Countering counterfeits in SEO

While Search Engine Marketing and Optimization (SEM and SEO) has long been a well established digital strategy for luxury goods companies, there is an added dimension of countering counterfeiters from using the same digital channels to sell rather than market a product. While luxury goods companies are only slowly coming around to e-commerce (Moving from digital marketing to Sales) counterfeiters typically have a field day using the anonymity of the web to rake in revenues from e-sales. One key area of conflict is in Search engine Optimization and the use of key words for optimizing web content. Search engines like Google for instance allow the use of trade-marked keywords to be used in SEM/SEO for ads by all and sundry. This leads to counterfeiters using trade-marked key words to link to their sites (instead of the original luxury goods company website/page) and then sell their fake products on it. While the genuine buyer quickly recognises a fake and stays away, the market does get flooded with cheap fakes to "less discerning" customers.

The European Cultural and Creative Industries Alliance have objected to this and asked search engines (Google in particular) to change their policy of making their Google adwords program a free for all and restrict the use of trade-marked key words. Google has always reverted that while key words are free to use, these trade marked copies are not allowed in the ad copy itself. Lets see how this impacts the SCMluxe in favour of counterfeiters through an example of the much effected LVMH group. Keywords of successful LVMH brand/collection of bags like PALLAS, MARLY or TURENNE are trademarked and hence should ideally be used by LVMH authorised entities. However when these keywords are used in the Google adwords set up by a counterfeiter as tags for his advert, a quick search by a customer on Google will lead the customer with links to these adverts and links rather than the LVMH site http://us.louisvuitton.com/eng-us/women/handbags. Note that the actual advert by the counterfeiter will not have these words (PALLAS, MARLY etc) in the actual ad copy (usually it will resort to the well worn counterfeiter strategy of using variations of these words in the ad copy like PALLASS, MARLEY etc). Customers who go to this counterfeiter ad are tempted to follow additional links to which actually lead to a e-commerce site wherein a purchase can be made. Though genuine customers of LVMH bags might avoid the site, there will be customers who will knowlingly buy a fake product - thus flooding the market with fakes. This was exactly LVMH's contention when it launched a lawsuit on Google for providing counterfeiters an legitimate marketing/sales channel on the web.
A positive outcome lately of course has been that both Google and LVMH have reached a settlement wherein they will cooperate to identify and close these loopholes in SEM/SEO
 

Digital Marketing to Digital Sales

The luxury goods industry always regarded the web as a medium of marketing and a tool to create brand loyalty and awareness amongst its customers. However growing online sales indicate that customers are slowly beginning to adopt e-commerce for luxury products as well. A Mckinsey study for digital marketing in 2013 shows the following:

 

·         20% growth in online sales of luxury goods in 2013 in a stagnant market

·         $12.5 billion online sales of luxury products in 2013 and expected online sales of $27.8 billion in 205

·         65% of online sales driven by fashion accessories across digital devices

·         66% of customers in brick and motor stores would like to interact with a sales associate armed with a mobile device

·         Multichannel customers (buying both online and in-store) spend more than in-store customers. For example Sephora multichannel customers spend 5 times more than old economy customers who bought exclusively in-store

The above numbers simply indicate one important message “The Web is being integrated into our lifestyles and the luxury goods industry can no longer insulate itself from it”

The previously held sacred belief of web for marketing and stores for selling will need to change. SCMluxe should now look at both digital marketing and sales. Access across mobile devices, online loyalty, e-commerce, click trough rates, e-campaigns, SEM/SEO will gain importance and SCM luxe needs to be prepared for it. In the next post let’s look at some of these terms in more detail

Recycling luxe raw materials

Every supply chain has waste reduction and recycling as a major area of focus. The recycling of finished goods returns, either due to end of life or due to dissatisfaction with the product has been well established with sophisticated returns and reverse logistics value chains in place. However in this blog post we will look at how waste raw material is managed. Raw material or Work in Progress (WIP) stocks are generally marked out for removal due to:

·         End of life or obsolete items

·         Non-moving stock which has to make way for newer fast moving inventory

·         Waste generated from the manufacturing process (left over pieces or by-products of the process which are not required in the end-product)

The methods used to manage this waste are similar to that of finished goods and in order of priority are:

·         Reduce the production of waste: Either by better manufacturing processes (eg. Make the leather cut outs for handbags designed to cover maximum area of the leather swathe through software programs) or simply better inventory management (again maybe through the use of demand and supply forecasting tools and technologies – inventory optimization software such as MEIO or Multi-Echelon Inventory Optimization tools such as SmartOpps, Toolsgroup, etc. are becoming increasingly popular in the luxury goods manufacturing process)

·         Re-Use: By ensuring raw material is utilized across product ranges, the reuse %s can be increased and obsolete inventory reduced. Delayed production and mass customization are some of the strategies which are used to increase re-use of material

·         Recover: Either recover raw material through refurbishment of the material or recover energy from the product. Luxury goods industries regularly refurbish material or use raw material to convert to energy

·         Dispose: the last option will always be the landfill and luxury goods supply chain is more prone to use this option to ensure the twin ideals of SCMluxe – Quality and Brand image are not sacrificed at the altar of frugality

 

Recycled leather at petit h

The house of Hermes has bucked this trend and come up with an interesting alternative to the above – in the creation of the Petit h atelier. The basic premise of Petit h is to create beautiful objects (just as desirables as Hermes products) out of the waste and leftovers of its parent company/ateliers or in its own words “The Petit h project sees discarded Hermès materials 'upcycled' into new objects of desire, building on the Japanese concept of wabi-sabi – were imperfections of nature are viewed as assets of beauty”. Pascale Mussard (a sixth generation member of the Hermes founding family) starts off by inviting artists to the Petit h workshop at Pantin (Paris) where all Hermes discarded products are piled up for the artists to indulge their creative spirits. The outcomes are as diverse as porcelain cups are refashioned into light fittings, mirrors finished with silk ties, crystal bowls becoming lamp shades and leather scraps (from Birkin bags?) forming patterns on blouses. Thus typical Hermes waste such as discarded animal skins from the "Kelly" and "Birkin" bags, other leather wear, and various elements, such as handles, hardware, and discarded ceramics, are being recycled into highly desirable products for sale under the Petit h metier.

Flying high - luxury sales at airport duty free outlets

Harrods at Heathrow

Luxury sales are flying high at most airport duty free outlets…but are these at the cost of margins? The short answer is “No”. The costs of maintaining airport outlets are usually set off by the savings in allied costs. Heathrow for instance charges nominal rent but takes a percentage of revenue generated at its outlets - with 70 million well-heeled passengers passing through every year with cash and time to spare, it’s betting big on its ability to drive sales. This is borne out by the staggering GBP 2,782 it generates in sales per every square foot of retail area. Compared with the GBP 1000 that Harrods generates at its Knightsbridge Store in Central London, this confidence in its ability to convert footfalls to sales is well justified. It works perfectly well for the retailers as well – most luxury outlets in major cities would need to fork out big money to keep up the high levels of security and store fronts 24/7. Security and round the clock store timings are far easier to achieve in a highly secure airport setting and yet achieve high average spends per shopper (average of GBP 38 per shopper at Heathrow)

Besides being able to attract busy travelers with money but no time and last minute shoppers, airport outlets provides two major benefits to luxury retailers over the high street:
1. Access to an international clientele – from BRICS and other emerging economies who might not regularly be able to shop at European high streets but can still say “I bought this in Europe”
2. Avoid issues with excess baggage, packing and security for items like premium wines, jewelry and food (Paris CDG offers special travel packaging for their more “smelly” cheeses)
All of the above are contributing to sales at airport outlets growing at 14% p.a while high street sales are struggling to achieve single digit growth rates

Luxottica...an eye for vertical integration

Luxottica HQ in Italy

While the debate on disbursed supply chain and contract manufacturers rages on...a small lux company from Italy has emerged as the champion of vertical integration and retaining key SCMluxe elements in-house. Luxottica is a $8billion eyewear company almost monopolising the eyewear market with a 80% market share. What is interesting about Luxottica apart from its impressive market share and growth rates of about 20% yoy is that it retains full control over the supply chain of its iconic in-house brands like Ray-Ban, Oakleys and Vogue and licensed ones like Burberry, Chanel, Dolce & Gabbana and others.  It has retained production in-house with six manufacturing facilities in Italy, as well as one plant in the United States and Brazil, and two in China. The China facilities again cater to the exploding Asian markets. Distribution is also kept in-house with 2 distinct segments - wholesale and Retail. In the Wholesale distribution segment the Company's products are mostly retailers of mid- to premium-priced eyewear, such as independent opticians, optical retail chains, speciality sun retailers and duty-free shops and are sold under the brand Oakley. The retail distribution operations are carried out through such brands as LensCrafters, Pearle Vision, OPSM and Sunglasses Hut and is again a prominent landmark in most duty free sections of airports. Obviously this strategy has helped Luxottica rake up business and keep the growth engine well-oiled (20% growth expected this year). But will it lead to improved perceptions amongst customers and brand equity or will the entire eyewear market be seen as a luxottica world with no differentiation?

Fake or Counterfeit - Whats the difference?

Both fakes and counterfeits are a huge concern in the luxury industry, but is there a difference between them? Yes, and knowing the difference can make a huge difference to how a lux company would deal with the problem at hand.

Fake: These are products which have the brand name on it but no attempt is made to hide that it is not the "real thing". Either the product is not a part of the lux brand (say a Rolex perfume or suit) or is made with a different design or made with such inferior raw materials that customers are in no doubt to the product being not the real McCoy. Fakes are also sold as such very openly to customers in designated markets (albeit shady ones) as a fake or replica at a much lower price. Customers go to these markets with the intention of buying a fake.

Counterfeit: These are products that are made and sold as the genuine product on unsuspecting customers. The product quality is maintained (mostly) and sold in regular lux retail outlets. The price is also not discounted as in Fakes. The customer also has no knowledge that the product is not geneuine.


A market of Fake Chanel bags

Obviously for the luxury industry, the overiding concern are the counterfeits. Lux industry is generally not too concerned with fakes since sales are generally not lost due to it. Customers who buy fakes have no intention of buying the real product and are not the lux industry's customer base. But every counterfeit sold is a direct hit on the lux company's topline and a blow to customer satisfaction in the long run due to inferior material or lack of branding due to loss of exclusivity caused by flooding of the market. Lux company's now take counterfeiting seriously and have taken several measures to put a stop to it. Since counterfeiting involves a larger and more sophisticated facilities for manufacture, the industry is teeming up with local governments to tackle the same.


The new Chanel store

On an interesting side note, Michele Norsa, the CEO of Ferragamo states that the Chinese customers are the most astutue customers when coming to identifying counterfeits. The level of awareness and much more than American customers. The average Chinese consumer typically investigates each purchase and takes an informed buying decision  only after being completely satisfied with the genueiness of the product.

Subcontracting at LVMH brand categories (Part 2 of 2)

LVMH category sales 2011

The levels of subcontracting varies by products and is mainly dictated by factors such as governmental regulations, production processes, availability of raw material and the brand image/policy planned for a particular product. Since these can vary by company to company across geographies let us look at some of the categories of LVMH which can be considered as representative of absolute luxury.

Wines and Spirits:

Inclusive of champagne, cognac and other liquers this category is strictly bound by unique regulations like geographic indicators (Appellation d’Origine Contrôlée, for champagne) which limits the production area and the amount of subcontracting that can be done given the need to procure produce from this limited supply. LVMH like most luxury houses sub contracts only the bottle handling and storage operations. The blending of the stock based on harvests allocated to the company will be done inhouse

Fashion and Leather Goods:

The defining feature of the fashion and leather goods market is its seasonality and …. Everyone wants next season’s bag or dress. This decreases the lead time available for the retailer, increases cost of inventory and high product variation leads to lost sales if the right merchandise is not available at the store. Although this would indicate all out subcontracting as a policy, the importance of quality and brand guidelines for luxe products prevent 100% subcontracting. LVMH follows a judicious strategy with all design and distribution being kept in-house to ensure strict compliance to quality and brand image of the product.  Production on the other hand varies by brand with an average of 45% being sub contracted. The difference between mass merchandising and luxe retailers are that this sub-contracting is usually done in the country of origin (Italy, France and Spain in the case of LVMH) and not in China! The variation in level of sub-contracting would depend entirely on the brand strategy for that particular product (Refer post Outsourcing)

 

Perfumes and Cosmetics:

A proliferation of brands and very high volumes define the perfumes and cosmetics industry. These factors make economies of scale an attractive proposition for support functions such as distribution and logistics. LVMH has centralized its production of perfumes to two centers in France but leverages a shared service center for all brands at Saint-Jean de Braye (France) and currently subcontracts only 9% of manufacturing. The large number of SKUs is managed by using postponement techniques (but not incorporating mass customization – Refer: mass customization in the perfumes industry)

 Watches and Jewelry:

Production of watches is in the stronghold of Swiss workshops with little of over 10% sub-contracting.  Though some design is outsourced to other studios, LVMH retains much of the design process within its studios. This low figure may also be due to the acquisition of ArteCad and Profusion (Swiss manufacturers of watch components) recently. Since LVMH does not represent the big names in luxury watches or jewelry this category may not reflect industry attitudes to subcontracting. 

Thus though the level of subcontracting depends strongly on the brand strategy for the particular product, other factors such as seasonality, statutory regulations, lead times, volume of business all play an important part. Even where sub-contracting is used extensively (Fashion, Leather goods) a modified and much finer version is used vis-à-vis traditional sub-contracting. i.e more control, local sub-contractors and iron clad contracts are used.