Fakes Target Top Brands

20 September 2007 (Last Updated September 20th, 2007 18:30)

Counterfeiters target brands in practically all sectors of the economy, with luxury goods particularly vulnerable. Brand owners can fight back provided they analyse the problem correctly and chose smart, multiple deterrents. Henry Sang Jr and Jim Colby of HP's Digital Printing & Imaging Laboratory explain some tricks of the trade.

Fakes Target Top Brands

Counterfeit products are turning up on shop shelves, in the repair stock room and on the internet. The fakes can be simple knock-offs, relabelled sister products, a mix of fake and genuine product, or a refill masquerading as a virgin product.

The crime and the players vary by country and by product sector. You may be victim of a do-it-yourself counterfeiter or of a vertically integrated cartel including dedicated factories, distribution chains and retailers. Your supplier or store could be an unsuspecting conduit or they could be complicit in the crime. One thing is clear: the problem is getting worse.

At HP, we fight to protect our customers from fake printer cartridges and computer parts.

We also deal with other fraud, including product diversion and smuggling, ghost-shift production and warranty fraud. The anti-counterfeiting teams use a series of practices from product-level fraud deterrents to education programmes and law enforcement interdiction that together comprise an anti-counterfeiting campaign.

KNOW THE PROBLEM

One thing that surprises many who ask HP about our efforts is when they discover that we deal with counterfeiters as though they were business competitors. What this means is that we try to work from facts, including metrics on the size of the problem and the losses to HP of the fraud. We compare this with the cost of attacking the problem to determine a return on investment (ROI) for doing the work, then we decide on how to spend our anti-counterfeiting campaign dollars.

More than likely, your company is being attacked in more than one way. Investigate how many different counterfeiting vectors, or types of scam, are being exercised on your company. For each vector ask 'by whom, how and where' is the counterfeiting being done. Then decide which to attack and with what methods.

"Counterfeiting affects up to 10% or products in some industries."

One vector may be opportunistic re-labelling or remanufacturing of a few hundred units a year by a technician, sold on an internet auction site. Or perhaps it is a bar tender refilling a bottle with a less expensive beverage and selling it a drink at a time. By the time most companies realise that they have a problem, there is usually more than one counterfeiting vector to face.

Once you know the vectors, you can analyse and estimate the associated losses, costs and ROI of reducing a specific problem vector. Then you can determine who the natural participants and partners are for fighting the problem throughout the manufacturing, distribution, retail and investigation processes.

Each of the major strategies – adding counterfeiting deterrents to a product, educating the targeted community and doing full investigations – can be very expensive, and represents new sets of costs to doing business. The costs vary with the counterfeiting vector being addressed, the location and the phase of the campaign.

Furthermore, you should expect the counterfeiters to react to your efforts since you are threatening their business. To be most effective and to control costs, it is important to coordinate these activities and adapt them to the evolving market conditions.

THE COUNTERFEITER'S PERSPECTIVE

To combat counterfeiting, it is usually useful to think about the opportunity from the counterfeiter's point of view. Consider a counterfeiter who is looking at creating a substantial business, as opposed to a local opportunistic one. With a high-volume counterfeiting vector, the counterfeiters are usually taking advantage of a product with high volumes of sales, strong brand recognition, and a large and diverse distribution chain.

"Treat counterfeiters like competitors and analyse the cost of beating them against the loss of revenue if you do nothing."

The first question for the counterfeiter is, "Can I fake the goods so that most people will buy them?" With many products, there is no way for the consumer or retailer to easily and confidently qualify a product itself as genuine.

Fake inkjet cartridges are usually refills and will work to some level. Fake wine, organic food or health supplements might not be readily recognisable to the average consumer. Fake brake shoes will fit on the designated models; they just do not stop your car to the correct specifications. Most products are readily faked and can fool the average consumer and the average retailer.

Many products are ready targets for counterfeiters because it is very easy to copy their packaging. If the product manufacturer uses undifferentiated bottles and boxes, and readily available labelling, it is easy for the counterfeiter to acquire the same materials and use desktop publishing systems to create counterfeit labels and packaging.

Take a stroll down your local pharmacy's nutritional supplements aisle and look at the packaging used for vitamins and other supplements. Don't the bottles and the labels all look like they came from the same manufacturing line? Adding a plastic clamshell around a product may help thwart consumers from opening the packages in the aisles, but it isn't a deterrent for a counterfeiter. One of the first things to address is to stop making it easy for the counterfeiter with undifferentiated packaging.

Confusion is another ally of the counterfeiter. If there are many different, ever-changing versions of the packaging, how is the consumer or retailer to know when a new product package arrives that it isn't legitimate?

BIG BRAND, BIG TARGET

The counterfeiter likes a strong brand since it equates to higher-priced merchandise. This increases their profit margin as well as allowing them to offer their product at a discount to incentivise sales. They need a high-volume product because their revenue is also volume dependent. Furthermore, they want to be able to hide their fake product within the flow of genuine products.

"Using hybrid deterrents increases your chances of defeating the fraudsters."

Ironically, the management team of a hugely successful, rapidly growing product is less likely to see that fakes are a growing part of their business because their revenues look great. Of course, they are precisely the victims the counterfeiter is searching to find.

Typically, with a high-volume product comes a complex distribution network.

Many stores are selling the product and distributors help balance the supply and demand. Excess product in one location is resold to other places at discount, or even at a premium to address short supply. Pallets might be broken apart and distributed. Excess cases might be re-palletised for shipment to another warehouse. This all makes it easy to hide within the legitimate distribution chain.

These are some of the critical elements for the counterfeiter. The surging product success provides them with an easy way to hide a significant volume of fakes. That same success makes it easy to command a great price and provides the appetite for 'good deals' in the distribution chain. If it is easy to fake, then their manufacturing is easy and less expensive. Plus that reduces the chances of getting caught in the act. Safe, easy, profitable and in demand: a perfect environment for the counterfeiter.

HOW DO YOU FIGHT BACK?

When counterfeits are first discovered to be a significant problem, companies tend to panic. When they search the internet or attend conferences, they will find a dazzling array of anti-counterfeit technologies. But it is difficult to understand which technologies to use for what problem.

"Think about how the counterfeiters can fake your deterrents."

Most fellow brand owners do not readily discuss all aspects of their anti-fraud campaigns. When you look at historical examples, you find a set of technologies, such as holograms, which are not working well against modern counterfeiters. Often, a manufacturing engineering manager is told to 'just do something'.

The most important consideration concerns who is to use a deterrent and the situation in which they will use it. Is it a cashier trying to move customers through a queue? An undercover investigator checking out a store? Perhaps a customs agent who is inspecting a shipping container, or your elderly mother buying medication?

Some deal with an individual item, others with cases and pallets. Some will be trained and diligent, whereas most will be lax about the checks unless there is a major publicity event.

Adding deterrents to product packaging is an essential part of the anti-counterfeiting campaign, since these deterrents can be used in the store. Product-based deterrents can also be strong, but they usually cannot be utilised at the time of purchase. Other deterrents need to be used at the case and pallet level to catch fakes before they make it to the retail shelf.

A step-by-step approach where you start with something that catches the eye of the user and reminds the buyer to be counterfeit-aware is a good approach to employ. For example, special foils or security tapes, followed by one or more quick checks that can be done in a matter of seconds. The goal of a quick check is to raise suspicion and to provide a modicum of deterrence for those who will only do the minimum inspection.

However, it is still important to have a set of thorough checks that completely qualify a product. Mass serialisation and hard-to-guess unique codes are becoming a popular way to do this for some products, whereas special chemical taggants and readers are used by law enforcement officials.

HYBRID DETERRENTS

There are different types of deterrent for each of these purposes. In the past manufacturers typically used static deterrents, meaning that they are the same on each product. Many of these are inexpensive since they can be produced in bulk. The problem is that most static deterrents are easily attacked by counterfeiters.

"The first question for the counterfeiter is, 'Can I fake the goods so that most people will buy them?'"

The trend is to go to digitally printed deterrents that vary with each product unit. With digital printing on labels, inserts and packages, you can create an array of different deterrents and can also take advantage of hybrid schemes.

A hybrid deterrent ties together two or more deterrents. For example, if you are using a mass serialisation code, you can also print the same code above it in UV invisible ink. Then a retailer can easily check the visible and invisible codes to see that they match.

Another simple visible hybrid is to have a set of symbols printed on a package that match with the same symbols on a label.

More sophisticated hybrids might require that the data from a machine-readable code (perhaps a digital watermark) be hashed together with a key code that must then match a mass serialisation code. Your credit card has a card security code on the reverse that is hybridised with your credit card number and a number at the bank.

Using digital printing and hybrids makes it easy to use simpler deterrent technologies, which simplifies the education process, increases the probability of usage and decreases error rates. There are other dynamic deterrent techniques that do not involve printing, usually making use of special media or random positioning of particles (magnetic specks, nanoparticles, paper fibres, etc).

Another thing to keep in mind is that deterrents age and seldom remain highly effective for longer than three years. You should have a strategy for refreshing your deterrents on a regular basis. For products that might affect a person's health, you might also include an emergency deterrent to use in case of a catastrophic event that would trigger a full product recall.

COMMON MISTAKES

Most companies that have a history of fighting counterfeiting also have a list of mistakes they have made. A common misconception is that a counterfeiter will quit the practice if you increase their production costs. For example, adding a plastic clamshell that encases a product will increase both your and their production costs.

"Many products are ready targets for counterfeiters because it is very easy to copy their packaging."

However, the counterfeiter typically has a lower production cost than you do, and will readily add the clamshell to their fakes, too. Hence you are stuck with increased production costs and no greater security.

Another common mistake is to use insufficient educational funds. Invest in advertising campaigns, including billboards, posters and placards explaining your deterrents. Otherwise, a knock-off of the deterrent may be convincing enough to pass a casual inspection.

This is what happens when the consumer sees a hologram and assumes that any hologram must be genuine. Could you distinguish a genuine hologram from a fake one on the next CD or DVD that you buy?

For a counterfeiter, success is having every non-complicit person handling the product downstream to accept their fakes as legitimate products. Their products do not need to be exact copies, only good enough to fool those handling or buying the goods. It is also important for companies to share experiences and best practices.

The problem of counterfeiting is most likely to continue its growth, which is estimated to be 6% per year on average, with some industries at over 10%. We need to use collective experiences to fight this rapidly growing threat.