9 Are Those Red Soles?

-by Matthew Serrano

There is something different about how the light reflects off the bottom of a new pair of Christian Louboutin’s, or how a Rolex shimmers in golden hour sunlight, or how the bright white of Louis Vuitton leather pops against the dark wood of a chair. Many feel jealousy, envy, and even a slight tinge of anger towards those who can afford the finer things. The luxury good marketplace continues to show incredible growth. Along with incredible growth, the illicit marketplace which sells counterfeit goods is also experiencing skyrocketing profits. The booming licit and counterfeit luxury good marketplace spans almost every country and touches most people.

First, the luxury goods marketplace is not only profitable but the room for growth within the industry is astounding. Kering, a European luxury good fashion house, headed out of Paris, containing brands like Bottega Veneta, Gucci, Stella McCartney, Saint Laurent, Balenciaga, and countless others, recently released its financials. Kering’s financial statements included operating revenue soaring from $14,276 Million in 2016 to $17,842 Million in 2017[i]. Taking a closer look at Kering, one of its most recognizable brands, Gucci, had skyrocketing profits with operating income climbing from $1,447 Million in 2016 to $2,448 Million in 2017[ii]. But it is not just Kering that is feeling the surge from increased demand. LVMH, Louis Vuitton, Moët, and Hennessey, another luxury conglomerate based out of Paris, released its financials. In the first half of 2018, its operating revenue is up 21% to 25,072 Million[iii]; however, it does not just stop at revenue, LVMH’s profit increased 28% to $5,357 Million[iv]. Clearly, the demand for luxury goods is strong and growing with each passing year. Posting high double-digit growth is not seen in many other sectors of the global economy.

The luxury brand market is a profitable sector in most economies; however, the reach of the counterfeit luxury goods is unprecedented. The counterfeit luxury good market spans cities across the globe. Whether on La Rambla in Barcelona, on the sidewalks of Canal Street in New York, or in flea markets in Hong Kong, counterfeits are everywhere. The business of fashion considers the production of counterfeit goods to be an act of organized crime[v]. Counterfeits, as pictured, sprawl on sheets on the pavement. This illicit marketplace almost perfectly mirrors every other market consumers know. The Organization for Economic Cooperation and Development (OECD) found around 67% of counterfeit goods are produced in Southeast Asia, a majority of these goods originate China[vi]. The OECD also found many of these goods are shipped overseas to many developed nations. The US has the highest rate of imported counterfeits, with Italy and France to follow the US respectively[vii]. The scope that the counterfeit luxury goods market affects is felt on every continent.

There are two different entities which are making the global counterfeit market grow at an alarming rate. These two entities are the internet and globalization of economies. The internet makes the marketplace for counterfeit goods more accessible while globalization allows suppliers to ship anywhere for a small fee. According to the 2018 Global Brand Counterfeiting Report, “losses incurred by Luxury Brands because of the sale of counterfeiting through internet accounted to 30.3 Billion USD”[viii]. The internet facilitates transactions all over the globe. The growth of the counterfeit market is not solely because of the growth of the internet, as the rise of globalization has also contributed to the growth of the marketplace. Globalization is defined as the breaking down of barriers, specifically to trade, which allows goods and services to flow freely throughout many different economies. The Global Brand Counterfeiting Report also details how “the globalization of trade and communication has offered unparalleled opportunities for organized crimes to engage in … counterfeiting”[ix]. The internet provides everyday consumers the means to purchase counterfeit goods, while globalized trade enables producers the ability to ship their goods all over the world. These two entities have made the counterfeit suppliers more accessible to the public. Clearly, the link between the expanding marketplace can be accredited to the growth of internet accessibility and the globalization of trade.

The negative effects that counterfeits have on the luxury market and consumers are significant. The Medium Cooperation, an online publishing organization, reported “in 2013, sales of counterfeit goods and pirated content exceeded $461 billion, or [around] 2.5% of the total amount of international trade”[x]. The more frightening part is this equates to “the GDP of Austria or the combination of GDP of The Czech Republic and GDP of Ireland”[xi]. These astounding figures bring perspective to the broad reach of the counterfeit goods market. While the number of counterfeit goods being pushed through borders is substantial, the amount in revenue luxury brands lose to counterfeit products is just as momentous. BusinessWire, a global press distributor, reported “the estimated losses due to counterfeiting of Clothing, Textile, Footwear, Cosmetics, Handbags, and Watches amounted to 98 Billion USD which includes counterfeiting from offline as well as online mediums”[xii]. The amount of revenue which is lost due to counterfeit products is serious. The negative effects do not just stop at corporations, as these revenue losses affect everyday people. When these luxury brands lose revenue, they are forced to cut hours or fire employees, close stores, and even stop the opening of new stores. These actions then cut worker hours and the creation of jobs which hurts the everyday consumer. As the scope of the counterfeit good market spans the globe, its reach significant damages these developed fashion houses like Kering and LVMH.

Many countries across the world face the difficulty of trying to protect luxury brands. Some luxury brands have even taken action in the fight against counterfeit suppliers. Alibaba, a Chinese E-Commerce giant (comparable to Amazon), is at the forefront of being accused of helping counterfeiters sell merchandise to clients. According to The Economist, in 2015 Kering is suing Alibaba. The lawsuit “alleges that [Alibaba] helps fakers sell goods on its websites” [xiii]. Clearly, the intellectual property laws and trademark rights are not doing enough to discourage these suppliers and producers from creating these counterfeit goods. Many different laws are being violated when counterfeits are produced. The Medium Cooperation describes it is mostly Trademark laws which are being broken. Along the same lines, many fashion designers and fashion houses are being left without “mechanisms to ensure their protection, so right holders are left face to face with offenders and have to meet enormous expenses to protect their rights” [xiv]. Many companies are facing the threat of having their designs stolen and being sold at discounted prices. Intellectual property laws, however, are being strengthened. Kering has since dropped the lawsuit against Alibaba and it has instead formed a task force to help keep counterfeits off the E-Commerce website[xv]. Often times, it does not need to come down to government regulation to help protect luxury brands.

There have been proven ways to fight black markets which are through the strengthening of laws. The European Union’s highest court took an active role in regard to property laws within the European Union. Christian Louboutin, a luxury shoe designer, known for sky-high heels and even higher prices, won a major suit in strengthening Trademark rights and Intellectual Property laws. Christian Louboutin is known for shoes with brightly painted red soles. Louboutin started his luxury shoe line in the early ’90s in Paris[xvi]. Louboutin found his inspiration for the classic red soles, from his assistant, who was painting her nails red, he grabbed her nail polish and painted a prototype[xvii]. In 2013, Louboutin sued a Dutch shoemaker for copying his iconic red soles. The court ruled Louboutin can hold a valid trademark on the iconic red sole[xviii]. Louboutin currently holds a valid trademark in the United States for the distinct red sole. The strengthening of intellectual property and trademark laws allows for legal ramifications for those who violate these specific laws. Through lawsuits like this, the EU is strengthening its intellectual property laws which is vital to stopping counterfeits from being produced and sold. What the EU and US have done increases ramifications for those who decide to counterfeit luxury goods. Through government intervention and the strengthening of intellectual property laws, there is a way to fight black markets.

Luxury goods span the world in a unique way. Mostly headed out of European cities, luxury goods hold a distinct place in the world. These brands are instantly recognizable, with recognition comes envy and jealousy, which is where the counterfeits come into play. The counterfeit luxury good market operates and acts just like the licit marketplace. Counterfeit goods start production in Asia and end up in countries all over the world. Counterfeit goods are some of the hardest products to control and regulate, but through the strengthening of property and trademark laws, some countries have allowed for larger legal ramifications which have decreased the spread of counterfeit luxury goods.