the problem of counterfeiting can only truly be stopped at the source, says Kumar. “Just like we all went after certifying sourcing partners for security after 9/11, now is the time to introduce intellectual property audits, ISO 9000 audits and social accountability audits,” he suggests.

John Reilly, Daymon Senior Director of Global Quality Assurance agrees that certain steps need to be taken at the source of manufacture to help prevent the problem. “There needs to be a careful vetting process in place to select the right manufacturer. An audit to review the factory’s capabilities, production processes, raw material sources, record keeping and product testing needs to occur. Annual visits to the factory to review the production process and recordkeeping, which includes traceability of raw material and finished goods as well as shipping records, should also be part of the brand owner’s quality program,” he explains.

According to Kumar, moving to a value-chain or co-sourcing model is yet another way companies could help reduce the risk and incidence of counterfeiting from the start. These models bring brand owners and suppliers together as collaborative partners. “They combine their efforts and both become protectors of the brand,” Kumar explains. This can disincentivize a supplier from creating counterfeit versions on the sly—a practice investigations have shown currently happens in some, but not all, cases of counterfeit production.

Kumar goes on to explain that many companies have done little to stop counterfeiting in the past since it often represented a percentage of their overall cost of doing business. But with the incidence growing, “retailers and brand owners have to do more than paying this problem lip service,” he says. “They have to invest in this, change the technology used, make it harder to counterfeit items. This will make the barrier to entry for fake goods higher and demotivate those who would seek to make counterfeit items.”

 

THE RETAILER PERSPECTIVE

In the case of the GAO investigation, while the retailers where products were purchased from weren’t the actual sellers of counterfeit goods: “if you create a marketplace that’s branded to you, ultimately you are responsible for the product,” says Dave Harvey, Vice President of Thought Leadership for Daymon. “The litmus test is if you, as a consumer, had a bad experience on that marketplace, would it impact where you shop in the future or what you buy?” 

A 2017 survey by brand protection firm MarkMonitor showed that nearly 27 percent of online shoppers have been duped into buying fake products—mostly (39 percent) from online marketplaces. As for the potential effects on retailer trust, while not directly addressed in the survey, it is perhaps telling to note that fewer consumers surveyed (7 out of 10) said they trusted online marketplaces to deliver on their expectations compared to known brand websites (9 out of 10).

Amazon, one of the marketplaces implicated in the GAO investigation, seems all-too-well-aware of the potential ramifications of counterfeiting on their brand equity. “Our customers trust that when they make a purchase through Amazon’s website—either directly from Amazon or from one of its millions of third-party sellers—they will receive authentic products manufactured by the true manufacturer of those products,” said an Amazon spokesperson in a statement to Retail News Insider.

“We strictly prohibit the sale of counterfeit products and invest heavily—both funds and company energy—to ensure our policy against the sale of such products is followed,” the statement continued. “We remove suspected counterfeit items as soon as we become aware of them, and we remove bad actors from selling on Amazon. We have successfully taken legal action against a number of bad actors and will continue to pursue legal action and work with law enforcement… We take this fight against bad actors very seriously and will not rest.”

For retailers like Amazon who already have established third-party marketplaces, a robust anti-counterfeit program is clearly a must. But for retailers who are still growing their e-commerce presence, such as many brick-and-mortar grocers, the better solution might be stopping before they even start.

“Traditional retailers who are still building out their e-commerce solutions need to realize it shouldn’t just be a back-end efficiency play,” says Harvey. “Pure-play online retailers like Amazon and Alibaba may need these third-party marketplaces to drive revenue. But if you’re a big brick and mortar retailer, you already have the foot traffic on high frequency items. So you really need to ask yourself, is the third-party model [and the risks involved] really the right thing for you?”

 

THE BRAND PERSPECTIVE

Brands also need to consider the risks of counterfeiting to their image. “I think there is no doubt that a counterfeit item can cause serious damage to a brand’s equity,” says Reilly. “Consumers who have purchased a product that turns out to be fake may blame the brand owner, which obviously results in a loss of sales. It can also seriously damage trust and goodwill.  Just as important as the loss of trust and equity, the economic repercussions of removing the counterfeit product from stores and the supply chain are enormous.”

Like Amazon, Urban Decay, one of the brands victimized by the counterfeiting documented in the GAO report, seemed well aware of these risks. In a statement, Urban Decay told Retail News Insider, “We take great pride in creating products that millions of people enjoy every day. We know our success depends on consumers’ trust that our products are safe, high quality and effective.

“An important part of our brand protection program is ensuring our products are sold only through authorized channels—retailers or distributors who are contracted to sell a product. Unfortunately, we know that some of our most popular products have also become the targets of counterfeiting. Led by former federal law enforcement employees, we implement a robust anti-counterfeiting program to mitigate the presence of counterfeit products on the market,” said [name of the person in the statement.

In addition to the sourcing controls noted above, brands can help prevent counterfeiting through the product development process as well, says Nicole Peranick, Senior Director of Thought Leadership for Daymon. “The more generic the packaging or product, the easier it is to replicate. So brands should be thinking beyond their branding scheme, what other proprietary product elements can they incorporate into the product so they’re harder to knock off. Maybe it’s a special type of packaging that has intellectual property attached to it, or a very unique color or flavor profile,” she explains. “There are many ways to add own-ability, and the more you can [differentiate], the better.”

 

THE CONSUMER PERSPECTIVE

The prevailing wisdom is that many consumers don’t know that they’re buying counterfeit goods online when they shop from these marketplace sites. The GAO report itself notes, “In the past, consumers could often rely on indicators such as appearance, price or location of sale to identify counterfeit goods in the marketplace, but counterfeiters have adopted new ways to deceive consumers. Consumers may have difficulty differentiating between counterfeit and authentic goods in the primary market for several reasons.”

Reasons cited in the report included:

  • a halo of legitimacy offered by the third-party marketplaces
  • more sophisticated packaging and branding that better mimics the appearance of genuine items
  • and prices set close to or even at the retail price of genuine goods.

Yet some consumers still seem to be getting savvy to potential dangers. According to the MarkMontior survey, 23 percent of consumers think it’s their own responsibility to avoid buying counterfeit products online. Strategies consumers surveyed said they use to help protect themselves include reading online reviews and avoiding purchasing certain categories, such as hair care, sun care and supplements.

“Consumers may be learning a lot from other sectors,” posits Harvey. “With the advent of ‘fake news,’ people have become more savvy or discerning about where they get their news from. [Similarly when it comes to shopping] consumers may be asking more questions now and trying to understand the origin.”

 

THE BOTTOM LINE

“Enforceability of intellectual property is very human,” concludes Kumar. “This practice of selling fake goods, it has to be checked through consumer education by the companies, through the work of sourcing managers doing elaborative monitoring of the whole supply chain and so on. The human element is much more needed. Systems and regulations are always going to be behind the people looking to make a quick buck.”

 

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