3Qs: Buying into the knockoff factor?

Retail titans Apple, Nike and Ikea have to compete with impostor replicas of their retail stores that have popped up in the southern district of Kunming city in southwest China and other parts of the world. These stores hawk knockoff products to sometimes unknowing customers. Tony Gao, an assistant professor of marketing in Northeastern’s College of Business Administration, interprets the broader implications to consumer welfare, intellectual property rights protection, competitive behaviors and the challenges they create for international marketing.

Why is China — a country that is aggressively trying to outperform others — resorting to copying the products, names or feel of existing retail companies? Doesn’t that show a lack of innovation?

This business practice resembles imitation much more than innovation. From a practical point of view, innovation should only be used as a means to an end, rather than an end itself — that is, innovation should be pursued as a business strategy only if it could viably and feasibly enhance the customer value of a company’s product and boost the company’s market competitiveness. Firms (especially those trying to catch up with market leaders) may find imitation to be a better way of competition. Therefore, it is not uncommon to see local firms emulate leading multinational companies in a developing market.

All imitation efforts by all firms must follow the laws of the government, be ethical and socially responsible and serve to enhance, rather than undermine, consumer welfare.  From the appearance, the copycat Apple stores in Kunming, China, may have violated the law, come across as unethical and damaged the welfare of its customers.

How do retail replicas compromise the brand integrity and revenue of companies such as Apple?

This is reminiscent of the private label (or store brands) phenomenon widely used in the global retail industry. This refers to the practice of retailers developing, branding and/or making their own products to replace or compare with leading brands owned by widely known manufacturers. Large retail stores across the United States and Europe have hordes of copycat products sold as retailers’ own brands to contend with the most reputable national brands. These store brands look almost identical to the manufacturers’ brands, but they are sold at much cheaper prices. As of 2010, the market share of private labels has reached about 20 percent of the total revenue of the U.S. supermarket industry, and even more so in Europe.

Imitation behaviors such as the Apple store in China and the private label practice in broader retail undermine the revenue and market position of the leading brands. Given the rising bargaining power of chain retailers, large manufacturers such as Proctor & Gamble and Whirlpool have learned to live with this fact and responded appropriately to the trend; for example, by offering their own economy brands or even producing private labels for large retailers on a nameless basis. Academic literature reports that the leading brands might enjoy broader market appeal because of the imitation efforts by others. Quality issues with copycat products may also help enhance the image of leading national brands.

When will the government create tighter copyright laws to protect the retail industry?

The practice of retail format imitation is a firm behavior rather than a government behavior. Many times, companies and their leaders in China and elsewhere engage in conduct that only benefits themselves while putting aside the interests of consumers, the nation and society at large. It is useful to recognize that as fast as China has been developing in the last decade, despite the governments’ efforts at formulating and more competently enforcing laws including IPR regulations, the Chinese government has been, perhaps, losing rather than gaining control in effectively regulating firm behaviors.

The Chinese government, Apple and other multinational companies could learn from this and find ways of better safeguarding the rights of multinational companies doing business in China. It will be interesting to watch how Apple will settle scores with the local stores blatantly copying its retail format, especially as these stores are said to be selling authentic Apple products. So far, news from the Apple side has been very limited.