Alibaba Playing Hardball On Fighting Knockoffs

Major consumer brands have struggled for years to control the massive grey market, where the brand’s goods are sold without authorization—and where the items sold may be counterfeit items of much lesser quality. This problem is especially challenging in much of the Asian E-Commerce space—and that is putting China E-Commerce leader Alibaba in a powerful position.

Alibaba is telling prestige brands—including Burberry, Estée Lauder, Gucci, Ralph Lauren and Giorgio Armani—that Alibaba would be pleased to shut down the knockoff stores on its site, for a price. That price is for those brands to buy their own stores on the site, according to a story in The Wall Street Journal.

“Alibaba has promised that once they open their own stores, it will purge goods sold on (Alibaba site)Tmall by retailers not authorized by the brands or do more to fight fakes on Taobao, Alibaba’s huge online bazaar,” the story said.

Beyond making more revenue, the Chinese dotcom leader has another incentive to sign up as many prestige brands as possible: an imminent IPO. “Alibaba has been eager to woo high-end brands ahead of a listing on the New York Stock Exchange that is expected to be one of the largest initial public offerings in U.S. history,” the Journal reported. “The presence of luxury brands lends a luster that can draw shoppers, other brands and potentially investors.”

Burberry’s experience—before and after cutting the deal—is illustrative. Before it opened its Tmall shop, more than 50 vendors were selling either Burberry products they were not entitled to sell or simply knockoffs, the Journal said. After Burberry’s store opened in April, those rivals all disappeared, “although two resellers of Burberry perfumes returned in July.”

Then there’s the kicker: “In contrast, the number of third-party vendors selling products from Gucci, which doesn’t have a Tmall store, rose to 69 in June from 63 in April. Third-party vendors of Giorgio Armani SpA and Ralph Lauren Corp. RL +1.47% —two other brands without a Tmall store—also increased.”

If successful for the long term, the strategy has potential to help Alibaba in two very different ways. First, the strategy of not fighting the clones or gray market companies—or even simply taking their money and asking no questions—is legally risky. Last month, Yves Saint Laurent sued Alibaba, accusing it of “knowingly (making) it possibnle for an army of counterfeiters to sell their illegal wares.” That lawsuit soon went away after the pair had agreed “to work together.”

Alibaba’s legal situation is complicated because of the murky nature of the issues. Selling another company’s goods without authorization—typically at steeply discounted prices—is restricted in some countries but is “generally permitted in China,” the Journal said. But selling counterfeit items—aka clones—is clearly illegal in China. The problem is that huge E-Commerce sites like Alibaba don’t have the investigative resources to distinguish between the two.

But beyond sidestepping these legal issues, the strongarm tactic may help overcome a strong resistance from major consumer brands to join Alibaba and to pay for their own stores. “Until now, most high-end brands had resisted opening storefronts, some saying their images could be tarnished by the bargain-basement atmosphere of Tmall, a sprawling marketplace with 70,000 vendors, where so-called gray-market’ resellers thrive,” the Journal reported.