Blog

Louis Vuitton and the crusade against piracy in China

Counterfeit goods sold openly in China can be hard to distinguish from the genuine article.By Jayce Crowther, Max Cheng, Josh Lunbeck, Alice Cheng and Chiu Chien-Kuo

Louis Vuitton Moet Hennessy (LVMH) knows the importance of doing business in China. In its 2009 annual report, it stated that Asia excluding Japan, accounted for more that 28 percent of revenue in leather goods, more than any other region. LVMH’s flagship brand in this industry is Louis Vuitton (LV), and the report commented that “the brand has made spectacular headway in Asia (especially China.)”[i] In fact, LV already has stores in 27 Chinese cities and is one of the most popular luxury brands there.  However, with great success comes imitation, and in LV’s case this isn’t done purely through rivals, but though counterfeit items - exact copies of the very same goods that LV sells.  Although counterfeit goods can be found in any country, the problem is especially prevalent in China, where it is a major industry and fake goods can be found on the street and in major markets.  The consumers are also different.  In other countries customers may be duped into buying fake goods, but in China customers knowingly make purchases of counterfeit items.  Thus far, tough stances taken by companies such as LV have been met with limited success.  To successfully tackle the problem of piracy in China, LV will need to better understand Chinese consumers and culture.

Who buys pirated goods?

At all income levels, there is a desire to purchase luxury goods in China.

China is currently the world’s capital in counterfeit goods with an estimated $60 billion in revenue amounting to 8% of the country’s total GDP.[ii] Within that, purses, Louis Vuitton’s main product, represents $70 million of lost revenue to counterfeit goods.[iii] Through consumer research conducted by the China Market Research Group, it was found that income level was the primary determinant in consumers’ decisions to purchase counterfeit goods.  Often consumers will fully intend to purchase the authentic good and may do so by purchasing small accessories and then using counterfeits to supplement their wardrobe.  However, those of an even lower income level may not have such an option and will be forced to buy counterfeits.[iv]

If historical precedent is any consolation, luxury brands should rest easy knowing that former capital of pirated goods, Taiwan and Korea, both experienced a sharp decline in the selling of counterfeit goods as the average income of consumers rose.  With China’s rapid economic growth seeing no signs of stopping, the industry has also seen a decline in the amount of pirated goods seizures.  This most likely represents the decline in piracy rather than lax enforcement since foreign companies are not the only entities negatively influenced by piracy as Chinese companies and the government have become proponents in fighting the black market industry themselves.

In dealing with the counterfeit goods industry it is important to note the differences between the Chinese market and other markets.  Louis Vuitton’s current strategy of signing contracts with retailers[v] and going after online sites selling counterfeit goods misrepresents the issue as a legal or moral problem.  Chinese consumers are typically aware that they are buying counterfeit goods.  Counterfeit goods are openly available in markets and at street vendors.  Indeed, they are particularly attracted to counterfeit luxury goods because of the status image associated with them.  However, in the eyes of the consumer, the desire is there to purchase the authentic product but there still lacks a deep relationship connecting the consumer to the brand and encouraging him or her to refuse the purchase of counterfeits.  They understand the value of owning such products, but do not have the means to afford such goods. If LV wants to combat piracy in China at the consumer level, it must focus on getting counterfeit goods off the streets and find a way to increase the Chinese consumers buying power, and ensure that consumers are able to afford their products through alternative means without devaluing the established brand image of its products.

Fake Bag Buyback

One method that has been highly successful at getting unwanted goods off the streets is the gun buyback program in United States.  In a “No questions asked environment” thousands of firearms have been taken off the streets and disposed of for much less money than the gun is actually worth. LV could institute a similar “buyback” policy. To entice customers to exchange their counterfeit goods, LV could offer coupons good for in-store rebates on similar genuine LV products.

Pricing of the discount would be critical to measure success.  If the discount offered is too high, it would result in customers only buying more counterfeit items to get the discount; too low and it seems as though it might not attract any customers. However it is important to note that most gun buyback programs have been extremely successful even though the cash offered for the guns is usually less than the gun’s actual value. People typically hand over their firearms because they feel that they are doing something positive by removing the dangerous item, and the money is just the incentive they need to get them to bring in their firearm.[vi] LV is on a similar position where the value attached to ownership of a genuine LV product is the true value to the consumer, and the coupon would be just the extra push needed to get them in the store.

This would create a win-win situation for both LV and consumers, as LV would be getting fake goods off the streets, and thereby increasing the sale of real LV products as well as its customer base.  In addition, the consumer has the satisfaction of being to afford the genuine product.

Consumer Financing

Another way LV could tackle the affordability issue is by offering consumer financing. Recently several consumer financing companies such as the Bank of Beijing Consumer Finance Co.[vii] have opened in China.  LV could make deals with such companies to attract new customers who cannot afford to buy the bags all at once.  These customers would be offered financing in-store through such companies and would be able to make monthly payments to the financing company.  Reaching these customers is key to successfully battling piracy, because these are the same customers who are most likely to buy counterfeit goods.  Some may argue that by offering financing to these customers, LV would make ownership of its products common and dilute the value of owning a luxury brand.  However, LV products are already readily seen on the streets in China, it is just that a majority of them are counterfeit.  Therefore this strategy would not dilute the brand, it would only increase the ratio of genuine LV products to counterfeit products.

Secondhand Goods’ Endorsement

For Louis Vuitton to fully address the issue of income level preventing consumers from purchasing its products, it cannot the flourishing of second-hand goods stores in neighboring markets like Hong Kong and Taiwan.[viii] LV can take head-on these crafty rivals by employing its own official appraiser who will guarantee the original source of a second-hand product, and further only issue endorsement for products with at least 80% of the original condition intact and make certain accommodations only for the rarest of items.  As a result, customers will not need to worry about unintentionally buying fakes from individual sellers or website auctions, like eBay.  In addition, customers purchasing these second-hand products will have the added benefit of Louis Vuitton’s lifetime after-sale service as well as the ability to purchase authentic luxury goods at a 10-20% discount over newer products.[ix]

China’s up and coming nouveau riche have the tendency to follow fashion trends quite closely.  Louis Vuitton could deepen their relationship with these consumers by assisting them in finding an endorsed dealer of second-hand goods who would, in turn, pay a minimal commission of 10-15%.  Consumers could then use the money gained from the sale of an older product to purchase new products ultimately adding to Louis Vuitton’s bottom-line and building trust with the consumer.

Luxury goods tend to retain their value more than other consumer products. For example, sales at Milan Station[x], a well-known luxury second-hand bags store in Hong Kong and Taiwan, reveal that the popularity of LV and Chanel is much higher than Coach or Burberry in the second-hand market.[xi] Additionally, LV has been devoted to limiting the quantity of each product in order to further retain value.  This competitive advantage serves as an entry barrier for several rivals, like Gucci or Coach, to compete in the second-hand market.

Education

As Louis Vuitton seeks ways to establish a deeper connection with consumers and provide alternative means to purchasing their products, the company should also seek to carefully differentiate the actions of consumers and those of the producers of pirated goods.  Actions taken by the company, or anyone else seeking to stem the tide of piracy, should be clear in their intention of denouncing producers and encouraging consumers.  The uniqueness of the Chinese market calls for Louis Vuitton to change its strategy to adhere to cultural difference.  Face is an extremely important issue in China and it is one issue that must be kept in mind when doing business in the country.

Therefore, Louis Vuitton can encourage a connection with consumers by establishing a web service where consumers who spot retailers selling Louis Vuitton goods without proper the proper endorsement provided by Louis Vuitton can snap pictures or video and upload them to a website. This we call our “Wall of Shame” whose primary goal is to denounce producers of pirated goods and thus causing them to lose face in the eyes of Chinese consumers.  Such a policy may sound controversial to Western consumers, but retailers have already initiated similar action plans where registered subscribers are given online access to in-store CCTV cameras and can earn money by monitoring and catching shoplifters.[xii]

Masion mode, Furong Road, Changsha, Hunan province, China. Feb 26th 2009

According to statistics from a report put out by the World Luxury Association, over 27.5% of luxury goods sold worldwide were purchased by Chinese consumers from 2009- 2010. [xiii] This demonstrates the enormous purchasing power of the emerging market in China. However, given the fledgling nature of the Chinese consumer, in all likelihood a good number of those customers lacked any real connection to a luxury brand. To conquer the Chinese market, Louis Vuitton should take responsibility by offering appropriate education to its potential buyers through a two-step process.

First, after careful analysis of its customer base, Louis Vuitton would benefit to provide special in-store workshops for distinguishing the key differences between counterfeit and authentic handbags, and effectively combat the large amount of pirated goods sold openly in the market.

Furthermore, by understanding the history, craftsmanship, and reputation of the brand, the consumer would have an added-value in purchasing the genuine item which would only benefit the company in the long-term.

Continuing education is an essential piece for any company attempting to developing loyalty among a growing customer base. The second step in the process would be to follow the example of other Chinese success stories by endorsing Chinese celebrities as consumers in China are heavily influenced by symbols affiliated with Western popular culture. As a result, many in the upper to middle class are trying to mimic what they see as an affluent Western lifestyle.

Brand awareness and consumer education of the brand both are an integral part of any business. Entering the Chinese market, marketers must have a clear understanding of their target market and how best to fulfill their needs. Companies may use traditional methods like in-store informational videos and workshops as well as email newsletters to preferred customers. However, especially for a luxury brand like Louis Vuitton, it is important to create and maintain customer loyalty.

This adds exponentially to the continued success of the business as it is more cost efficient to brand to loyal customers, then to convert new customers.[xiv] In addition, having a loyal customer base is incredibly useful, so much so that managers must consider this factor first before implementing new marketing strategies.   The Chinese market carries a special significance for luxury as it possesses the world’s largest population, 50 percent of which are women.

China’s dynamic market, as well as the demand for luxury products, creates a unique interest between both global and domestic fashion companies. Many companies go so far as to pay outrageous sums to discover the key characteristics of the Chinese consumer. That is why it is hoped that with the information provided here, luxury brand companies currently in, or hoping to enter the Chinese market, will be better prepared to successfully target Chinese consumers so that they in turn can be served better.


[i] LVMH, 2009 Annual Report, pg. 27.

[ii] “Counterfeit Goods Ranking.” Online Database of Black Markets. Havoscope, LLC. Web. 12 Dec. 2010. <http://www.havocscope.com/blackmarket/counterfeit-and-piracy/counterfeit….

[iii] “Counterfeit Purses.” Online Database of Black Markets. Havoscope, LLC. Web. 12 Dec. 2010. <http://www.havocscope.com/blackmarket/counterfeit-and-piracy/counterfeit….

[iv] Rein, Shaun. “How to Win the China Piracy Battle.” BusinessWeek - Business News, Stock Market & Financial Advice. 20 June    2007. Web. 12 Dec. 2010. <http://www.businessweek.com/globalbiz/content/jun2007/gb20070620_006304…..

[v] Giles, Warren, and John Rega. “U.S., EU to Fight Counterfeits From China, Russia (Update1) - Bloomberg.” Bloomberg - Business & Financial News, Breaking News Headlines. 16 June 2006. Web. 12 Dec. 2010. <http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTSjqiimKzYc&refe….

[vi] Modesti, Kevin. “L.A. Gun Buyback Too Successful - LA Daily News.” LA Daily News. 11 May 2009. Web. 12 Dec. 2010. <http://www.dailynews.com/news/ci_12334501>.

[vii] JingTing, Shen. “First Consumer Finance Company May Struggle to Attract Interest.” China Daily - Connecting China Connecting the World. China Daily, 2 Mar. 2010. Web. 12 Dec. 2010. <http://www.chinadaily.com.cn/bizchina/2010-03/02/content_9524588.htm>.

[viii] Rein, Shaun. “How to Win the China Piracy Battle.” BusinessWeek - Business News, Stock Market & Financial Advice. 20 June    2007. Web. 12 Dec. 2010. <http://www.businessweek.com/globalbiz/content/jun2007/gb20070620_006304…..

[ix] “LV二手奢侈旗艦店年底生意紅火 - 台北101精品.” 台北101精品. Web. 12 Dec. 2010. <http://www.lv111.com/lvnews-533.html>.

[x] “Milan Station 米蘭站.” Milan Station. Web. 12 Dec. 2010. <http://www.milanstation.com.hk/en/history.html>.

[xi] “Lv二手包精品店店最愛-名媛貴婦忍痛拿出lv名牌包包來變賣-歐亞國際.” LV2010新款,LV包包,LV官方網站,LV,LV官網,LV官方,LV錢包,lv2010春夏新款. 歐亞國際, 6 Nov. 2008. Web. 12 Dec. 2010. <http://www.gucci88.com/infor_53.htm>.

[xii] Shah, Dhruti. “BBC News - CCTV Site Internet Eyes Hopes to Help Catch Criminals.” BBC - Homepage. BBC News, 3 Oct. 2010. Web. 12 Dec. 2010. <http://www.bbc.co.uk/news/uk-11460897>.

[xiii] Yang, Hu. “Chinese Consume 27.5% of World’s Luxury Goods.” China Daily Website - Connecting China Connecting the World. China Daily, 10 Feb. 2010. Web. 12 Dec. 2010. <http://www.chinadaily.com.cn/bizchina/2010-02/10/content_9457739.htm>.

[xiv] Lindstrom, Martin. “Brand Loyalty at Branding Strategy Insider.” Branding Strategy Insider. 11 Nov. 2010. Web. 12 Dec. 2010. <http://www.brandingstrategyinsider.com/brand_loyalty/>.

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.