Flawed beauty: counterfeits in the cosmetic industry

17 July 2018

According to MarkMonitor’s latest research, the beauty industry lost over $45 billion to counterfeit products in 2017, and the scale of the problem grows exponentially when trying to account for unreported, online or intangible losses that follow a counterfeit cosmetic case. Matthew Rogerson uncovers the dark issue of black market beauty and speaks with brands that are doing everything to protect their consumers.

Counterfeit goods have been around since the dawn of designer brands, but that doesn’t mean those brands can’t fight back. In 2003, Estée Lauder Companies formed a global security team to crack down on fakes. Comprised of 42 agents and led by the former head of the US DEA’s office in New York, the team scours fake websites, third-party retailers like eBay and Amazon, and flea markets around the world to find counterfeit makeup. They work with local law enforcement to rack up enough evidence to press charges against those putting dangerous fakes on the market. In some cases, justice is served.

The Department of Homeland Security (DHS) ramped-up the fight against counterfeit cosmetics with a specific operation dedicated to plastics and cosmetics. This effort was led by the National Intellectual Property Rights Coordination Centre (IPR), which works with 19 federal agencies and four international agencies to stop counterfeiters. A whopping 83% of their work occurs in mainland China and Hong Kong, where counterfeit packaging is largely produced. In 2016, DHS seized over 2.8 million fake Estée Lauder products, but this just scratches the surface – counterfeit cosmetics are on the rise.

It’s a syndicate

There are some very big players operating in the counterfeit cosmetics world. In December 2013, for example, nine members of a New York-based syndicate led by Ming Zheng – known as ‘Uncle Mi’ – pleaded guilty to importing counterfeit perfume, handbags and footwear with a combined retail value of $300 million. But the family’s trafficking was substantial enough to occasionally get intercepted by US authorities. During 2009– 14, US Customs and Border Protection (USCBP) seized 16 packages heading their way, out of roughly 240 total shipments, according to DHS documents.

In 2014, complaints over counterfeit merchandise increased by 357%, with commerce authorities receiving 77,800 individual complaints. The year prior, counterfeiting accounted for 2.5% of the world’s trade. Though retailers like eBay and Amazon try their best to remove counterfeit listings, many slip through the cracks. Alibaba, China’s version of Amazon, has over 22,000 listings for lipstick, many of which are openly marked as counterfeit and have not been removed.

It’s not simply the loss of sales that concerns major beauty brands. Counterfeits tarnish a brand’s reputation, because many buyers don’t know that what they’re buying is a fake. Unfortunately, counterfeit make-up is almost impossible to detect by look alone. Many times, packaging is replicated perfectly. Make-up giants are continuously looking for new ways to thwart counterfeit packaging, which is often the only discernible way for the average person to spot a fake. These high-tech methods, such as watermarks, holograms and RFID chips, require a great amount of research. In 2017 alone, Big Beauty spent an estimated $41 billion on these types of anti-counterfeiting measures.

Lead astray

The cosmetics and perfumery industry is one of the market areas most affected by counterfeiting and smuggling operations. In 2015, it was estimated that the total revenue lost to imitation products across the EU was €4.7 billion, or 7.8% of total sales, according to a report into counterfeiting in the beauty industry by the The European Observatory on Infringements of Intellectual Property Rights. Aside from the economic losses created by these goods, imitation cosmetics and fragrances have been found to contain toxic levels of hazardous substances, such as cyanides, arsenic, lead and mercury. In some cases, the chemicals have been found to cause allergic reactions, including skin irritations, rashes, burns and swelling, as well as longer-term health problems.

In its most recent research, MarkMonitor revealed that more than 27% of people had unwittingly purchased non-genuine consumer goods online. This included everyday items, with 32% accounting for make-up, 25% being skincare, 22% supplements and 16% concerning medication. Overall, nearly 30% of online shoppers have purchased fake make-up, skincare and over-thecounter products. Customers can access these products through a number of channels, such as search engines, apps, advertisements and online marketplaces, but 89% of people are most likely to trust brand websites, and 74% prefer online marketplaces. However, online pharmacies account for 67% of counterfeit consumer goods sold online.

“The threat of counterfeiters is everpresent, affecting brands and consumers,” says Anil Gupta, chief marketing officer of MarkMonitor. “For brands, it is all about the loss of revenue, reputation and customer trust. However, when it comes to non-genuine consumer goods, such as cosmetics, skincare, sun care and medicines, the consequences for shoppers are far greater – affecting their health and well-being. As a result, it is up to brands to ensure they have a solid online brand protection policy in place to deal with the counterfeit threat and keep their customers safe from harm.”

This sentiment was reflected in the research, with 34% of respondents stating that they believed it was a brand’s responsibility to protect them from counterfeiters. This is reinforced by the fact that almost four in every ten consumers that unwittingly bought a fake product complained directly to the brand. In addition, with 80% of consumers relying on online reviews before making buying decisions, ensuring customer satisfaction is crucial.

Aphrodite, a European police operation, caused the seizure of over 20,000 counterfeit products and the shutdown of over 1,000 illegal shops on social media websites across nine member states, including Belgium, Bulgaria, Cyprus, Greece, Ireland, Italy, Portugal, Spain and the UK. The products seized included fake sportswear, medicine, cosmetics, phones, designer clothes, jewellery, glasses and watches.

Because of the rampant increase in social media platforms, the internet continues to be a major facilitator of intellectual property crime. “Because of social media platforms, it became easier to post and advertise offers for goods and content that turn out to be counterfeit and pirated,” a spokesperson for Europol said.

Yes we scan

There are a number of ways companies can protect themselves. Swisse Wellness, for example, employs a scannable label to protect and authenticate its growing portfolio of products. Growing from a humble warehouse in Australia to become a leading global wellness brand with a global market presence, there are multiple products and growth launches planned for the coming years. Acquired by H&H Group of Hong Kong for $1.7 billion in late 2015, Swisse Wellness’s product portfolio has more than 200 products, including vitamins, sports nutrition, skincare and functional foods, manufactured in GMPcertified facilities.

The company reports that, in China, Swisse Wellness is a top online vitamin brand, with consumers willing to pay a premium for esteemed products that deliver purity and authenticity in a market where poor or counterfeit goods remain common. But as demand, distribution and retail exposure of these products has grown, the Swisse brand has faced challenges from counterfeits. In response, Swisse adopted a series of packaging innovations to protect the authenticity of its products worldwide.

The first brand protection innovation was a new-form product package labelling, first seen in 2016, and is continuing to roll-out on hundreds of Swisse products worldwide –more than 150 to date. In 2017, the company unveiled, among other features, next-generation scannable labels that employ the Swisse product authentication mobile app. The company says the scanning technology allows consumers to easily recognise and verify authentic Swisse labels by scanning these icons using their smartphones. The icon associated with the app cannot be replicated and uses what the company refers to as the most advanced surface scan identification technology available.

Managing director Oliver Horn reinforced the company’s commitment to brand protection and consumer trust as an important responsibility, saying,“Consumer trust in our brand is a key priority. Swisse has seen great success globally through our commitment to producing high-quality products, which use premium formulas. But we know that with premium, in-demand products there are always likely to be individuals wanting to exploit them.” Horn continues, “We have had a considered approach to our strategy around anticounterfeiting and have been working on developing our product authentication app for many years. This has been a large investment for our brand, and it’s something we wanted to make sure was spot on and easy for our consumers to navigate before we introduced it to the market.”

“Cosmetics counterfeiting is a global epidemic,” says Gregg Marrazzo, senior vice-president and deputy general counsel for Estée Lauder Companies. He leads the company’s intellectual property group, which focuses on anti-counterfeiting – a reality for many in-demand brands, including MAC Cosmetics, part of Estée Lauder’s portfolio. A few of its most hotly counterfeited products are Studio Fix fluid foundation and Ruby Woo lipstick.

Marrazzo cites a recent case in which a group of bloggers outed an Australian department store for selling faux MAC products. The store paid out $1 million and ran corrective advertising.

Counterfeit cosmetics sometimes contain harmful or even carcinogenic ingredients.
– Karen Buglisi-Weiler, MAC

While companies are concerned about fakes because it hurts their image and profits, these copies can have much more dire consequences for consumers.

“It’s horrifying,” says Karen Buglisi-Weiler, outgoing global brand president at MAC, which is one of the few beauty brands bringing awareness to the issue. “It’s vital to remember that this is not just a MAC issue, but it’s a public health and safety issue. Counterfeit cosmetics sometimes contain harmful or even carcinogenic ingredients – perhaps not intentionally designed to harm, but due to the counterfeiters feeling no obligation to protect the consumers.”

“We’re not talking about a knock-off designer bag that you carry around on your arm,” says Buglisi-Weiler. “You’re purchasing products that you put on your eyes and lips, which you may ingest.”

“Even if you buy a counterfeit lipstick and come out unscathed, it’s not a victimless crime,” says Barchiesi. “In some cases, the proceeds support organised crime and the funding of terrorist organisations.” If it seems too good to be true, it probably is. “Think of it like a $20 Rolex watch,” says Barchiesi. “At that price, it’s fake.” However, she acknowledges that counterfeiters’ prices aren’t always that disparate, which makes things trickier.

To avoid counterfeit goods, one must scan for red flags, including misspelled product names and haphazard packaging. The beauty blog community can help, as they name and shame many bogus items – from Urban Decay’s Naked Palette’s to Benefit’s BadGal lash mascara – calling out exactly what to look for. “Like many companies, we are struggling with counterfeited,” says Urban Decay’s legal team. “We have a programme in place with USCBP that intercepts these shipments, but it catches only a fraction of the amount eventually shipped into the US.”

Research suggests that more than 25% of people have at some point purchased counterfeit goods online.
Unlike counterfeit designer clothes, fake cosmetics products, which come into contact with your eyes, mouth and skin, can be incredibly harmful.

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