Real World Impact of Forgeries

Retailers in virtually every segment are struggling to protect their brand equity in a world where supply chain risks are rampant and catching the bad guys is a perpetual shell game.

Companies have tried to protect their brands using a variety of methods. One luxury jeans manufacturer sews a security tag into its jeans; a sports franchise brand uses holograms and video fingerprinting. Sadly, however, the annual value of counterfeit and gray market luxury goods continues to climb.

In late April, U.S. Customs and Border Protection seized more than 20,000 pairs of counterfeit designer jeans in Norfolk, Va. The shipment, which included several brands of jeans, had a total domestic value of more than $403,000. That same month, Los Angeles police investigators discovered more than 22,000 counterfeit items – including purses, wristwatches and DVDs — with a net worth of $10.5 million inside downtown buildings.

Luxury goods are among the most commonly counterfeited items, but footwear has the dubious distinction of being the most copied category. STORES executive editor Susan Reda recently spoke with Chris Jensen, vice president of marketing, and Laura McCaughey, vice president of business development with Irvine, Calif.-based New Momentum, about the scope of the problem and a solution the company has developed to tackle counterfeiting.

Can you put a dollar value on the amount of counterfeit and gray market luxury goods sold in the United States?
McCaughey: The number varies depending on which sources you use. The annual value of counterfeit and gray market goods globally is estimated at $1.2 trillion, of which luxury goods account for $300 billion to $600 billion. U.S. Customs and Border Patrol has really been on top of the luxury goods industry because trademarks and copyrights are recorded through Intellectual Property Rights [e-Recordation].

The domestic value of counterfeit goods seized for intellectual property rights violations in fiscal 2008 rose by 39 percent to $272.7 million, according to U.S. Customs and Border Patrol. The gray market can be a little harder to define. Companies generally have a pretty good idea that they are losing revenue to counterfeits and gray market activity, but typically are not aware of the magnitude of those losses.

Are the figures on the rise, or have the steps taken thus far managed to stem the tide?
McCaughey: The problem is burgeoning. Some categories, namely pharmaceuticals, footwear [and] handbags/wallets/backpacks, experienced 100 percent [year-over-year] increases in fiscal '08.
Jensen: One of our high-tech clients said they were losing close to $2 billion a year on counterfeits; a well-known Tier 1 pharmaceutical manufacturer lost $1.5 billion on one drug in 2008.

The high-tech manufacturer started a brand protection group shortly after they became aware of quality issues and high rates of return. Their use of contract manufacturers reduced their production costs, but it also created a number of risks throughout the supply chain, counterfeiting being one of the most challenging. If you're outsourcing globally, everything has to be monitored.

Our very first customer, in the telecommunications industry, also had problems in the supply chain that they detected via product quality problems and high rates of return. That's usually how companies in any number of categories discover that they're having a problem.