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Growth in illicit trading too important to ignore

With retailers having plenty to contend with right now it might seem a bit unhelpful to add something extra to the “to do” list. By Helen Dickinson

GENERAL MERCHANDISE

Growth in illicit trading too important to ignore

But as you might expect in tough economic conditions the problem of illicit trading isn’t one which seems to be going away any time soon and is something that consumer-facing businesses need to be aware of. 

This was highlighted to me by recent research from KPMG which examined the availability and price of a basket of counterfeit goods, including luxury branded sunglasses and handbags, DVDs, cigarettes and alcohol, across the world.  Fake luxury goods, sunglasses and watches topped the list of the most heavily discounted goods of those reviewed and in London shoppers were able to buy a counterfeit high-end branded watch for 1 per cent of the price of a real one or a fake designer handbag for 13 per cent, with similar discounts in Madrid, Sao Paolo and Hong Kong.
 
In addition, according to a wide-ranging survey of illicit trade by the Organisation for Economic Co-operation and Development (OECD) the total global value of cross-border trade in counterfeit and pirated goods reached US$250 billion by 2007, more than double since the beginning of the decade.
 
But it’s a tricky problem to pin down particularly as illicit trading can take many different forms.  As well as counterfeiting (the trade in fake goods) and piracy (where mainly digital products are copied and sold) there’s unlicensed manufacturing, where a contract manufacturer over-produces goods and sells them through unlicensed channels; and parallel trade, when authentic goods are sold without the trademark owner’s permission in markets they were not intended for – not necessarily illegal in itself in most jurisdictions, but in practice it frequently involves illegality.

And it seems that many large consumer companies still lack a coordinated and proactive response to the threats that illicit trade presents.  However, whether the costs of these types of illicit trading show up directly as reduced profits, indirectly as loss of reputation, or loss of strategic control of a business, the costs are very real and will eventually appear on the bottom line.

So with numerous issues to contend with, how can consumer companies act to limit the damage that illicit trading may inflict?
Awareness is the initial step and first and foremost the nature of the illicit trading needs to be identified and quantified.  This is the stage where the scale and impact of the problem is assessed.  Companies will probably need a way of measuring the scale and impact of illicit trading; ideally something which provides a picture of the scale of the problem and this may combine market research, econometric modelling, market analysis and expert interview programs.  The impact analysis of data could also include assessments of reputational as well as financial risk, a review of the regulatory environment, and an assessment of how stakeholder interests are affected by the issue.

Secondly, there needs to be a review of their current position on addressing the problem.  Do its own processes contribute to fraud in areas such as procurement or sales and marketing, and therefore help to generate illicit trade?  A review of all these functions to assess adherence to internal standards can reveal any significant mismatch between policy and practice.

Finally, companies need to find and implement solutions.  These will often need to be collaborative, such as working with external agencies like the EU Commission’s Anti-Fraud Office, as well as police and customs authorities.  Management teams may also have to explore solutions in collaboration with suppliers and distributors.
 However, as is so often the way in business, challenge can be turned into opportunity.  For example, my colleagues worked with a company to implement a “track and trace” system that would allow individual product to be authenticated anywhere in the production and distribution system, reducing the levels of counterfeit products in world markets.  In the second phase of the project, a joint venture partner was identified to take the solution to market and commercialise it for other brand companies facing similar challenges.

Sadly, illicit trading is one of the many dimensions of the globalisation that has greatly expanded consumer markets and created enormous opportunities for investment and trade, but which has also brought with it a dark side of organised illegality that stretches around the world.   At a time when few businesses can scarcely afford to take a further hit to their bottom line, it’s an issue that is surely too important to ignore.

Helen Dickinson is Head of Retail at KPMG

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