Brands and counterfeit goods: The mythical standoff

Imitations of branded clothing in Russia account for as much as 37% of the total turnover. This was reported by the Department of Economic Security (DES) with the Ministry of Internal Affairs, in summing up the operation "Counterfeit." Police shut down underground shops and sites that make and sell fake products. Yet, counterfeiting is the flip side of brands themselves.

As noted in the message of the department, 15 to 30% of perfumes and cosmetics items, clothing, household and food products are falsified.

According to the authorities, there was a decrease in counterfeit audio and video products in Russia. It makes no sense to spend money on CDs when everything is available on the Internet. Apparently for the same reason, the use of pirated software fell by 7%, although the percentage of illegal software is overwhelming - 80%.

"Approximately five thousand offenses were revealed, the illegal activities of 73 enterprises and clandestine workshops that produced counterfeit goods was aborted, illegal activity of 70 Internet sites was suspended," stated a representative of the ESD of the Ministry of Internal Affairs about the results of the operation.

At the same time the true dimensions of the counterfeit production and trafficking in Russia are hardly known to law enforcement agencies. There are only rough estimates that indicate that these sectors make up a significant part of the economy.

The turnover of counterfeit products on the Russian market at the lowest official estimates is over 100 billion rubles a year. If this estimate is correct, the state budget is not getting approximately 35 billion rubles.

Unofficial estimates of sales of counterfeit goods in Russia exceed $6 billion a year. Some experts suggest that the number should be multiplied several times.

The main supplies of counterfeit in Russia come from the South-East Asia (China, Singapore, India, etc.) as well as Bulgaria, Turkey, Poland and Ukraine. In some areas of the country bordering with China, over 95% of total trade is counterfeit.

In the Russian Federation the volume of counterfeit production is significantly smaller that the import flows of counterfeit. However, there are groups of goods where domestic counterfeit is an absolute leader. This is the production of alcohol, mineral water, as well as audio and video products. A significant proportion of the counterfeit domestic market is occupied by counterfeiting of medicines and dietary supplements.

In terms of quality the counterfeits of the consumer products vary dramatically. The lion's share is relatively normal in terms of characteristics and parameters of a product that is simply lacking required documents. Quite legitimate businesses may work in this way. This is the so-called "fourth shift" at the distilleries, pharmaceutical industries, record companies, etc.

If someone's trademarks are used illegally and products are sold at respective prices with a certain brand markup, the manufacturer takes away a part of the profits of the brand owners. For example, this happens when pharmaceutical manufacturers sell a domestic analogue of western medicine as authentic merchandise in appropriate packaging.

Brand-name products always bring profit, the so-called brand margin. It is an additional charge to the wholesale price of the goods with already embedded profit at the amount of 30% -50% of the cost, but may be substantially higher.

When brand owners claim billions of dollars of financial losses due to counterfeiting of their products they are not being entirely honest. In a sense, it can be called lost profit, or rather, extra profit. In addition, it is unrealistic to calculate the actual volume of counterfeit products from which billions of dollars in "losses" are derived. That is, the numbers are unjustified.

In addition, this markup for the myth designed for the consumer makes large amounts of supply unwanted, cutting off a significant portion of demand. This is especially true of products in the premium and luxury category. The reason is lack of ability of a significant portion of the population to pay premium prices.

This is why people buy counterfeit goods, paying for a myth, but only from those who sell it cheaper, adjusting to the ability of the buyer. It would be naive to assume that this very significant market share, giving huge profits, would be left unattended by the producers of branded goods.

It is no secret that most European manufacturers of branded apparel have long moved their production facilities to Southeast Asia. The main stream of counterfeit products comes from the same place. Simply put, branded products and the so-called fakes are mainly produced by the same hard-working Asian hands.

Given that taxes on these products are often not paid, and the status of a "fake" allows saving on product quality, the profit rate for werewolf brands doing business of fakes production are not less profitable than official manufacturing. Every product has its customer.

All this cheating only helps the brands that segment the market this way and have their profits from the widest possible audience. It is only a hypothetical government that is left in the red. The interests of the bureaucracy are also not violated. After all, this market share cannot be obtained without having to bribe officials for massively turning a blind eye to the financial flows bypassing the budget. They then join the crowds of customers of actually branded products.

Last year, the EU conducted a study of real loss of manufacturers of brand items from counterfeit products. The researchers came to two conclusions: brands exaggerate their losses from the counterfeit. In addition, counterfeit is working for the brands serving as advertisement.

Incidentally, the British research advisor of the Ministry of the Internal Affairs David Wall who commented on the research made a very interesting slip. He said that we need to focus on combating crimes such as trafficking in drugs or counterfeit parts for aircraft and other similar cases that do cause social harm.

It is hard to imagine an underground plant for the production of forged aircraft parts. Furthermore, the production technology and marketing schemes for such products are difficult to comprehend. This is a bit more complicated than mixing alcohol with water in a basement.

It is worth noting that consumer behavior and their attitudes towards brands and counterfeit are fairly rational. Even in well-behaved Western Europe, according to research by sociologists, large numbers of people are willing to buy high-quality counterfeits.

Europeans are most sensitive to brands when buying alcohol (67%), electronics (63%) and food (61%). This is understandable, as electronics are rather expensive, but alcohol and food have to do with health, which is known to be very difficult to fix even with money. Europeans are least concerned with "proprietary" brands in the event of purchasing clothing and footwear (55.4%).

Perhaps truly dangerous for the consumer is the "garage branded economy" that produces fake products that do not comply with basic norms and cause real harm to the consumer.

However, as shown by numerous tests of different brands of products, often brand guarantees nothing in terms of product quality. However, this is mostly the question for the Russian government that got rid of the old normative standard and did not introduce anything in its stead.

Vitaly Salnik.

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Author`s name Dmitry Sudakov