E-commerce growth and online counterfeiting: need to create a trusted online ecosystem

08 Jan E-commerce growth and online counterfeiting: need to create a trusted online ecosystem

E-commerce sales to surpass $2 trillion next year

On August 11th, 1994, a man sat down at his computer and purchased Sting’s Ten Summoners’ Tales compact disk with his credit card. It was the first secure retail transaction on the Internet[i].

18 years later, ecommerce sales were hitting $1 trillion in consumer spending. And this was only the beginning.

Ecommerce is now the fastest growing segment within retail with a 30 percent annual growth. According to emarketer, online sales are going to hit $1.5 trillion in 2014 and are projected to surpass $2 trillion next year[ii].

 China: the largest ecommerce market in the world

After conquering Western countries as a quicker, more effective and convenient way of shopping[iii], e-commerce has landed in China where it is currently booming.

In 2000,China had yet to develop any[iv] e-commerce applications, and had only 2.1 million total Internet users[v].

China’s ecommerce market became the largest in the world in 2014 with online shopping sales reaching $296 billion[vi], 600 million Internet[vii] users and 190 million online consumers[viii].

By 2015, e-commerce transactions in China are projected to hit USD 540 billion, or approximately 10 percent of total retail transactions, and by 2020, China’s e-commerce market is forecasted to be larger than those of the US, Britain, Japan, Germany, and France combined.[ix].

By just comparing the 24-hour e-commerce revenue in US and in China respectively during the Cyber Monday and the Singles day[1], we can realize how big are online sales in China. During the 2014 Singles day, all Alibaba owned shopping sites made almost 3 times more revenue than US during the Cyber Monday.

Several factors are frequently mentioned to explain the massive e-commerce growth in China: (i) the development of better payment systems and physical delivery mechanisms[x] (ii) the efforts promoted by the 12th Five-Year Plan to make China a global e-commerce leader[xi] (iii) the Chinese consumers preferences for speed and convenience[xii] (iv) the development of large e-commerce, social media and digital platforms[xiii] and (v) the very high smartphone penetration (71%)[xiv].

E-commerce growth followed by counterfeiters

E-commerce growth is unfortunately not just an opportunity for the good guys. Counterfeiters are also taking the full advantage of the online ecosystem to enlarge their business. In fact, counterfeiters are now able to access anonymously a far wider market and leverage every advance in technology to be more organized and more efficient.

Online counterfeiting appears in many forms. Independent websites, online marketplaces and social media websites are becoming a popular and cheap method for counterfeiters to attempt to sell fake goods[xv].  

The International Chamber of Commerce (ICC) estimates that counterfeiting accounts for an estimated $600 billion a year[xvi] and expects the value of counterfeit goods globally to exceed USD 1.7 trillion by 2015, that’s over 2 % of the world’s total current economic output[xvii] and there is no doubt that online counterfeiting has its role to play here:

  • One in six products sold online is identified as counterfeit[xviii].
  • According to the Office of the US Trade Representative, the volume of pirated and counterfeit hard goods sold online will soon surpass that of goods sold by street vendors and in other physical markets[xix].
  • One out of four Facebook advertisements for cut-price luxury goods such as Louis Vuitton handbags and Ray-Ban Aviator sunglasses links to websites selling counterfeit items, according to findings by two independent cybersecurity researchers[xx].
  • In EU, nearly 70% of the customs interventions focused on packages shipped by express mail or post[xxi] and 30% of all counterfeit seizures are linked to Internet distribution channels[xxii].
China: the world’s largest producer and supplier of counterfeit goods

No one would be surprised to know that China is still the world’s largest producer and supplier of counterfeit goods. From 2008 to 2010 almost 70% of all counterfeits seized globally was from China [xxiii]. In 2013, 93 percent of the value of knock-off goods seized by US customs was from China[xxiv].

The China ecommerce growth will certainly dramatically extend the reach of Chinese counterfeiters both locally and globally. Here are some facts that already show the spread of counterfeiting amongst the main Chinese online retail platforms:

  • Some international brands estimate that up to 80% of listings for their products on Taobao.com are fakes[xxv].
  • A recent official State Administration of Industry and Commerce’s (SAIC) investigation into Alibaba’s annual Singles’ Day sales found that more than 10 percent of the goods bought online from retailers were counterfeit or suspicious. Alibaba recorded more than $9bn in sales that day[xxvi].
  • 78% of luxury consumers in China highlighted concerns about the authenticity of products bought online[xxvii].
  • 45 per cent of Chinese eshoppers say they fear products will be exchanged with fakes during delivery, according to a study by Boston Consulting Group[xxviii].
The victims of online counterfeiting

Counterfeiting affects multiple actors, which are mainly the brand owners, the consumers and the online retailers.

Brand owners

Counterfeiting limits the sales of brand owners in two ways: 1) counterfeiters cannibalize their potential clients and 2) counterfeiting affects their brand reputation, which leads to customer defection. Also, brand owners might be suited because of poor quality products. The brand owners multinational rights holders collectively lose approximately 10% of their top line revenue to counterfeiters each year, and the number of affected brands is growing.[xxix]

Consumers

There are two main types of consumers who buy fakes: consumers who know they are buying a fake at an attractive price and consumers who ignore it and pay the price for a real product. Both are exposed to serious health dangers related to poor-quality products and good faith consumers are furthermore being scammed. A study released by MarkMonitor has found that for every shopper searching for counterfeit goods, 20 others are seeking value-priced and sale goods, and one in five of those bargain hunters are intercepted by counterfeiters’ rogue websites[xxx]. Vestiairecollective.com, Europe’s leading trusted social site for the resale of designer and premium fashion, releases a study revealing that 61% of female online marketplace shoppers have been mislead into purchasing counterfeit designer goods, or knew at least one person who had accidentally brought a fake designer item through the internet[xxxi].

Online retailers

Even if online retailers might take advantage of selling fakes, there are serious business risks related to counterfeiting. First, they are legally liable to host counterfeiters on their platform. Secondly, be considered as a hub for counterfeiting could seriously harm their attractiveness for brands, consumers and investors and therefore strongly compromise their growth.

Online retailers are beginning to realize these risks and start to take actions: Chinese e-commerce leader Alibaba said it has spent more than 1 billion yuan (£103m) $160.7 million fighting counterfeits on its websites from the beginning of 2013 up to November of this year, removing 90 million listings that may have been fake[xxxii]. Alibaba’s US counterpart E-Bay claims based on court document filed in 2010 that the company spends more than $20 million per year on “buyer protection programs[xxxiii].

Proposed actions

Regarding the previous facts the question to ask is: how to leverage the potential of e-commerce without increasing the risks of counterfeiting?

CREATE A TRUSTED ONLINE ECOSYSTEM

Instead of individual repressive actions against counterfeiting, a pro-active collaboration between the affected actors could lead to more effective and significant results.

This collaboration could take the form of a trusted online ecosystem in which every victim of online counterfeiting takes action.

This collaboration could take the form of a trusted online ecosystem where brands, products, E-commerce partners and shipping companies would be certified and where product authentication could be done at any step of product lifecycle, until consumer’s door.

In brief, brands need to add a secure and unique digital identity to their products that can be authenticated by anyone physically but also online. E-commerce websites could easily interface with a secure platform that would be able to read and confirm every identity to develop an online trust standard with strong guaranties for the consumer.

Such a secure environment would be sustainable, as every actor would benefit from it. In fact, good faith consumers would be able to identify and buy authentic items and would pay a fair premium for that valuable service. Brand owners and online retailers would manage the risks of counterfeiting while selling more at a higher price.

The success of this ecosystem would largely rely on the consumer willing to pay a premium for authentic items and online retailers vision of counterfeiting (short term versus long term profit). The wind currently blows in the right direction:

  • Chinese consumers of high-end goods are said to place a great premium on authenticity[xxxiv].
  • Trusted sellers on Ebay charge ~2X more than Low-Trust Sellers
  • Jumei.com is asking suppliers to add anti-counterfeiting technologies to their products[xxxv].

 

MONITOR DE WEAK POINTS

Even if the setting of a trusted ecosystem would eliminate the main risks of counterfeiting, several threats would remain for brand owners. In fact, consumers who are explicitly looking for fakes could be supplied either by online retailers who host fake good sellers to make additional transactional profit or by the counterfeiters themselves.

Several actions can help brand owners to monitor these dangers including:

  • Online monitoring tools to track the web, identify illicit activities and send takedown notices to Internet Service Providers which host website content
  • Customer education about the risks of counterfeiting goods
  • Government and customs action.
Conclusion

The rise of e-commerce has brought major opportunities and is planned to be a 2 trillion business in 2015. Unfortunately, online counterfeiting has followed this growth.

Online actors are now exposed to serious risks and should consider serious initiatives to guarantee that the tangible and intangible costs will not outweigh the benefits of e-commerce.

Create a trusted online ecosystem where brand owners, online retailers and consumers collaborate could bring effective results. Of course, this should be combined with other brand protection actions against bad faith online operators.

SOURCES

 

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