Saturday, 2 February 2008

Del Boy Goes East

There is, in the British tradition of comedy heroes, a character called Del Boy Trotter. Del Boy is something of a folk legend in the UK. He earns his living from ‘wheeler dealering’, usually on the other side of the law. His speciality is what, in the UK, we call ‘knock off’ – stolen and counterfeit goods – as well as goods smuggled into the country to evade customs duties (there is a brisk trade in smuggled cigarettes and alcohol). These are usually sold in unlicensed street pitches and pub car parks. The sad thing is that most of us in the UK actually know someone who makes a living in this way.

A recent issue of McKinsey Quarterly (see article) examined the rise of China’s middle class. Of particular interest to me was the projected rise (and then decline) of the lower middle class. The lower middle class is estimated to be 12.6% of the population in 2005, 49.7% of the population in 2015, falling to 19.8% of the population in 2025. The purchasing power of this segment is projected to rise from $93.9bn in 2005, to $542.7bn in 2015; to $288.0bn in 2025 (all figures in billions of constant 2000 US Dollars). These figures ought to alarm those who monitor the trade in counterfeit goods and the custodians of brand integrity.

The lower middle class in China is what, elsewhere, McKinsey describes as ‘aspirational’. They aspire to high levels of material consumption, but can’t afford to purchase primary brands (the average income per household is $3,900 a year in 2000 constant US Dollars). What happens is that, in order to buy ‘face’, members of this group buy fake and replica brands, as well as originals that may have been stolen in transit from the point of production to the point of sale. ‘Face’ is an important purchase for this group, as it enables the members of the group to purchase social status and standing. Members of the group are what they wear.

Del Boy, visiting China in 2015, will feel as if he has died and gone to heaven. The size of the ‘knock off’ market is likely to be huge. It will be interesting to see how the law enforcement agencies and the brand owners respond to this potential threat. One avenue of approach might be to attempt to bind the Chinese government even further into the rule base of global trade. However, an edict from the centre does not mean that it will be enforced locally. One can question the ability of the Chinese government to effectively disrupt the trade in fakes and counterfeits if local officials have a stake in it flourishing.

It is possible, however, that the brand owners may have a more effective response. If the sale of branded items moves away from the sale of ‘things’ and towards the sale of ‘experience’ using the branded items, then more control can be retained by the brand owners. It is easier to copy and counterfeit a ‘thing’ – whether that ‘thing’ is a watch, an accessory, a piece of software, or a piece of apparel – than it is to counterfeit an ‘experience’. If the future of branding moves in this direction, then the owners of brands are likely to be able to retain their role as the gatekeepers to the brands. In this world, the business model of the brand owner would change so that the ‘thing’ is given away at cost, but the customer is charged for the ‘experience’ of using the ‘thing’.

Failing that, an investment in a brand would need to have a very short payback period. The brand premium would only last as long as it takes for copies to go on sale. In some cases involving software, that period is currently negative (the copies are sold before the originals are launched). It is difficult to see how many brands would make money in that environment.

Perhaps we are coming to the point where Trotters Independent Traders (Del Boy’s company) is going global?

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