Fake or Real? The challenge of product authentication for luxury brands
The rise of online commerce and, more recently, the boom of resale companies has brought the counterfeiting to the headlines in the luxury sector.
The estimated losses due to counterfeiting of high-end consumer goods amounted to 98 billion USD in 2017, which includes counterfeiting from offline as well as online channels, according to the 2018 Global Brand Counterfeiting Report.
Most counterfeited luxury brands are Louis Vuitton, Gucci and Chanel. But counterfeiting is not exclusive to absolute luxury: brands such as Nike, The North Face or Levi’s are at the top of the rankings.
Louis Vuitton would probably be the most committed brand to fight against counterfeiting, with its Zero Tolerance Policy, and has created a specific team fully dedicated to the management and protection of intellectual property rights, who are in charge of performing thousands of counterfeiting raids each year.
At the end of the day, fighting against counterfeiting is not only about protecting short term sales but protecting brand equity, craftmanship and exclusivity halo, which are the luxury survival pillars.
Why people buy counterfeit products?
Luxury is a sign of status. Many studies show that we have the perception that people owning luxury products are more successful, smarter, sexier… than those who don’t.
Luxury is generally linked to expensive, unaffordable goods for most people. Then, main reason for buying counterfeits is affordability, price.
After that, it comes the quality of the counterfeit. Nowadays, some counterfeited goods are extremely difficult to distinguish from original ones, even for professionals. Then, if buyers consider that there is a good balance between quality and (extremely lower in comparison) price, then the result is obvious.
Finally, due to the boom of resale market, there is a new motivation for counterfeiting that has not directly to do with individuals’ aspirations to look successful with a limited budget: the resale price of pre-owned luxury goods, which aims to target a different, more premium, customer segment and, therefore, counterfeited goods ROI has become really attractive.
The challenge of authenticating a product
Intangible brand assets such as the brand name or anagram can be protected through copyrights, but all companies still struggle to protect the physical products, which, at the end of the day, are the tangible measure of a brand success.
From the proof authenticity cards to hologram codes or heat stamps. All luxury houses do take steps to protect their property, but with dubious results as per the counterfeiting figures.
The only mechanism that has proved high levels of reliability against counterfeiting (although it is 100% counterfeit proof) is the digital proof of authenticity, which consists in a unique serial number, that cannot be copied or modified, that gathers information about that specific item and can be accessed by the customer through a QR code (that can be connected to a RFID tag). So, customers can access not only its online certificate as well as a complete digitally-based brand experience by reading the QR with their smartphones. Pioneering luxury brands in this field are Moncler and Salvatore Ferragamo who have already tested or implemented QR+RFID tags in their products.
Blockchain in the luxury segment: a matter of brands, customers… and resellers
Blockchain can be defined as a platform where people can carry out transactions of all sorts without the need for a central or trusted arbitrator. As every step of the item’s life cycle is registered, blockchain enables a new and transparent storytelling.
The expression Blockchain became widespread in 2008 with the emergence of the bitcoin. Nowadays, there are many applications for blockchain across various industries such as smart contracts or proofs of provenance for foods.
Blockchain technology for luxury segment is in the early stages of development. Most, and almost unique, initiatives are LVMH’s proprietary blockchain called Aura and Richemont’s blockchain-based authentication for Vacheron Constantin Les Collectionneurs collection, which is based on the Arianee protocol.
There are significant benefits behind adopting blockchain as the gatekeeper for trust for all stakeholders: brands, customers and resellers.
For brands, it is not only a matter of preserving equity and securing revenues but also a way to provide a whole new brand experience as it enables a complete new range of opportunities for storytelling.
For customers (first owners), it may provide, first, an undoubtful proof of authenticity and, also, complete traceability on the product maintenance history (e.g. for watches)
For resellers and their customers, the ability of resellers to properly authenticate products (every single time) and thus, build consumer trust is at the core of the $25 billion – and growing – pre-owned luxury market.
As per the benefits shown above, there is no doubt that blockchain adoption represents a win-win-win situation. So, why it has not been deployed at scale yet? There are diverse factors that are preventing an effective deployment of blockchain technology, such as:
Standardization and interoperability between different blockchain platforms. There is not a consensus on which variables and values should be registered and, more important, each blockchain is a silo, with specific hashing algorithms and consensus models. Because of that, there are limited opportunities for bringing blockchain to scale.
Mandatory involvement of all stakeholders in the value chain. From raw materials sourcing to production and even maintenance, each stakeholder needs to have not only the commitment but also the proper training and supporting hardware and software to register his activity.
Automated data capture. “Digital” trust has to do with removing human interactions to capture or register data or, in other words, automating and bringing sensors (IoT) to scene. In the case of luxury, because of its implicit craftmanship, this principle needs to be reconsidered.
In any case, blockchain prospects are such that there currently are a growing number of startups focused on developing luxury-specific platforms. Most well-known, apart from Aura and Arianee, are Luxochain, Vechain or Crystalchain.
The product authentication business
While blockchain is not deployed, all businesses and platforms that have stakes or are under scrutiny for being potential channels for counterfeited products are developing their own approaches to prevent fake goods:
Big online marketplaces and auction sites such as Amazon, Alibaba or ebay have their programs to fight against counterfeiting, most of them in partnership with leading luxury brands. For example, Amazon Project Zero program, apart from a detailed screening of products and product serialization, allows original brands to delist products from sellers if they demonstrate they are fakes.
The biggest preowned goods resellers like TheRealReal, ThredUp, Poshmark or StockX have been developing their own certification capabilities, which are currently based on a bunch of experts that perform physical, visual inspections to check whether a product is original or not. They look for small signs that indicate the product can be fake: screws, bolts, linings, labels, zippers and other fittings are monitored closely because they are expensive to produce and forgers may try to skip or fake them. TheRealReal even has a Chief Authentication Officer to show its commitment with product quality.
But resale industry is becoming so attractive that legacy retailers such as Nordstrom, Macy’s or JC Penney are starting to make the first steps into the premium secondhand market. For those retailers that don’t partner with online resale platforms, as well as for other preowned small businesses and individuals that cannot afford the cost of creating an in-house authentication capability, there is a huge number of startups that offer authentication services. Most relevant, just to cite three, would be Entrupy, Clair or Authenticate First.
Authentication as a service consists basically in installing the app, then taking some pictures of the product and finally sending the product for a physical inspection. The entire process is quite straightforward and does take from 1 to 48 hours, when shipping is required.
Most of these startups are heavily investing in advanced analytics for image recognition. A good example of that may be Entrupy’s latest computer vision-based solution called Legit Check Tech, which allows users to place a sneaker in a “magic” box and enter its sneaker model into the accompanying mobile app. Then the box, which contains six cameras positioned at various angles, takes multiple photos of the shoe, sending the information to Entrupy’s database. Within about 10 seconds, between 500 and 1,300 data points on the shoe are checked against millions of data points in Entrupy’s database, and a verdict of authentic or not is returned on the app.
Fighting counterfeiting is on the agendas of all luxury brands… and resellers. Significant efforts carried out by both stakeholders, and, although fake goods market grows at steady pace, there are signs that this trend may change: per Entrupy report, 2018 saw a drop in counterfeit goods among resellers.
Which is the future? In the short term, authentication will be linked to technology. Blockchain to secure “authenticity from scratch” is a good idea and we will see progression on it but it will take many years to get proper traction as it requires a lot of effort and consensus from all stakeholders. AI for image recognition may also be an option but it will take some time to train the models to provide service to an extensive range of products.
But… what if there would be another way to authenticate products that may be 100% counterfeit-proof? Would DNA be an option?