July 9, 2007
Counterfeits Causing Real Damage in Human Terms
Too often when the discussion of counterfeit goods comes up, there is an emphasis on topics such as intellectual property rights and the profits lost by major corporations. Recent events, however, suggest that the real issue at hand is the safety of consumers.
Fake pharmaceuticals, toothpaste, infant formula, extension cords and batteries are just a few of the products that have made their way into unsuspecting consumers’ homes with deadly consequences.
A recent article in The Toronto Star discussed the experience of a senior Royal Canadian Mounted Police official who was given a pack of counterfeit batteries by a subordinate to illustrate the types of goods coming into the country, in this case, from China. A few months after receiving them, the batteries exploded inside the RCMP official’s desk. The sound was compared to that made when a gun goes off.
RCMP Superintendent Ken Hansen, who gave the batteries to the official, told The Star, “It was quite an explosion. If you were holding it in your hand you probably would have lost some fingers.”
The increase in fake goods hitting markets in North America has been staggering and low budgets and a lack of personnel have made it nearly impossible to keep these potentially dangerous items out of the hands of consumers.
Many items, such as fake pharmaceuticals, are primarily sold directly to consumers over the internet but in some cases, counterfeit prescriptions are mixed in with the real thing. In at least one case, counterfeiters attempted to get the most bang for their smuggling buck by loading counterfeit Louis Vuitton bags with fake medicine. According to an estimate by the World Health Organization, 10 percent of all pharmaceuticals sold globally are counterfeits.
In May, the Food and Drug Administration issued a press release that said it had identified three occasions when consumers had purchased counterfeit versions of the weight loss drug Xenical. Testing showed that none of the products contained orlistat, the active ingredient in Xenical. Some of the samples tested contained talc and starch as ingredients.
Consumer product manufacturers are working with the governments of various countries around the world to deal with the explosion of fake goods making their way to the consumer market.
While China has been the focus of many international counterfeit fighting actions, and certainly many recent news reports, it is far from being the only country with criminals seeking to make a buck on a legitimate brand’s reputation. Earlier this month, Unilever signed a deal with the Algerian customs director general to share information and step up efforts to prosecute counterfeiters.
Discussion Questions: How big a problem, in terms of lost sales and profits, have counterfeit goods become for law-abiding retailers? What has been the impact on manufacturers? What should retailers and suppliers be doing to combat counterfeiting?
- Dangerous fake goods crossing border – The Toronto Star
- FDA Warns Consumers about Counterfeit Drugs from Multiple Internet Sellers
– U.S. Food and Drug Administration (FDA) - Discount Counterfeits Can Be Dangerous – The Associated Press/Forbes.com
- Algeria signs agreement with Unilever in battle against counterfeit good –
AFX News Limited/Forbes.com
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It’s easy to blame counterfeits for health and quality dangers. However, many retailers require their suppliers to list the retailers on their product liability insurance ACORD forms, so the retailers are covered, not just the suppliers. Given the alleged huge volume of counterfeits, no one has proven that the dangers are statistically greater, compared to genuine products. Even the most reputable brands (Apple, Motorola, Sony) have recalls from time to time.
It is important to note that the “policing” of counterfeit products is not the retailer’s responsibility, but instead that of the manufacturer. It is also important to note that batteries, even counterfeit ones, do not “explode” unless they are close to a flame. They just do not have the ingredients, even the worst ones (they have less active product) usually leak or don’t perform well. To explode would require a great seal (something poorly made batteries do not have) and good chemicals. I am skeptical of this story, to say the least, and I have many years with both Duracell and Energizer in my background. Either way, counterfeits are the responsibility of the manufacturer, who should be protecting their brand and their pricing. Asking the retailer to do this is outside of the parameters that most retailers can afford, or should be able to do.
A quality-appearing or seemingly-safe product is not true just because it is well uttered, less expensive, or packaged magnificently. Yet despite the strong appeals and honest methods of law-abiding manufacturers and retailers, counterfeit goods exist to accommodate both non-law-abiding providers and consumers seeking the prevalent advantage in pretense.
As for a solution, I can appreciate Frank Dell’s suggestion that a partial answer may rest in the future use of RFID.
Retailers and suppliers who sell counterfeit products probably don’t care anyway. Let the buyer beware. Don’t do business with companies you don’t know.
One effective way to fight counterfeit goods is to educate consumers. Retailers can play a significant role in this area by providing leaflets that briefly describe dangers posed by counterfeit goods and list pointers as to how to identify counterfeit products and where to report them. Such information can be provided on retailers’ respective web sites also. Making consumers your partners in fight against counterfeit goods makes sense. Retailers can also publicize steps they are taking to fight counterfeit trade.
Counterfeit consumer products are not a new issue, just new to food and drug industry. Buying fake watches or hand bags on the streets of New York has been going on for years.
While working in Russia, we explored the concept of bringing American jeans into the country as there was great demand. When we looked at what was being sold, it was almost all fake [brand] jeans from China, thus no market for American manufacturers. Now, this is happening with food and drug products. Retailers must only buy from the valid supplier.
The most common entry into the food store for counterfeit merchandise is through the diverting channel, so additional controls are required there. Retailers must keep their house clean.
An internet sale of counterfeit merchandise does damage to the brand and is thus an issue that manufacturers must resolve. The use of RFID through the supply chain will likely be a longer term solution.
This just underscores the need for country of origin labeling. It was always important but with all the bad press that China is getting, it would be very helpful to know what products are coming from there. While China isn’t the only one guilty, it is pretty high on the list of recent offenders.
Learning of Chinese ingredients in name brand foods such as pet food is another big problem that unfortunately country of origin labeling won’t solve. The execution of the Chinese leader shows that China is worried about their image and hopefully will go a long ways toward starting to correct the problem in their country.
In the U.S., counterfeiters have found a haven targeting recent immigrants like the Hispanic consumer. It has been blatant, or as subtle as changing a letter on the name brand, a logo, or a color.
Considering the size of the market, the projections of growth, and the liabilities in brand erosion or worst, it is imperative manufacturers are aware of all distribution channels and critical for them to communicate the genuine brand attributes to consumer and trade.
If the retailers refused to buy the counterfeit goods, the counterfeiters would stop producing the product, and the companies importing the products would change their business practice. The retailers tend to turn a blind eye to the problem, until they get caught. And when they do get caught with the goods in their stores, they act innocent as if they did not know the product exists on their shelf.
I recently visited a major retailer in the U.S. selling a “branded” item at 1/3 the cost of the normal price. On closer inspection, the product had an incorrect spelling on the back of the package. When I pointed this out to the store manager, he said that they carried the product all of the time, and that it was from a “different country” than the actual brand.
When retailers are unwilling to sell the product, the problem in the U.S. will start to dissipate.
Work with trusted suppliers only. Counterfeit goods make it into the mass retail market when a buyer is offered a deal from a less well-known source or under the table that is too good to be true. If it sounds too good to be true, it probably is. That doesn’t help solve the problem of consumers buying this stuff direct, but if retailers–especially independents–really crack down on that kind of buying, then it will be a lot harder for those goods to make it into mainstream retail.
I think the reality is that the safety issues associated with counterfeits–outside the pharmaceutical area, which are very real–are minor and getting undue publicity versus the facts, safety issues with legitimate products, etc.
That said, counterfeiting and privacy are huge issues with regard to lost sales by manufacturers and retailers, so what is happening is that business is now smartly using the safety issue to finally get tougher legislation and enforcement around piracy, including in one bill, tough sanctions against citizens who bring counterfeit goods purchased overseas into the country (A bad idea, in my opinion).
The bigger safety issues in my mind surround the thousands of legitimate goods that are made and increasingly designed as well overseas, without the importer/offshorer really understanding well the methods, processes, raw material sources, etc. used. This was what happened with the deadly pet food.
China itself is taking some steps, but we will see more of these issues.
This issue is not going to go away and in the next few years it will be impacting nearly every retail category. It’s things like this that will drive the use of RFID and other supply-chain control processes.
It’s easy to point the finger on this and say it’s the responsibility of the government but in fact, it’s the responsibility of everyone including the consumer. The two biggest single parties involved are of course Asian countries, with China leading the pack and websites, led by eBay.
It’s a shame that we live in an era where traditional values like honesty and integrity no longer have meaning in some of the cultures we trade with.
While there has always been smuggling, piracy and counterfeiting, the flexibility and volume suggests that substantial resources and procedures are well established, indicating bureaucratic involvement and corruption.
Be careful with whom you trade; the relationship will end up defining you as well.