<h2>The menace of counterfeits and fakes</h2>Illicit trafficking of counterfeit goods is more profitable than other illegal activities, such as the trafficking and sale of narcotic drugs, people and weapons.(1) Though often perceived as a ‘lesser crime’, it has far-reaching consequences. Counterfeit goods not only hurt customers and lead to lost sales but also deliver a serious blow to the credibility of the original brands. A FICCI study estimates that the industry suffers an annual sales loss of ₹1 lakh crore.(2) To add to their woes, these companies have to bear the expense of monitoring the market and instituting legal proceedings against the infringers. <figure class="image"><img style="aspect-ratio:4000/3094;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//cg-article-23-img-1-1734851563_1777354249.jpg" width="4000" height="3094"></figure>What’s more, the sale of counterfeit products and tax evasion in just seven key sectors resulted in a loss of ₹26,190 crore loss to the exchequer, in 2012 alone.  <h2>Combating counterfeiting: A uphill task</h2>It is believed that counterfeiters are able to flood the market due to a legal lacuna in the country. While there is still a long way to go, special police cells, CID, and Economic Offences Wing (EOW) of the central crime branch now proactively work towards the eradication of counterfeiting. Over the past decade, companies have also been working closely with law enforcement to bring these fraudsters to book. Companies are further fighting this battle by conducting awareness programmes about the harmful effects of these fakes and undertaking promotional programmes in small towns and villages. They have also introduced cheaper variants or smaller packs to make the products more affordable. Brands also use new and improved packaging, new labels and copy-proof holograms to make their products difficult to imitate.  Yet, despite the best efforts of individual companies and law enforcement agencies, the widespread sale of fake items has been increasing rapidly in the country. According to ASSOCHAM, “the present size of counterfeit products in India is 5% of the overall market size and growing at a rate almost double of that of genuine products.”(3) What is puzzling is that the measures taken to combat counterfeiting seem to be (comparatively) successful in curtailing fakes in urban retail. In contrast, the rural and urban areas are still flooded. With cheaper variants and smaller pack sizes eliminating the affordability issue and increasing awareness, why are fake goods still so popular in these areas?  The analysis of the market share of counterfeits in various sectors (see Figure 1) also shows that the extent of counterfeiting in the industries with better reach, like FMCG or tobacco, is less than that in industries which are known to have a larger market penetration gap (e.g., auto parts).<figure class="image"><img style="aspect-ratio:4000/2940;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//cg-article-23-img-2-1734851574_1777354196.jpg" width="4000" height="2940"></figure>This indicates that the answer to the ‘stickiness’ of counterfeiting with small retailers could lie in the ‘reach’ of companies. A closer examination of the behaviour of these markets helps clarify why the prevailing practice of companies not servicing small retailers directly, but instead relying on wholesalers, has created a Gordian knot for them.  <h2>Inadequate reach leaves markets vulnerable</h2>The 'economically unserviceable' small retailers: Though the majority of the Indian population live in small towns and villages (over 86%), the distribution networks of companies tend to be predominantly based in big urban cities. Even large FMCG companies, which, as an industry, have the best distribution, do not have extensive reach into the rural or even 'rurban' markets. <figure class="image"><img style="aspect-ratio:4000/3474;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//cg-article-23-img-3-1734851583_1777354126.jpg" width="4000" height="3474"></figure>This lack of direct reach (i.e., distributors’ sales teams servicing retailers in an assigned territory) into these markets is not due to a lack of market potential, but rather because distribution decisions are always based on 'cost to serve'. Faced with a cost trade-off, most small retailers, especially in rural or urban areas, are deemed not 'economically serviceable'. Instead, companies sell in bulk to wholesalers at lower prices, hoping that the wholesalers will help them secure sales in these unserved areas. Unfortunately, wholesalers are passive sellers who sell only to those who approach them.  <h2>Retailers’ dilemma creates fertile ground to foster counterfeiters</h2>This lack of direct attention from companies creates a serious dilemma for the small retailers who are forced to make a trip to the nearest wholesaler whenever they need merchandise. To save on transportation costs (and the sales lost when they shut their stores), these visits are necessarily infrequent. And with their limited capital, the range they can pick up is also minimal. Moreover, very often there are slow-moving products that have gone stale at the store, which the wholesaler is unlikely to accept back. So a retailer who picks up merchandise from a wholesaler has to pick up a small range in large lots by paying cash! The further the retailer is from the wholesaler, the more aggravated this conflict is: <ul><li>Counterfeiters’ appeal: Over time, a community of agents has evolved to solve this dilemma for the retailers. These agents, who are purveyors of counterfeits, frequently service small retailers at their stores. The retailers do not have to close their shops, lose sales, transport the merchandise back or invest in buying in bulk. They get credit, and their merchandise yields them a higher ROI. They are also protected from lost sales due to a popular brand going out of stock, since they can now suggest a look-alike or knockoff to their customer. Soon, they stop visiting the wholesaler altogether or do it very infrequently. The customers of small retailers may be tolerant of fakes, either out of ignorance or because they have no other choice. Over time, some of these fake brands may even develop a loyal following! </li><li>Reach - a necessary condition to counter counterfeits: The counterfeiter’s distribution network can only be effectively countered by direct distribution. This is the first step required to prevent the growth of this menace. Any other action taken - on the legal front or through marketing activities - while important, would be futile if taken without the retailer’s being serviced directly. Moreover, with a direct distribution system in place and distributors’ sales teams visiting these retailers, market intelligence can be easily gathered. Negligible reporting of counterfeiting is a major hurdle in tackling this menace. Further, the distribution system pushes into the country, the smaller the opportunity for counterfeiting.  Companies want to increase the reach of their direct distribution. They are intuitively aware that their dependence on wholesalers is dysfunctional. But since these companies believe that it is 'cost inefficient' to try to close the market penetration gap, they have resigned themselves to living with it. But what is generally not realised is that this decision to save on costs by not using an organised distribution network could actually be costing big time!  </li><li>Brands end up competing with itself: The wholesaler’s modus operandi plays havoc with the company’s sales. Wholesalers tend to compete with the company's distributors for the same market as the distributors’ retailers. This forces distributors to erode their margins, as they are threatened by wholesalers who buy the same brands at deep discounts. With lower ROI, the distributor finds it unaffordable to service retailers in his territory with regular beat plans, further eroding the company’s sales. </li><li>Excess inventory due to erratic ordering: Bulk sales to wholesalers, while attractive in the short term (to meet sales targets), often backfire on both the wholesalers and the companies. Sporadic large orders from small retailers motivate the wholesalers to place even larger orders with the company. When these small retailers don’t come back, the wholesaler is stuck with this inventory and gets into a credit lock with the company, hurting future sales. The combined impact of these two alone (without even counting the evils of counterfeiting) is far more damaging than the costs the company would have to incur for direct distribution! This makes it imperative that organisations abandon wholesaling and quickly build their direct distribution coverage. But letting go of wholesaling is scary for most companies. Old habits die hard. Many companies are wholesalers themselves, i.e., they set different unit prices of the product based on who they are selling to and how much is being bought. It is an accepted norm for companies to give lower prices for bulk purchases. This, in turn, makes wholesalers in the network a necessary evil for most companies. Moreover, the transition, in which wholesaling is abandoned and direct distribution is developed, would result in a short-term drop in sales. This is difficult for top management to accept. But once the direct distribution is established and the best plans followed conscientiously, the organisation would not only curtail fakes but leap ahead in sales as well. Companies’ hesitation to undertake the necessary transition holds them back from effectively addressing the menace of counterfeiting and fakes.</li></ul>

Key Takeaways

Find out why counterfeiting flourishes among small retailers primarily due to companies' limited reach and reliance on wholesalers. Transitioning to direct distribution is crucial for curbing counterfeits and building a healthier distribution environment.

Counter counterfeiting

<h2>The menace of counterfeits and fakes</h2>Illicit trafficking of counterfeit goods is more profitable than other illegal activities, such as the trafficking and sale of narcotic drugs, people and weapons.(1) Though often perceived as a ‘lesser crime’, it has far-reaching consequences. Counterfeit goods not only hurt customers and lead to lost sales but also deliver a serious blow to the credibility of the original brands. A FICCI study estimates that the industry suffers an annual sales loss of ₹1 lakh crore.(2) To add to their woes, these companies have to bear the expense of monitoring the market and instituting legal proceedings against the infringers. <figure class="image"><img style="aspect-ratio:4000/3094;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//cg-article-23-img-1-1734851563_1777354234.jpg" width="4000" height="3094"></figure>What’s more, the sale of counterfeit products and tax evasion in just seven key sectors resulted in a loss of ₹26,190 crore loss to the exchequer, in 2012 alone.  <h2>Combating counterfeiting: A uphill task</h2>It is believed that counterfeiters are able to flood the market due to a legal lacuna in the country. While there is still a long way to go, special police cells, CID, and Economic Offences Wing (EOW) of the central crime branch now proactively work towards the eradication of counterfeiting. Over the past decade, companies have also been working closely with law enforcement to bring these fraudsters to book. Companies are further fighting this battle by conducting awareness programmes about the harmful effects of these fakes and undertaking promotional programmes in small towns and villages. They have also introduced cheaper variants or smaller packs to make the products more affordable. Brands also use new and improved packaging, new labels and copy-proof holograms to make their products difficult to imitate.  Yet, despite the best efforts of individual companies and law enforcement agencies, the widespread sale of fake items has been increasing rapidly in the country. According to ASSOCHAM, “the present size of counterfeit products in India is 5% of the overall market size and growing at a rate almost double of that of genuine products.”(3) What is puzzling is that the measures taken to combat counterfeiting seem to be (comparatively) successful in curtailing fakes in urban retail. In contrast, the rural and urban areas are still flooded. With cheaper variants and smaller pack sizes eliminating the affordability issue and increasing awareness, why are fake goods still so popular in these areas?  The analysis of the market share of counterfeits in various sectors (see Figure 1) also shows that the extent of counterfeiting in the industries with better reach, like FMCG or tobacco, is less than that in industries which are known to have a larger market penetration gap (e.g., auto parts).<figure class="image"><img style="aspect-ratio:4000/2940;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//cg-article-23-img-2-1734851574_1777354174.jpg" width="4000" height="2940"></figure>This indicates that the answer to the ‘stickiness’ of counterfeiting with small retailers could lie in the ‘reach’ of companies. A closer examination of the behaviour of these markets helps clarify why the prevailing practice of companies not servicing small retailers directly, but instead relying on wholesalers, has created a Gordian knot for them.  <h2>Inadequate reach leaves markets vulnerable</h2>The 'economically unserviceable' small retailers: Though the majority of the Indian population live in small towns and villages (over 86%), the distribution networks of companies tend to be predominantly based in big urban cities. Even large FMCG companies, which, as an industry, have the best distribution, do not have extensive reach into the rural or even rurban markets. <figure class="image"><img style="aspect-ratio:4000/3474;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//cg-article-23-img-3-1734851583_1777354082.jpg" width="4000" height="3474"></figure>This lack of direct reach (i.e., distributors’ sales teams servicing retailers in an assigned territory) into these markets is not due to a lack of market potential, but rather because distribution decisions are always based on 'cost to serve'. Faced with a cost trade-off, most small retailers, especially in rural or urban areas, are deemed not 'economically serviceable'. Instead, companies sell in bulk to wholesalers at lower prices, hoping that the wholesalers will help them secure sales in these unserved areas. Unfortunately, wholesalers are passive sellers who sell only to those who approach them.  <h2>Retailers’ dilemma creates fertile ground to foster counterfeiters</h2>This lack of direct attention from companies creates a serious dilemma for the small retailers who are forced to make a trip to the nearest wholesaler whenever they need merchandise. To save on transportation costs (and the sales lost when they shut their stores), these visits are necessarily infrequent. And with their limited capital, the range they can pick up is also minimal. Moreover, very often there are slow-moving products that have gone stale at the store, which the wholesaler is unlikely to accept back. So a retailer who picks up merchandise from a wholesaler has to pick up a small range in large lots by paying cash! The further the retailer is from the wholesaler, the more aggravated this conflict is. <ul><li>Counterfeiters’ appeal: Over time, a community of agents has evolved to solve this dilemma for the retailers. These agents, who are purveyors of counterfeits, frequently service small retailers at their stores. The retailers do not have to close their shops, lose sales, transport the merchandise back or invest in buying in bulk. They get credit, and their merchandise yields them a higher ROI. They are also protected from lost sales due to a popular brand going out of stock, since they can now suggest a look-alike or knockoff to their customer. Soon, they stop visiting the wholesaler altogether or do it very infrequently. The customers of small retailers may be tolerant of fakes, either out of ignorance or because they have no other choice. Over time, some of these fake brands may even develop a loyal following! </li><li>Reach - a necessary condition to counter counterfeits: The counterfeiter’s distribution network can only be effectively countered by direct distribution. This is the first step required to prevent the growth of this menace. Any other action taken - on the legal front or through marketing activities - while important, would be futile if taken without the retailer’s being serviced directly. Moreover, with a direct distribution system in place and distributors’ sales teams visiting these retailers, market intelligence can be easily gathered. Negligible reporting of counterfeiting is a major hurdle in tackling this menace. Further, the distribution system pushes into the country, the smaller the opportunity for counterfeiting.  Companies want to increase the reach of their direct distribution. They are intuitively aware that their dependence on wholesalers is dysfunctional. But since these companies believe that it is 'cost inefficient' to try to close the market penetration gap, they have resigned themselves to living with it. But what is generally not realised is that this decision to save on costs by not using an organised distribution network could actually be costing big time!  </li><li>Brands end up competing with itself: The wholesaler’s modus operandi plays havoc with the company’s sales. Wholesalers tend to compete with the company's distributors for the same market as the distributors’ retailers. This forces distributors to erode their margins, as they are threatened by wholesalers who buy the same brands at deep discounts. With lower ROI, the distributor finds it unaffordable to service retailers in his territory with regular beat plans, further eroding the company’s sales. </li><li>Excess inventory due to erratic ordering: Bulk sales to wholesalers, while attractive in the short term (to meet sales targets), often backfire on both the wholesalers and the companies. Sporadic large orders from small retailers motivate the wholesalers to place even larger orders with the company. When these small retailers don’t come back, the wholesaler is stuck with this inventory and gets into a credit lock with the company, hurting future sales. The combined impact of these two alone (without even counting the evils of counterfeiting) is far more damaging than the costs the company would have to incur for direct distribution! This makes it imperative that organisations abandon wholesaling and quickly build their direct distribution coverage. But letting go of wholesaling is scary for most companies. Old habits die hard. Many companies are wholesalers themselves, i.e., they set different unit prices of the product based on who they are selling to and how much is being bought. It is an accepted norm for companies to give lower prices for bulk purchases. This, in turn, makes wholesalers in the network a necessary evil for most companies. Moreover, the transition, in which wholesaling is abandoned and direct distribution is developed, would result in a short-term drop in sales. This is difficult for top management to accept. But once the direct distribution is established and the best plans followed conscientiously, the organisation would not only curtail fakes but leap ahead in sales as well. Companies’ hesitation to undertake the necessary transition holds them back from effectively addressing the menace of counterfeiting and fakes.<o:p></o:p></li></ul>

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Improving direct distribution coverage can help companies combat the menace of counterfeiting and fakes effectively. Read to know more.