Last year, Coach (NYSE:COH) was awarded $257 million in a case involving a series of counterfeit dealers. The company is one of the biggest proponents of the crackdown on counterfeit goods, and has a section on its website dedicated to spotting and reporting the fake goods. Michael Kors (NYSE:KORS) also addresses the issue on its site, though in smaller detail. The companies' goal is to help fight the global counterfeiting rings that dilute brand value, deprive businesses of revenue, cut taxes from governments, and fund illicit activity.
A new law is being proposed in New York City that would take aim at a part of the underground business normally left untouched -- the demand side. Consumers would risk fines and jail time for purchasing counterfeit items, giving authorities an avenue to help dry up demand for the counterfeit goods.
The problem with counterfeits
Coach estimates that counterfeit sales deprive the U.S. of upward of $500 billion in tax revenue every year. The 'business model' that dodges these taxes works like a well-oiled machine. Counterfeiters use popular handbags, watches, sunglasses, and other luxury items as their blueprints. They then use cheap labor -- often children -- to recreate the items with cheap materials. These fakes are then distributed to corner shops, websites, and other venues to be passed on to consumers.
One of the biggest problems of counterfeiting is rarely addressed -- consumers like the products. As aspirational shoppers, American consumers are happy to spend $20 to get a bag that looks like it cost $2,000. What we're all too happy to overlook is that, by buying the bags, we support child labor, hurt the very brand we're trying to align ourselves with, and help fund all sorts of evil activities -- like terrorism.
As a representative from True Religion (NASDAQ:TRLG) pointed out, buying from websites is especially damaging, as purchasers are putting their credit card details and addresses in the hands of a company that could very well be a front for Hezbollah -- seriously. According to True Religion's Deborah Greaves, "They have everything they need to steal from you."
What the new law proposes
City councilwoman Margaret Chin first proposed the bill two years earlier, but it has just now made its way to the fore. The bill would give authorities the ability to prosecute buyers of fake goods, fining them and, potentially, putting offenders in jail. The bill is meeting some opposition, as businesses are worried that it would deter customers from shopping in certain parts of town. Chin said that the goal is to "cut down on the demand."
That would be a big step forward, and it's helped in places like France and Italy, which have both made efforts to cut down on demand for counterfeit goods. The combination of legal ramifications and education should help the U.S. start to combat its counterfeit problem, as well.
While the law probably won't have an immediate impact on income statements, it should help companies combat counterfeiting more effectively. In addition to the law, New York would need to support some sort of education so that consumers weren't caught unaware -- though it seems unlikely that a shopper wouldn't know what was up. That combination of education and legislation is just what the luxury-goods sector needs to get its counterfeiting problem solved.
As a consumer, you can help be part of solution by shopping only at reputable businesses, and by demanding to know more about the supply chain when you make a purchase. As a last resort, keep in mind the immortal words of every good mom: "If it seems too good to be true, it probably is."
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.