Traditional anti-counterfeiting strategies have always felt like waving a candle in the wind, but the combined force of item-level digital traceability, cell phone–driven user interaction, and real-time analytics is fundamentally changing the game.
It was difficult not to envy the audacity of the street vendor selling “Louis Vuitton” bags right in front of the brand’s retail store on the Venetian piazza. When I saw the scene, I thought to myself, “At least the scam is overt,” because the option was pretty clear: buy the Real McCoy inside or buy the knock-off outside if your aspiration was bigger than your wallet.
The bold vendor was just one example of how counterfeiting has been a constant source of misery for brands all over the world, syphoning sales and consumers away from legitimate businesses. While there is obviously a demand for explicitly knocked-off branded products where customers know exactly what they’re getting, a 2019 Incopro study found that 26% of US consumers had inadvertently purchased a counterfeit in the previous 12 months, and that 52% had lost faith in a brand after purchasing a fake product online. In a 2019 survey, the OECD and the EU Intellectual Property Office reported that counterfeit and pirated products totaled $509 billion in 2016, accounting for 3.3 percent of global trade, up from $461 billion in 2013. These figures are also rising as the pandemic accelerates online trade.
However, it seems that there is now hope for brands facing this almost insurmountable challenge. The crowdsourcing power of consumers interacting with goods through their phones is changing the game. Digitization is now making it possible to collect an unprecedented amount of traceability data on billions of objects as they pass through supply chains, and the crowdsourcing power of consumers engaging with products through their phones is changing the game. The combination of digital identifiers on goods, data aggregation across the supply chain, and customer interaction through mobile phones is generating tracking data on a previously unattainable scale. All of this information can now be analysed in real time using cloud-based analytics tools to determine if a product is genuine, in the part of the world or place it is supposed to be, and even in the hands of the person or company who is supposed to own it.
Faking It Is a Big Business That’s Getting Bigger
Counterfeit and illegal trade has benefited from the increasing proportion of retail sales made via online platforms. According to Research and Markets’ 2018 Global Brand Counterfeiting Study, global losses due to online counterfeiting totaled $323 billion in 2017, with luxury brands alone accounting for more than $30 billion. In 2016, Ghost Data conducted research that found that 20% of social media posts about top fashion brands it reviewed “featured counterfeit and/or illegal goods.” Fakespot, a company that creates software that detects fake online reviews and sellers, recently analyzed more than 124,000 Shopify stores and discovered that approximately one-fifth of them were connected to counterfeits, data breaches, the purchase of fake reviews, and other fraudulent behavior.
If spotting and shutting down brick-and-mortar counterfeit stores was a whack-a-mole challenge for brands, e-commerce has exponentially multiplied the problem, with counterfeiters able to set up new sites even more quickly with digital resources and meeting less geographical constraints. E-commerce provides bad actors with more privacy and access to a global audience, while also opening up new security vulnerabilities. Fraudsters can sell on the internet not only through websites but also through social media and large third-party e-commerce and recommerce marketplaces.
Consumer trust is being impacted by the arms race. According to Incopro’s 2019 survey, 51% of consumers said they would lose confidence in a brand if they bought a fake product from a search engine, and 64% said they would lose trust in an e-commerce marketplace if they bought a fake there by mistake. The problem is being exacerbated by the exponential growth of recommerce networks. According to a 2020 report conducted by GlobalData for ThredUp, the US resale market for apparel is projected to hit $36 billion by 2024, up from $7 billion last year, making it the fastest-growing retail sector.
Bringing a Peashooter to a Gunfight is a risky proposition
In the past, brands have attempted to combat counterfeiting by design and manufacturing, essentially making it too difficult or costly for counterfeiters to copy goods in the first place. To thwart counterfeiters, fashion and luxury brands introduced difficult-to-replicate details such as unique stitching, patterns, or handmade parts into their goods, while spirits brands used unique bottle designs. These interventions, however, may not be successful for customers who are less vigilant. In the spirits industry, counterfeiters are not burdened by the high proportion of tax charges that make up the average retail value of a bottle, and they have been known to manufacture very high-quality bottles, effectively competing on physical product quality even though the contents were fake and, in some cases, lethal to customers.
Some brands use holographic stickers, hidden and invisible inks imprinted onto labeling or packaging, or other authentication methods to identify their goods. Consumers may not know what to look for, which is a concern. After goods are released to the market, brands usually hire teams of inspectors in the field to perform spot checks to protect their IP and credibility. Inspectors visit retail locations and purchase goods from online marketplaces to locate suspect products and collect information to assist brands in pursuing legal action against offending retailers and distributors. However, sample rates are poor, and even well-staffed inspection teams fail to cover distribution networks by more than a few fractions of a percentage point. Keeping up with the army of anonymous bad actors who can easily set up fake websites and post dozens or hundreds of fakes for sale on social media each day is a tall order.
Since locating and prosecuting counterfeiters has proven to be so expensive and difficult, many brands have accepted these losses as a cost of doing business. Drawing attention to the issue has also been unwelcome, as media reports and public announcements run the risk of exacerbating the problem and, as a result, increasing customers’ apprehension about buying from a company.
To the Rescue: Data Science and Crowdsourcing
With digitization making it easier to monitor goods through the supply chain and with consumers, visibility into where products are and who has them is rapidly improving. The global barcode standards organization, GS1, has been rolling out an update to the ubiquitous technology that gives every product a web address, usually via a QR code on the object, which can be used to link each item with a cloud-based digital twin. Apple AAPL -1.5 percent and Android smartphones also have built-in camera applications that can automatically search standards-based codes like QR codes.
This ensures that brands can collect data from anyone with a smartphone at any point in the supply chain, including the point of sale and after the sale. This information can be sent quickly to the cloud, where algorithms can evaluate it alongside other information about the product in question to draw conclusions about credibility and other aspects of business integrity, such as grey marketing (also known as parallel trade). With a significant portion of customers scanning items to access information and services related to them, as well as to authenticate the item, brands are able to collect massive quantities of traceability data and quickly identify suspicious products or supply chain trends.
Counterfeiters would have a tougher time faking QR codes on fake goods due to the large amount of traceability data that can be captured. Serialization, the method of assigning unique identifiers to individual objects, usually requires reliable algorithms that are difficult to spoof, and the sampling rate achieved through user interaction and supply chain scanning ensures that copied or spoofed identities can be identified quickly.
Smartphones’ widespread availability (the Pew Research Center reports that 85 percent of Americans now own one) makes them an effective tool for crowdsourcing data, and a growing number of customers are engaging with QR codes on goods. Since QR codes allow contactless interaction for anything from payments to ordering meals at restaurants to obtaining information about a product’s provenance, the pandemic has encouraged more consumers to use them—particularly in Western countries, where adoption of the codes has lagged—the pandemic has encouraged more consumers to use them. According to Statista, 11 million US households will scan a QR code by 2020, and the current pandemic is likely to continue to drive consumer adoption of these codes.
However, QR codes aren’t the only choice. Digimarc DMRC -11.5 percent, based in Oregon, offers watermarking and serialisation technology that can be integrated into product packaging or labelling. Digimarc’s watermarking technology is being used in conjunction with specific QR codes and digital identities in the cloud to provide multilayered brand security in collaboration with packaging giant WestRock WRK -0.5 percent. The combination of physical product identifiers and cloud-based algorithmic intelligence creates a robust tracking and authentication system that can be scaled to any type of packaged or printed object.
This data-gathering capability isn’t limited to customer crowdsourcing. Data can also be collected when products leave manufacturing lines and are scanned in distribution centers, and data-sharing networks are emerging that enable brands to share tracking information through their supply chain, as well as with retail partners and customers. The Aura Blockchain Consortium, which will allow businesses to use physical signatures on items in conjunction with blockchain-based certificates to allow customers to monitor the provenance of goods and authenticate them, was recently launched by European luxury leaders LVMH, Prada Group PRAA +0.1 percent, and Compagnie Financière Richemont, for example. The World Economic Forum is collaborating with a group of clothing brands and re-commerce marketplaces on an initiative that will use digital identifiers on items to authenticate goods arriving at secondary markets for resale. Brands would be able to authenticate products using digital identities in the same way that credit card companies work with e-commerce sites to process payment transactions.
Cloud Machine’s All-Seeing Eye
Few people in the industry believe counterfeiting can be fully eradicated. However, it appears that the ease with which customers can obtain authentication information, the growing amount of traceability data being produced, and the increasingly evolving ability to apply machine learning and artificial intelligence to that data is a game-changer.