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How Data Science And Crowdsourcing Are Revolutionizing Brand Protection

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Traditional approaches to fighting counterfeiting have often felt like holding a candle in the wind, but now, the combined power of item-level digital traceability, mobile phone–driven consumer engagement and real-time analytics is fundamentally changing the game.

It was hard not to admire the audacity of the street vendor selling “Louis Vuitton” bags on the Venetian piazza right in front of the brand’s retail store. “At least the fraud’s overt,” I thought to myself when I witnessed the scene because the choice was pretty clear: buy the Real McCoy inside or, if your aspiration was bigger than your pocket, buy the knock-off outside.

That brazen vendor was just one small example of how counterfeiting has been a constant pain to brands the world over, leeching revenue and customers from legitimate businesses. There is clearly a market for explicitly knocked-off branded goods, where consumers know what they’re buying, but a 2019 Incopro report found that 26% of US consumers had unwittingly purchased a counterfeit in the past 12 months and that 52% said they had lost trust in a brand after buying a fake product online. In another 2019 report, the OECD and EU Intellectual Property Office estimated counterfeit and pirated goods reached roughly $509 billion, or 3.3% of international trade, in 2016, up from $461 billion in 2013. With the pandemic accelerating online trade, those figures are also growing.

But now it appears there is hope for brands struggling with this seemingly insurmountable problem. Digitization is now making it possible to gather an unprecedented amount of traceability data on billions of items as they flow through supply chains and the crowdsourcing power of consumers engaging with products through their phones is changing the game. The combination of digital identifiers on products, aggregation of data across the supply chain and mobile phone–driven consumer engagement is generating tracking data at a previously unachievable scale. All of that data can now be processed with cloud-based analytics software in real time to draw conclusions about whether a product is authentic, in the part of the world or the location it is supposed to be, and even in the possession of the individual or enterprise who is understood to own it.

The Big Business of Faking It Is Getting Bigger

The growing proportion of retail sales made via online channels has been a booster for counterfeit and illicit trade. The 2018 Global Brand Counterfeiting Report from Research and Markets found that losses due to online counterfeiting globally reached some $323 billion in 2017, including more than $30 billion for luxury brands alone. And research conducted in 2016 by Ghost Data found that some 20% of social media posts about top fashion brands the firm analyzed “featured counterfeit and/or illicit products.” Fakespot, which offers software that flags fraudulent online reviews and sellers, recently analyzed more than 124,000 Shopify stores and found that nearly one-fifth of them were linked to counterfeits, privacy leaks, purchasing fake reviews or other fraudulent activity.

If brands were facing a whack-a-mole problem in identifying and shutting down brick-and-mortar counterfeit retailers, e-commerce has exponentially multiplied the problem, with counterfeiters able to set up new sites ever more rapidly with automated tools while facing reduced geographical limitations. E-commerce offers bad actors access to a global audience and more anonymity while creating new channels for security failures. Fraudsters can sell online not only through websites and massive third-party e-commerce and recommerce marketplaces, but also through social media.

The arms race is impacting consumer confidence. Incopro’s 2019 survey found that 51% of consumer respondents said they would lose trust in a brand if they purchased a fake product they found via search engine and 64% said they would lose trust in an e-commerce marketplace if they accidentally purchased a fake through it. The rapid growth of recommerce channels is exacerbating the problem. A 2020 study that GlobalData conducted for ThredUp indicates that the US resale market for clothing alone is expected to reach $36 billion by 2024, up from roughly $7 billion last year, which would make it the fastest-growing retail sector.

Bringing a Peashooter to a Gunfight

Brands have often attempted to fight counterfeiting in the past through design and production, basically trying to make it too hard or too expensive for counterfeiters to duplicate products in the first place. Fashion and luxury brands incorporated hard-to-replicate details such as unique stitching, patterns or handmade components into products, while spirits brands have used unique bottle designs to thwart counterfeiters. Yet these measures may not work for less observant consumers. In the spirits market, counterfeiters are unburdened by the high proportion of tax charges that make up the typical retail value of a bottle and they have been known to produce very high-quality bottles, effectively competing on physical product quality even if the contents of the bottles were fake and, in some cases, even lethal to consumers.

Some brands tag products with holographic labels, secret and invisible inks imprinted into the labelling or packaging, or other authentication devices. The problem is that consumers may not know what to look for. Once products are released to market, brands typically adopt another strategy to protect their IP and reputation: employing teams of inspectors in the field who conduct spot checks. Visiting retail locations and buying products from online marketplaces, inspectors seek to identify suspect products and gather evidence to help brands pursue legal action against offending retailers and distributors. But sample rates are low and even well-staffed inspection teams struggle to achieve more than a few fractions of a percentage point of coverage across distribution networks. It’s a tall order to keep up with the army of anonymous bad actors who can quickly throw up fake websites and post dozens or hundreds of fakes for sale on social media each day.

Tracking down and holding counterfeiters accountable has proven so costly and challenging that many brands have considered these losses simply a cost of doing business. Drawing attention to the problem has also been undesirable, as media coverage and public statements risk highlighting just how big the problem is and, in turn, raising consumers’ fears about purchasing from a brand.

Data Science and Crowdsourcing to the Rescue

Visibility into where products are and who’s got them is improving quickly now that digitization is making it possible to track items across the supply chain and with the consumer. GS1, the standards organization responsible for the global barcode, has been rolling out an upgrade to the ubiquitous technology that gives every product a web address, typically using a QR code on the item, which can be used to connect each item with a digital twin in the cloud. Apple AAPL and Android smartphones can now automatically scan standards-based codes like QR codes through their built-in camera apps.

This means that brands can gather data much more easily from anyone using a smartphone at any point along the supply chain, at the point of sale or post-purchase. This data can be rapidly transmitted to the cloud, where algorithms can analyze it along with other data held about the product item in question to draw conclusions about authenticity and other aspects of business integrity, such as gray marketing (also known as parallel trade). With a meaningful proportion of consumers who purchase a product now scanning it to access information and services linked to it, and to authenticate the item themselves, brands are able to gather enormous amounts of traceability information and rapidly detect suspicious products or supply chain patterns.

The sheer volume of traceability data that can be captured makes faking QR codes on fake products harder for counterfeiters. Applying unique identifiers to individual items, a process known as serialization, typically involves secure algorithms that are not easily spoofed and the sample rate achieved from consumer engagement and scanning in the supply chain means that copied or spoofed identities can be rapidly detected.

The ubiquity of smartphones (the Pew Research Center estimates that 85% of Americans now own one) makes them a powerful tool for crowdsourcing data and an increasing number of consumers are interacting with QR codes on products. The pandemic has encouraged more consumers to use QR codes—particularly in Western countries, where adoption of the codes has lagged—because they enable contactless interaction for everything from payments to ordering meals at restaurants to accessing information about products’ provenance. Statista estimated that 11 million US households would scan a QR code in 2020 and it’s likely that the ongoing pandemic will continue to act as a tailwind to consumer adoption of these codes.

But QR codes alone are not the only solution. Oregon-based Digimarc DMRC provides watermarking technology that can be incorporated into product packaging or labeling along with serialization. In cooperation with packaging giant WestRock WRK , Digimarc’s watermarking technology is being used in combination with unique QR codes and digital identities in the cloud to provide multilayered brand protection. The combination of identifiers on physical products and algorithmic intelligence in the cloud makes for a strong means of tracking and authentication that can be scaled across any kind of packaged or printed items.

This data-gathering capability is not limited to crowdsourcing with consumers. Brands can also gather data as items come off production lines and are scanned in distribution centers and data-sharing networks are emerging that enable brands to share tracking information across their supply chain as well as with retail partners and consumers. European luxury leaders LVMH, Prada Group PRAA and Compagnie Financière Richemont, for example, have recently partnered to launch the Aura Blockchain Consortium, which will enable companies to use physical identifiers on products in combination with blockchain-based credentials to allow consumers to track the provenance of goods and authenticate them. The World Economic Forum is working on an initiative involving a consortium of apparel brands and recommerce marketplaces that will use digital identifiers on products to authenticate goods arriving at secondary markets for resale. The digital identities will allow brands to authenticate items in much the same way that credit card companies work with e-commerce platforms to process payment transactions.

The All-Seeing Eye of the Machine in the Cloud

Few in the industry believe that counterfeiting can be eliminated. But it seems clear that the ease with which consumers can access authentication information, the burgeoning amount of traceability data being generated and the rapidly developing capability to apply machine learning and artificial intelligence to that data is a fundamental game changer.

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