Posted by: itm2011 | May 15, 2011

Lopping off Twigs or Uprooting the Tree: Kathrirne Baumann against Counterfeiters

IN434- INTERNATIONAL MANAGEMENT
FINAL WRITING ASSIGNMENT- CASE STUDY
Date: May 18, 2011
Name: Eunyoung Yoon

Case Title: Lopping off Twigs or Uprooting the Tree— Kathrirne Baumann against Counterfeiters

1. History of Kathrine Baumann Beverly Hills
Kathrine Baumann Beverly Hills began in 1988 as an exclusive miniaudiere label. A miniaudiere is a small ornamental purse which is covered by tiny crystals. Because of its exclusiveness, high quality materials and craftsmanship, Kathrine Baumann’s products value from $800 to $2,700 at the retail price. Some special purses with precious stones are priced at $250,000. Kathrine Baumann who is the founder of this company turned this small company (started with a mere $130 unemployment check) into a multi-million dollar business. She prides herself for being a part of the country’s small business force, credited as the backbone of the American economy.
Kathrine Baumann’s bags are adorned by many celebrities including Eva Longoria Larker, Kim Cattrell, Cynthia Nixon, Beyonce, and Mariah Carey, especially when they are on Hollywood’s red carpet.
Kathrine Baumann’s whimsical creations, which are inspired by various American characters and brands, make people smile. Baumann has national and international licensing agreements with mega companies including The Coca-Cola Company, The Walt Disney Company, King Features Syndicate, Warner Bros., Mattel, Campbell Soup (CSC), McDonald’s, Jim Henson Productions, Volkswagen and Mercedes. Her works are protected by copyright laws.

(Kathrine Baumann’s official website http://www.kbaumann.com)
(“Concept and Cases in Retail and Merchandise Management” by Nancy J. Rabolt, Judy K. Miller)

Industry overview 1)
Luxury Accessory Market in the United States
The US accessories industry is growing and highly fragmented as many players operate in niche markets. Since this market is getting more and more competitive, consumers are able to demand better products at lower prices in more convenient ways. Consumers tend to shop in specialty boutiques rather than department stores for better services, and over the internet for possibly cheaper prices offered. (http://www.marketresearch.com)
According to Packaged Fact and Accessoriesmagazine.com, the economic downturn has actually increased the sales of fashion accessories- such as silk handkerchiefs and winter hats- from $16.3 billion to $32.46 billion. (http://weconnectfashion.com) The latest study on global luxury goods by Bain & Co. says “The 2010 numbers from the analyst firm show growth in accessories was 16% versus 8% growth in clothing. The 2009 numbers show that accessories fell by 1% versus a 10% decline for clothing compared to 2008.” Pete Nordstrom, Vice President Merchandising at the luxury retail chain Nordstrom explained this phenomenon as “people have chosen the most versatile pieces that can be used several times over. You can use a bag or shoe several times, since an outfit can be limited to two or three times a month.” (theluxuryproject.com) Because of the change in what consumers buy and where they buy, the luxury market needs to change their marketing and distribution strategies.

2. Summary of the Case and Problems
In 2001, during a Henri Bendel trunk show, a customer informed Baumann that Manhattan retailers were selling unauthorized copies of her works. She did not really believe that at first because she had believed copyright laws protected her designs. However, after she checked several Manhattan stores, she realized her customer was right. There were knockoffs and even counterfeits of her designs available to customers and they looked incredibly similar to Baumann’s works.
However, there were also significant distinctions between those counterfeits and Baumann’s original works, in terms of the quality, finishing, sophisticated technique and the price, of course. Moreover, these knockoffs and counterfeits did not have the Kathrine Baumann’s special logo and her signature.
Some of the manufacturers of the counterfeit products stated bags were made in the same factory as the originals, which is in Italy. However, the counterfeit copies were actually made in China under sweatshop conditions. Counterfeiters even placed an ad for their copies where Baumann had previously invested $20,000 for advertisement of the collection. These people took advantage of Baumann’s investment and tried to fool unsuspecting customers.
Through the research, Baumann realized that not only her designs and the reputation of her brand but also her customers’ investment were harmed by the copies. Most importantly, counterfeiting threatened the stability and security of her workers. Finally, she decides to investigate the fakes herself. It was actually very dangerous decision, because of the counterfeit market’s huge value and the lack of ethics. Counterfeiters can earn 10 to 20 millions in nontaxable income, so they could have just killed her for their business if they knew who she was.
Baumann started investigating in 2001, and it took a lot of time and energy. Consequently, that caused a decrease in sales of her collections and the unemployment of employees. Baumann claimed counterfeiting had cost her company millions in potential revenue and growth.
When she first tried to contact the enforcement division in Washington after collecting much evidence, the officer did not take her case seriously. The person said 95 percent of people think they are being copied and Baumann was part of them. However, Baumann convinced the officer and she finally realized Baumann’s case was serious.
In a nutshell, Baumann did not give up investigating fakes. After gathering sufficient evidence, she went to the court. Finally, government officials arrested and convicted retailers on criminal charges of copyright infringement; Baumann’s lawyer filed additional civil lawsuits against store owners for selling the counterfeit goods. Unspecified monetary settlements have been reached, and permanent injunctions have been imposed. Baumann estimated that through litigation, as much as 85 percent of the fakes of her designs have been removed from the street. (“Concept and Cases in Retail and Merchandise Management”)

Industry overview 2)
Counterfeit Market in the United State
“In the United States, businesses and industries lose about $200 billion a year in revenue and 750,000 jobs due to the counterfeiting of merchandise. According to The United States Bureau of Customs and Border Protection, the volume of tangible counterfeit and pirated products in international trade could be up to US $200 billion in 2005 alone. Worldwide, counterfeiting accounts for more than 500 billion dollars which is 5% to 7% of world trade each year.”
“China is the U.S.’s top trading partner for IPR violations. China totaled $204.7M and accounted for 79% of the total domestic value for all IPR seizures. At Xiushui Market in Beijing, for example, hundreds of vendors occupy cramped stalls offering cheap knock-off merchandise, such as LV bags, Hermes neckties, or Ralph Lauren cashmere sweaters, at an extreme fraction of what the authentic goods would cost. Xiushui Market is visited by as many as 20,000 customers on a busy day and sells an estimated $12 million worth of merchandise annually. Although these numbers alone are significant, similar markets are scattered across Beijing, Shanghai, and other large cities. Hong Kong contributed $26.8M of the total domestic value for all IPR seizures, making it the second largest contributor with 10% of the market. India was in third place, with $3M and 1% of the total domestic value.” (http://www.unc.edu)

3. Alternative Solutions
Although it seems Kathrine Baumann made a good decision, I could still raise some important questions. I believe there are a few alternatives Bauman could have taken.

1) “Baumann could have ignored counterfeiters and instead invested the time and money on her new collections.”- Brand renovation
There is no doubt over the fact counterfeiting is a serious crime which often involves gangs, child labors, sweatshops, etc. People generally believe counterfeit goods ruin brands’ equity and possible revenues. However, not everyone may agree, especially when someone sees this issue at a pure designer perspective.
Legendary fashion designer Coco Chanel had different belief about copies of her designs. When someone asked and worried how she felt about the copies of her works, she replied let them copy. Chanel wanted everyone who liked her style to enjoy it even if it was a copy. She never stopped putting out new styles and designs. Chanel never failed throughout the history of fashion which proves copies do not always ruin brands.
Some people even believe copies help original brand’s success. Because copies are usually more affordable and reachable, common people easily get to know the brand and design through its copies, and it eventually makes them desire the original product. If the person is never willing to or able to buy the original, it is not going to be different even if copies do not exist in the market. Actually, according to an article from Marketing Magazine, less than 20% of people who bought fake goods responded they would have bought the original, and even it is highly possible that they lied. Shortly, the luxury market and counterfeit market do not compete over the same customers. Louis Vuitton bags, for example, created the biggest counterfeit market. Once I read a Korean article and it said eight out of 10 Louis Vuitton bags are fakes. However, the sales of Louis Vuitton bags are always around the top in the world luxury market. Louis Vuitton presents ground breaking designs every season, and the demands for their bags are never significantly drop.
Demands toward fakes may indicate that more and more people are aware of the original brand and more people who earn less income also desire the brand’s product. So when Baumann found fakes are on the street, she might want to develop a second line which is more affordable. That way, she could have achieved bigger range of customers when her brand was at the peak of its popularity. It seems Kathrine Baumann Beverly Hills already passed its peak years ago. It is rare to see a celebrity carrying her purse after 2008. She should have realized her brand’s limitation and come up with new strategies.
It is not easy to define what knockoffs are. We can say something is counterfeit when the fake good is actually labeled the original brand’s logo. However, the line between knockoffs and inspiration is not so obvious. Baumann said there were significant distinctions between her original works and fakes. If the distinctions were really significant, as she said, can it really be a counterfeit or fake? Customers would also notice the distinctions (even it is only possible when they were aware of Kathrine Baumann), but they still wanted the fakes. Then can Baumann really say the sales of fakes were equal to her possible sales?

Givenchy Sues BCBG for Knocking Off Their Handbags
November 11, 2010

Givenchy has filed a lawsuit against BCBG’s diffusion line, BCBGeneration, for ripping off their Nightingale bag (which retails for $2,175). They’re claiming that BCBGeneration’s Rembrandt bag, which doesn’t seem to be for sale anymore, “unlawfully copies and imitates” their own design. The court documents state that the offending purses are “likely to cause consumers, the public, and the trade to erroneously believe that [BCBGeneration’s bags] … are authorized, sponsored, and/or approved by Givenchy when, in fact, they are not.” Do you find the bags confusing?


BCBGeneration’s Rembrandt bag (left), Givenchy’s Nightingale bag (right).
Photo: Macy’s/Barneys

(http://nymag.com/daily/fashion/2010/11/balenciaga_sues_bcbg_for_knock.html)

2) “Baumann could have educated customers instead of taking fatal risks chasing counterfeiters.” – The ultimate solution
Demands lead supplies. Fakes are always there because there are always people to buy them. To eliminate fake goods, I strongly believe educating consumers should come first. Otherwise, fighting with counterfeiters is like lopping off twigs keeping the stem and root alive.
Baumann could have cut out fakes of her works through providing information to consumers both of her original good and fake goods. The education methods could have been various, such as advertisements, publications, or media commercials. If she succeeded to make people feel ashamed with buying or carrying fake goods, it would have been uprooting the tree. She would not have had to take deadly risks investigating counterfeiters.
There is a perfect example of how much customer education is important. Many people have tried to eliminate the use of animal furs since they learned how immorally those furs were produced. People including PETA members protested animal furs in many aggressive ways. Although the protests were shocking and successful in gaining attention, people did not really sympathize. People even made fun of them. However, once people provided more information and educational things in “cool” ways (for example, by using celebrities in anti-fur advertisement). Now more famous designers also show their philosophy against using animal furs. Miuccia Prada proved how synthetic furs can be more sophisticated and cool than the genuine furs through her fall/winter 2007 fashion show. This one fashion show totally changed people’s attitude toward animal furs, and the fur industry lost many potential customers. Now more people believe wearing animal furs is disgusting and immoral, so people tend to avoid wearing them even if they already have some in their closet. The future of the counterfeit market should take the similar way of animal fur industry by educating consumers better to make them feel disgusting about fake goods. Once the demand drops, suppliers would be no longer attracted to manufacture fake products.
Recently, in a New York City, a new bill has been introduced by Councilwoman Margaret Chin, which could fine counterfeit good buyers up to $1,000 and possible jail time. Even though buying fake goods is obviously wrong, many people have already shown strong hostility toward this new bill. (fakesareneverinfashion.com) The reaction assures that consumer education should come very first before actually punishing the buyers.

3) “She could have organized a group against counterfeiters instead of fighting alone.”- Gathering power
Counterfeiting is not a new issue. It has been a huge market and is getting bigger and bigger. The US government and numerous local businesses have lost huge amount of money fighting against this unethical market. Oddly enough, however, it is hard to find an influential organization, which actually protects the authentic businesses and educate customers. Fashion magazine Harpers Bazaar started make a voice about this problem through their April issue in 2005, and since then, publish special editorial annually. They also created a website named Fakes Are Never in Fashion (http://fakesareneverinfashion.com) to bring this issue out there. I actually became interested in intellectual properties by one of the Harpers Bazaar’s annual editorials a few years ago. However, it was only possible because I was a fashion magazine reader. Otherwise, I might not get a chance to find this issue as a serious matter.
When Kathrine Baumann found the fakes of her works in 2001, she was certainly not the only designer who had problems with counterfeiters. Once a brand became successful, fake goods almost naturally appear on the street. This could even be the criterion of success of the brand. In other words, Baumann was probably not the only one who wanted to eliminate counterfeiters. Then she could have gathered the designers and made an organization against counterfeiters. That way, she could have solved the problem taking less time, money and energy by creating a synergy effect. Moreover, once there is an official group or organization, activities become systematic and permanent while working individually tends to take more time and risks but often ends up as a temporary happening. This organization could have helped many small companies and new designers in the United States and educated customers efficiently. If it had really happened, Baumann would have gained a great reputation. A brand that has a good reputation never fails.

4. Conclusion
I think Baumann made a fine decision because she at least eliminated 85% of the fakes of her works at that time. However, I think she also could have taken a better choice which would be more ultimate and permanent. After winning the lawsuit, Baumann said one of her goals is to educate consumers on the negative ramifications of counterfeit product and to get the attention of government enforcement officials. I hope she has made some achievement with these. Also I strongly recommend her to try to official organization against fake goods. It would make a huge difference in terms of her business and those differences would make her life much easier fighting with counterfeiters. Also, if I was her, I would make the Kathrine Baumann’s second line which would be more affordable and allow more people to enjoy her designs. If her bags could make more people happy, she would be even happier.

<Bibliography>

Rabolt, Nancy J., Miller, Judy K. “Concept and Cases in Retail and Merchandise Management”: Fairchild Books, 2009. Print.

Kathrine Baumann Beverly Hills Official Website,

“Baumann prevails in knockoffs lawsuit,” All business, 19 Oct. 2004.
“Tiffany & Co., Kathrine Baumann win knockoff suit,” Tiffany Blog, 24 Jun. 2009.

“Kathrine Baumann issues a ‘call-to-arms’ against counterfeiters,” JCK, 28 Jan. 2005.

“Counterfeits: Good for Luxury Brands?” Branding Strategy, 3 Oct. 2007

“Why luxury accessories rise in times of recession,” The Luxury Project, 20 Mar. 2011.

“Luxury Fashion Accessories Snapshot Report: A Trend Report on the Market for Luxury Fashion Accessories,” Market Research.com, 1 Aug. 2009

“USA Accessories Market Research Report,” WeConnectFashion.com, Sep. 2010.

“Statistics on Counterfeiting and Piracy,” ACG

“Givenchy Sues BCBG for Knocking off Their Handbags,” New York Fashion, 11 Nov. 2010

Fakes Are Never in Fashion,

“The Backlash against Fining New Yorkers,” 6 May, 2011

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