Solutions for Brand Protection & Revenue Loss Prevention From Counterfeiting

counterfeit prevention in manufacturing

Whitepaper on solutions for brand protection and revenue loss prevention from counterfeiting by:

Guankai (GK) NG 
Director – Business Development

NABCORE PTE LTD
Brand Protection & Tracking Specialist in Asia

4 Jan 2021

Download PDF version HERE or read the online version below.

EXECUTIVE SUMMARY

Counterfeiting is often overlooked by most brand owners – the US$1.9 Trillion counterfeit market in 2019 is already growing steadily, with Covid19 further fueling its growth. In the past, people used to think that only luxury goods would be a target for counterfeiting but right now, any product with a logo can be a target.

Counterfeit products are an invisible competitor to a brand. These fake products cause revenue losses, liabilities and even brand erosion for companies.

Counterfeiters mainly target 2 market segments – the primary and secondary markets. The prices of fakes are close to genuine for the former, and for the latter, there is a wide disparity range. The confusion between real and fake products is a costly one, causing more than 40% of global consumers to buy counterfeits unknowingly.

To combat that, brand owners need to prevent product duplication, secure distribution channels and communicate with their consumers. Achieving that is simpler than it sounds. By adopting the following 3 solutions outlined in this paper, physical product authentication, digital verification, and consumer marketing engagement, companies can start their fight against counterfeiting.

Contrary to popular practice, there is no single brand protection solution or technology that is superior to the point that it can be proclaimed as the most effective solution. Instead, interlocking solutions in the form of a combination between physical and digital technology is observed to be the “most effective” solution. Another added benefit to interlocking solutions is that company executives can gain visibility along the supply chain with product tracking. Interaction with consumers also enables brands to gather data and insights to drive future business growth.

A brand is one of the biggest assets that any company can have, and they should not rely solely on country regulations to protect it. Being able to prevent a loss of revenue from counterfeits and gaining insights on market trends is an absolute game-changer for brand owners.

INTRODUCTION

Counterfeiting is the only industry that continues growing even as global trade falls. According to the Organisation for Economic Co-operation and Development (OECD) and EU’s Intellectual Property Office, the losses brand owners suffer from counterfeiting related reasons are valued at US$1.9 trillion in 2019 and is expected to reach US$2.2 Trillion in 2022.

The mega trends of digital transformation and E-commerce have also fueled the growth of fake products since 2010. Counterfeiting has reached such an alarming level in Asia that it is often agreed upon as the top location where fake goods are made and sold. In 2016, China, together with Hong Kong, contributed to more than 80% of the global counterfeit products. While other Asian countries, such as India, Thailand, Vietnam and Pakistan are also producers of fake products, their volume is less significant than China. Asian port cities like Hong Kong and Singapore are considered to be important transit hubs for counterfeit trades. Fake goods often arrive in containers and are distributed in small parcels by post or courier services.  

Figure 1: Top Origin Locations of Counterfeit and Pirated Goods Seized in 2016 (Source OECD)

In recent years, the shipping of fake products in small parcels have been observed to be growing strongly, as a result of the boom in demand for E-commerce. Every day, there are millions of small parcels moving around, and this becomes a significant problem for enforcement.

The landscape of counterfeiting has also changed. In the past, luxury brands used to be the only ones to attract counterfeiters. However, right now, any product with a logo could potentially be a target of counterfeiting. Victims of counterfeiting can range from anything like food, electronics, spare parts, and even to pharmaceutical products. Fast-Moving Consumer Goods (FMCG) such as toothpaste, cosmetics, alcohol and even cigarettes are not spared either. Based on seized shipments, apparel products such as footwear and leather articles are the most counterfeited goods, as shown on the table below.

Figure 2 - Top 20 Product Categories That Were Counterfeited or Pirated in 2014-2016. (Source OECD)

Counterfeiters would potentially target any product that consumers are willing to pay more for its brand, design, quality or safety. On top of that, imported products usually have a higher perceived value than local products and is thus subjected to more attacks in Asia.

Impact of COVID-19 on Counterfeiting

In 2020, COVID-19 was observed to have negatively impacted many industries. However, interestingly, it had positively impacted the counterfeiting industry. Sales of counterfeit products was already growing prior to COVID-19 but it boomed further during the pandemic period and will continue booming in the foreseeable future due to the three following drivers:

  1. Offline to Online Purchase Habit

Due to lockdowns and safe distancing rules to prevent the spread of COVID-19 during the pandemic, there has been a notable shift in purchasing behaviour, going from offline to online. This habit is common now even among the elderly as consumers are forced to adapt.

With more purchases being made online, the chances of consumers unknowingly buying fake goods through E-commerce platforms have also increased. This is especially true if the products consumers see online look well presented.

2. The Fear of Missing Out (FOMO)

COVID-19 has resulted in a large shortage of supplies, especially in the pharmaceutical and FMCG industries. Products such as COVID-19 test kits, masks, sanitizers, gloves and even cleaning solutions faced shortages globally when the pandemic hit. The fear and anxiety of the masses, coupled with the shortage of genuine products, gave criminals the perfect reason to increase their counterfeiting efforts, targeting the pharmaceutical, food, and daily essential sectors.

3. Incentive/ Push Factor to Produce Counterfeit

Supply chain disruption and the closure of factories have caused companies to be exposed to more fraud in these trying times. The lack of raw materials, packaging and security solutions for normal operations needed by companies provided a great avenue for counterfeiters to continue and thrive in their illicit operations. They easily increased their efforts to eat further into the market share of genuine brands since the products produced did not need to adhere to quality standards.  

Many companies are currently already facing survival issues, and the problems with counterfeiting only accelerates and exacerbates their losses. This silent killer has caused many companies to collapse and will continue to do so until action is taken against it.

PROBLEM STATEMENT

The Invisible Competitor – Fake Products

Crowded business environments, the global pandemic, and complex buyers’ behaviours are already causing brands difficulties in terms of generating high sales growth for their products. This tough situation is worsened when a brand is facing another competitor – fake products. These counterfeiters do not need to abide by any regulations and their underground operations are hard to detect. Therefore, they are often regarded as invisible competitors to brand owners. The rise of global counterfeiting, with better fakes being produced constantly, is destroying companies and consumers.

Companies suffering from counterfeiting and piracy are found primarily in developed economies in Europe (e.g., Germany, France, Switzerland, Italy, UK), Japan, Korea, Hong Kong, Singapore, and the United States (Figure 3). However, there is a rising number of companies in emerging economies such as Brazil and China being affected too. This implies that counterfeiting has become a critical risk for any innovative companies that rely on intellectual property for business growth, regardless of where they are located. Even China, the top place where fake products are typically produced, is impacted too.

Figure 3: Origin of Rights Holders Whose IP Rights are Infringed from Seizures of Counterfeit and Pirated Goods (Source: OECD)

Contrary to popular belief, counterfeiting is not a victimless crime. Brands should tell consumers who exactly gets hurt when they buy fake products. Most counterfeit goods in China are produced by slave or child labourers, who are often victims of human trafficking.

Figure 4: Child Labourers Working in Sweatshops in China (Source: Daxue Consulting)

Counterfeit companies, unlike branded corporations, will not face backlash, boycotting or be held accountable when they exploit cheap labour. This is because consumers do not know who manufacturers these knock-offs and they often remain in the shadows by continuing to copy the brands. According to OECD, there are generally 2 market segments that counterfeiters target: Primary Markets and Secondary Markets.

In the primary markets, the prices of the fakes are close to the genuine ones. Here, consumers want to buy genuine products but are not able to differentiate between the real goods and counterfeit products. Hence, they unknowingly end up buying fakes. Due to this, brand reputations are tarnished, with product recalls and liability claims further adding insult to injury when counterfeiters infiltrate the supply chains.

As a fake product fails or causes harm, it reflects badly upon the original brand – the damages done never reflect poorly on the counterfeiters themselves. This tarnishes the image of the manufacturer and distributors. Every sale of a fake product on a primary market represents a direct loss for brand owners.

On the other end of the spectrum, for secondary markets, the prices of the fakes are in wide ranges as compared to their genuine counterparts. In this situation, there are 3 types of consumer mentalities:

    1. Consumers knowingly purchase the counterfeits because they are not willing to pay for the real products.
    2. Consumers knowingly purchase the counterfeits because they are not able to afford or have no channels to get the real products.
    3. Consumers unknowingly purchase the counterfeits because they think that the real products are on sale and are happy that they are getting a good bargain.

In the OECD report, it was highlighted that 58.5% of counterfeit and pirated products traded worldwide in 2016 were sold to consumers who actually knew they were buying fakes. The remaining 41.5% of consumers purchased counterfeit items unknowingly. This is an alarming statistic. In essence, brand owners are losing a significant percentage of their rightful revenue while also losing consumers who might have been unsatisfied with the purchases, they thought were genuine.

Figure 5: Lifecycle of Counterfeiting. (Source: DataDot)

Typically, counterfeiting affects and destroys a brand and business through 4 stages:

Stage 1 – Entry

At the start, normally, small volumes of fake products would penetrate the supply chain and reach consumers. The loss of sales by the brand in this stage is often hard to detect. Usually at this stage, brand owners and official distributors are unaware about the presence of the fake goods.

Stage 2 – Growth

As time goes by, sales of the counterfeit items will grow. At the growth stage, the sales volume of fake goods increases significantly due to their low prices, prompting more fake suppliers to jump onboard. In this stage, the volume of fake products will scale up while the volume of genuine products will begin to decline. Brand owners and their distributors start to become aware of the counterfeit products as they see some losses in sales and revenue. However, many companies ignore them or are uneducated in terms of how to tackle issues of counterfeiting effectively. Once brands reach this stage, it is noted that they will generally progress to stage 3 very quickly.

Stage 3 – Critical

At the critical risk stage, the sales volume and growth of counterfeits have overtaken that of the real products. This is also the stage where retailers would start selling fakes openly or even mixing the real and fake products to sell to consumers. This then becomes a do-or-die situation for the brand. Businesses need to take swift actions to counter the counterfeiting if they have not done so earlier.  

Stage 4 – Fatal  

When it reaches the fatal stage, consumers cannot or do not want to differentiate between the real and fake products anymore. They have lost their trust in the brand and are no longer keen to buy the product. Consumers would then start to look for competitor brands. The product, brand and business then incur fatal damage and falls to a point of no return. Sales volume of genuine products nose-dive in this stage. The volume of counterfeit products will also start to dwindle as demand drops.

With shrinking demand, the stronger counterfeiters would then look for other brands which are more lucrative for them to fake and the cycle starts again. Once a brand gets negative publicity due to fakes and is deemed harmful, consumers would start shunning them as well. A good example would be the fake milk powder (Abbot & Beingmate) scandals in China. Beingmate, reported by SCMP, observed a net income decrease of 90% in 2014 after the incident.

SOLUTIONS

Brand protection strategies must be brand specific to consider the company’s target market, types of counterfeits produced, and how the counterfeits are manufactured, distributed, and sold.

The typical deterrence strategies that brands have used in the west will not work in the Asian market. To effectively tackle issues from the multi-billion-dollar counterfeiting market, it depends on whether the brand owner is able to prevent product duplication, secure distribution channels, and communicate with consumers. The following are 3 proven approaches that need to be present for the above proposed solution to be successful: 

    • Physical Authentication
    • Digital Verification
    • Consumer Marketing Engagement.

 

1)    Physical Authentication – Product Duplication Prevention  

Product authentication is primarily carried out by incorporating visual security features onto a product or packaging for anti-counterfeiting purposes. Clear specific instructions are required to be given to consumers on what to look out for to tell which items are fake and which are not.

Good security features allow consumers to easily authenticate genuine products before and after their purchase, creating barriers to counterfeiting and deterring copying. On top of that, the incorporation of security features onto products also serves as a signal to potential counterfeiters that the brand owner is serious about their product and is ready to take on the fakes. 

In the realm of physical authentication, there are several security technologies such as holograms, security inks, RFIDs or QR codes that are suitable for product authentication. While there is not a single “best” security technology, an important question to ask is which technology would be most suitable, cost effective and seamless for your operation. The key to know if a security solution is good for product authentication is for it to pass the “Granny test”. This means to say that even an elderly person with a lower level of technological experience should be able to verify the product easily.

With that being said, the efficacy of authentication using one’s naked eyes can vary from person to person, especially if they are old and are unable to see as well anymore. Therefore, using the smart phones or mobile devices that people carry around for authentication will be more reliable. The ease of authenticating products creates immediate results for both brand owners and consumers. Moreover, QR codes can be readily incorporated onto packaging during production.

The anti-copy capability of security QR codes leverage on image resolution and functional losses that occur when counterfeit/copy printing occurs. Print conversion losses when going from digital to analog result in a drop in resolution and sharpness. The difference in ability to capture and analyze these QR codes form the basis of the anti-copy/clone unique function. 

Figure 6: Anti-copy Capability of Security QR Codes (Source: Nabcore)

However, having only physical product authentication is simply not enough for brand protection to be effective and successful. To make the brand protection strategy more useful, tracking products through digital verification and consumer engagement is needed.

 

2)    Digital Verification with Track and Trace

Brand owners normally do not have visibility of how their products are being distributed beyond their first and second layers of main distribution channels. Therefore, the tracking and tracing of products from that point to the end consumers is often limited. While brands may be able to protect the authenticity of goods sold through authorized distribution channels, they cannot easily control the sale of fake goods, sold as genuine, on the internet.

To deal with that, unique identity codes should be given to each of the products during the manufacturing process. Each physical product will have its own unique digital identity code (like a birth certificate), making the authentication and tracking of each itemized product a simple task. This unique identification code can then be recorded and assigned to distributors prior to the shipping of the physical products. Below is an overview of how the process can be achieved:

Figure 7: Process Overview on Digital Identification for Products (Source: Nabcore)

Unique product identity codes can be incorporated seamlessly onto product packaging or applied as a security seal on the products during production. Distributors, retailers and consumers are then tasked to verify the unique identity codes with their smartphones. Distributers and retailers will scan and authenticate the products to ensure that they receive the original goods for sales, while consumers scan and authenticate the products to ensure that their purchase is genuine. Data of products and the locations of the scans are captured during the verification process. 

Counterfeiters, in their attempt to reproduce these unique identity codes, will also need to scan them. Data of failed verification attempts can then be captured and traced back to the locations where they happened. Suspicious areas are then narrowed down upon once detected. These pieces of data give valuable insight for brand owners to act upon – it can be shared with enforcement for follow up investigations to be carried out on suspicious places.

The use of a unique product identity to track products helps to disrupt attempts to introduce fake goods and expose counterfeit locations, making it easier to identify the source. On top of helping to deter counterfeiting, the verification of the product ID also helps brands to gain insights on trends.

The data captured in different stages provide important insights such as:

  • Identification of top-selling and trending products.
  • Locations of the products being sold.
  • Sales data on distributors and the products being sold.
  • Alerts on products sold outside of the distribution channels.

By analyzing such valuable insights, company executives can derive product and consumer trends. Insights on the best-selling products in the retail market and a heatmap of sales locations can be gathered. This information can help a company better allocate resources and become more agile to cater to any growing trends. By leveraging on data, brand owners can be assured that they will be ahead of their competition.  

Figure 9: Example of Screen Shots on Top Scanned Products & Heatmaps (Source Nabcore)

By taking the simple step of providing a digital identity for physical products, brands can obtain valuable insights on counterfeiting locations and data on product trends, aiding the management in driving business growth. However, the downside to this is that data analysis through digital verification cannot be achieved without user engagement.    

 

3)    Consumer Marketing Engagement

In the 21st century, consumers want to be engaged on their own terms, and brands need to take action to attract, engage, and retain them. According to a survey done by Brand packaging, more than 50% of shoppers say that bright attractive colors draw their attention to a product. In addition to that, it was found that when a label of a product does not provide enough information, 60% of shoppers are unlikely to buy it. Based on that report, two main insights can be distilled:

    1. Nice packaging does indeed attract customers to products.
    2. Enough information must be provided on the product for consumers to make a buying decision.

Brand owners will have to provide the above to stand out. Attractive packaging is crucial for brand owners to get the attention of consumers especially in the current noisy marketplace we are in. As such, nice-looking 3D foils & holographic labels can help to attract consumers’ attention and enhance a brand’s value, all while it provides security.

Figure 10: 3D Holographic Foil and Security Labels (Source: Nabcore)

Once a consumer has been attracted to a product or packaging, they need to be engaged immediately. This can be achieved with smart product labeling or packaging. Consumers are looking for reasons to buy your particular branded product. Given the short time span where you are holding their attention, relevant information such as product information, quality assurance and incentives need to be presented to assure consumers that they are making the right purchase decision.

Figure 11: Consumer Marketing Engagement Process (Source: Nabcore)

Benefits of a Smart Product Label for Brand/Product Owners

    1. Increase perceived product value (selling price) with attractive holographic label seals as it feels premium.
    2. Increase sales with opportunities to upsell other ranges of products.
    3. Stronger consumer engagement with marketing programs (e.g., Lucky draw).
    4. Increase brand image and brand consumer loyalty.
    5. Track sales and distribution with big data analysis.


Examples of Smart Product Labels

Figure 12: Smart Product Label for Marketing Engagement (Source: Nabcore)
Figure 13: Smart Label Design Idea (Source: Nabcore)
Figure 14: Product Info Displayed Upon Being Scanned (Source: Nabcore)


Consumer Marketing Engagement Through Loyalty Programs and Gamification

Having consumer engagement is hardly new. However, there must be an incentive or some form of gamification to allow for interaction between the brand, the consumer and the purchased product. Gamification functions exactly like a game – the more you buy, the higher your chance is to win or gain something (e.g., lucky draws). Such campaigns help to create an ecosystem, and a sense of belonging & identity in getting the product.

Loyalty programs with gamification attracts consumers and keeps them coming back for more. A good customer engagement program is essential to complete and protect the brand in a meaningful manner. If consumers are rewarded for authenticating their product purchase, they will actively look to purchase from the brand repeatedly. This loyalty helps brand owners to gain recurring revenue and strengthen their brand’s position in their consumers’ minds.

CONCLUSION

Counterfeiting is the direct result of industrial growth and the value placed on a brand’s image. Product counterfeiting will only continue to grow over the coming years, and futureproofing in the form of brand protection is a key way for brand owners to protect their rightful revenue. Additionally, consumers are also becoming more interested in product origins, leading to enhanced visibility and accountability on a company’s part. A brand is one of the biggest assets that any company can have, and while companies commonly rely solely on country regulations to protect it, it is simply not sufficient anymore.

If company executives do not take action to protect their brands, they are actually helping the counterfeiters. If no action is taken on their part, it will only cause more harm to their consumers, their jobs and their next generation. The simple action of evaluating how brand protection solutions can prevent the loss of rightful revenue and drive business growth is the first step to beating the long-standing war on counterfeiting.

The Need for Interlocking Brand Protection & Tracking Solutions

Due to how our world is a mixture of physical and digital spaces, there is not one single brand protection technology or solution that can be touted as the “best” for any brand owner. The best brand protection solution may also not be the most advanced or proprietary technology. Instead, a brand owner needs to consider solutions that are suitable for their product.

Brand protection has become highly accessible to companies with the advent of smart phones and internet accessibility. Brand owners can also now leverage on both physical and digital technologies to prevent the loss of their rightful revenue and drive business growth, changing the landscape of counterfeiting forever.

The most effective solutions are interlocking and improves over time to tackle the constant evolving counterfeiting threats. The three solutions presented in this whitepaper for a successful brand protection solution should not be employed in silos but should be interlocked with each other. A brand protection solution is useful for brand owners only if it is interlocking because:

    1. Products need to be authenticated in a simple, fast, and secured way to prevent counterfeiting.
    2. Distributions need to be tracked along the supply chain to grant brand owners visibility.
    3. Consumers need to be engaged for insights and data to help drive business growth.

Similar to how currencies around the world adopt multiple interlocking security solutions to prevent counterfeiting, brand owners must employ the same approach to protect their brand.

Interlocking Solutions for Brand Protection and Anti-counterfeiting

ABOUT THE AUTHOR

Guankai (GK) NG 
Director – Business Development

NABCORE PTE LTD
Brand Protection & Tracking Specialist in Asia
www.Nabcore.com

Guankai is a solution architect based in Singapore and the business development director of Nabcore Pte Ltd. He specializes in smart brand protection tracking solutions, with 10 years of experience navigating the grey market in Asia. His focus is on designing interlocking smart applications for FMCG, industrial and automotive products and brand owners to prevent counterfeiting and enable post-purchase marketing engagement.

To learn how your brand can be protected and tracked, contact Guankai at guankai@nabcore.com for a discussion OR request for a free trial of Nabcore’s Asia Brand Protect System. 

REFERENCES

Trends in Trade in Counterfeit and Pirated Goods.

https://www.oecd-ilibrary.org/trade/trends-in-trade-in-counterfeit-and-pirated-goods_g2g9f533-en

Behind the counterfeit product industry in China

https://daxueconsulting.com/counterfeit-products-in-china/

How Counterfeiting Can Destroy Your Brand & Business

https://www.datadotdna.com/how-counterfeiting-can-destroy-your-brand-business/

China’s new baby milk scandal to trigger tighter cross-border e-commerce rules

https://www.scmp.com/business/markets/article/1934204/chinas-new-baby-milk-scandal-trigger-tighter-cross-border-e