Luxury Brands Have a Counterfeit Problem. Or Do They?

Luxury Brands Have a Counterfeit Problem. Or Do They?

The fastest growing niche in the luxury goods industry isn’t handbags or watches… it’s counterfeit.

According to the OECD, the overall market for fakes is ~$4.5T. Over 60% of that is suspected to be made up of luxury knock offs.

Some estimate between 5-7% of the luxury goods industry is made up of fakes. Many would argue that’s a far too conservative number, however for obvious reasons, it’s nearly impossible to calculate a perfect measure of this market segment.

Though we may not be able to pinpoint an exact number, its impact on the authentic industry is undeniable. Companies like LVMH spend $17M / year on legal action fighting against unauthorized sellers producing and profiting off of their dozens of subsidiaries (Tiffany, Louis Vuitton, Marc Jacobs, etc.). It’s common to see robust lobbying efforts on behalf of the industry which seek to convince foreign governments to crack down on these operations — in some cases pleading for the seizure and destruction of counterfeit goods.

Much of the opportunities for fraudsters stems directly from the decisions made by the brands themselves. In recent decades, globalization has provided irresistible opportunities for cost-cutting via outsourcing. This resulted in lower-quality production, looser adherence to brand guidelines, and, as Harvard Business Review described it, a severance of the “centuries-old association of luxury goods with their historical places of origin.”

Adding to the incentives for fraud is the incredible growth of retail prices across many of the most coveted brands. Recent reports from retail data firm EDITED reports a 25% increase in the average price of luxury goods since 2019. Digging into the most high profile brands tells an even more extreme story.

From 2010 to 2016, the cost of one Chanel bag increased 70%.

With tech enabling an explosion in the secondary/resale market, which was valued at around $30B in 2021 and is expected to surpass $50B by 2026, the stigma for buying ‘second-hand’ has essentially vanished, replaced by a culture that values the precise opposite — entrepreneurs who can successfully flip sneakers, watches, and just about anything else.

The confluence of these factors are the perfect storm for counterfeiters.

Not only does the outsourced production lead to the degradation of quality (making the production of knock-offs that much easier), but the surging retail price of luxury goods overall lights a fire under the belly of potential fraudsters. Not to mention the decreased accessibility of these goods for the average person: the consumer base for this shadow market.

Solutions like third-party authentication have taken off — quickly developing into a key pillar of the ecosystem. These companies range from white glove ‘expert’ services providing documentation after thorough examination to tech-based platforms using high resolution photography to issue seals of approval. Even marketplaces like eBay have taken on some responsibility by adding authenticity guarantees in certain high-dollar categories.

All this seems like the ultimate headache for the luxury goods industry, right?

A looming existential crisis?

Maybe.

Or maybe it’s one of the best tailwinds in the entire market.

It’s important to think about the audience for counterfeit goods. Whether it’s Birkin, Rolex, or Chanel, the buyer is almost always complicit.

You’d have to be pretty dumb to think the $50 watch you bought just happens to be 2% of the price of an authentic Rolex.

So it’s pretty clear the counterfeit market isn’t about deceit, it’s actually a collective decision:

They can’t afford the real thing, and would much rather have a cheap knock off than nothing at all.

For every person caught with a fake Birkin, Hermès reaps the benefit of an organic conversation placing their product on a pedestal. The public mockery of a celebrity caught wearing fake Gucci implicitly tells everyone paying attention that the real deal is worth every penny.

Basically, it comes down to the value system upon which the entire industry is built on — relying on mystique and intangible brand qualities to prop up eye-popping prices that are rarely defensible on the grounds of purely high-quality production.

Consumers are so bought into this aura surrounding the world’s most coveted and expensive brands that they are buying at record rates… and those who can’t afford? Well, they are too. For the same exact reason.