The number of counterfeit jeans crossing the counters of department stores in the U.S. in the mid-2000’s was unprecedented. At the time, the denim market was in the midst of a seismic shift. Women had suddenly begun ditching their inexpensive jeans for premium denim from brands like 7 For All Mankind, Hudson Jeans, Joe’s, Rock and Republic, and True Religion, whose wares bore price tags well into the 3-digits.
You would be hard-pressed in 2005 to not find women ogling over the offerings of premium denim brands in Macy’s contemporary women's department, which stocked 15 different upscale denim brands and two to three styles per brand. At the heavily-attended fashion industry trade show MAGIC in Las Vegas in 2007, a similar story was playing out. The number of department-store and other buyers shopping for women's premium denim jumped 72 percent from 5 years prior.
Discerning consumers scrambled to get their hands on just the right pairs of status-identifying denim, often with carefully embellished or stitched pockets, which served to identify their source, leading to a revenue heyday for brands and retailers, alike.
It was against this background that the market became inundated without counterfeits. They ranged from shoddily produced Rock and Republic jeans with asymmetrical “R”s on the back pockets to convincing copies of 7 For All Mankind denim complete with the little burnt orange rectangles that adorned the right-side back pocket and a spot on the waistband right above.
Those fake jeans inevitably made their way into department stores, and readily changed hands between cashier and buyer, but not in the way that one might expect. Instead of buying counterfeit jeans, consumers were the ones responsible for them. As part of a rising scheme known as returns fraud, consumers were buying authentic jeans and returning fakes, and putting the money they got back right into their bedazzled back pockets.
The tactic was proving to be rampant, particularly when it came to premium jeans.
Barbara Kolsun – who was serving as the general counsel for 7 For All Mankind between 2005 and 2007, when the brand was bringing in over $300 million in sales – says that she was being flooded with issues because the amount of fakes being returned to stores by consumers was truly “significant.”
“I had to put a dead stop on crediting Nordstrom for the returns,” she says, referring to the retailer’s practice of charging brands – 7 For All Mankind in this case – for the cost associated with returns or unsold items. It got to the point, Kolsun says, “that I told them not to take back any unless they checked with us as to the authenticity of the product.” Far too many fakes were slipping through the cracks, and the brands were being forced to pay for them.
Fast forward to 2018, and the problem of returns fraud has not only remained a reality for brands and retailers, it has been exacerbated. “The ease with which stolen goods can be sold online, the rise in gift card fraud schemes, the shortage of staff in [the brick-and-mortar] stores, and the demand for certain brand name items or specific products” has led to a new level of fraud, according to Appriss Retail, artificial intelligence-fueled retail performance improvement solutions provider.
Last year in the U.S., retailers and brands saw more than $369 billion worth of products returned. Between $18 and $24 billion of those returns can be directly linked to fraudulent, per Appriss Retail.
The ever-increasing amount of fraud-based returns is also aided by the use of “fake receipts, and price tags, as well as cloned credit cards and gift cards,” and due to the fact that the sophistication of counterfeit goods has become unparalleled. “We are now at the point where the fakes are almost identical to the real thing … where they are almost 99 percent identical,” Antonio Linares, the operator of Fake Education, a site dedicated to educating consumers about the differences between authentic and counterfeit sneakers and streetwear, told TFL.
In other words, even if brands are prepared to deal with the rampancy of returns fraud, the quality of many counterfeits is often stacked against them and their in-store associates.
The cost of return fraud for brands and retailers when it comes to counterfeit luxury goods goes far beyond the cost of the individual item, itself. It “transcends the dollar losses because counterfeiting threatens the brand’s most important asset — its reputation for quality with consumers,” according to Paul Rosengard, president of Anatwine, a fashion-focused software company that facilitates vendor-direct shipments and real-time inventory optimization.
“Retailers selling high-end goods want to protect their brands and their reputations for trustworthiness,” but can be ill-equipped to determine the authenticity of what have become known as super-fakes, or high quality counterfeits. More than that, store associates “also want to ensure a seamless, positive customer experience, which means that they may frequently accept returns without asking too many questions,” assuming the customer and item can be found in their system, says Rosengard.
Such an approach is proving dangerous, as returns fraud becomes easier to accomplish and also given that designer clothing and handbags are among the products most frequently at the center of return fraud scheme, according to Appriss.
The company notes that jeans still rank pretty high on that list, too.