Spy Games: New Tag Technologies Help Fight Theft, Counterfeits

Customs officials recently seized more than $230 million in counterfeit merchandise bearing the names of Chanel, Prada, Nike, True Religion, Coach and Louis Vuitton, among others, highlighting a perennial problem for the fashion industry.

In Los Angeles alone, counterfeiting and piracy losses topped $5.2 billion in 2005, according to a recent study released by the Los Angeles County Economic Development Corp. The study further estimated the city’s retailers lost $2 billion due to sales of counterfeit items during the same period and the area lost 106,000 jobs, as well as $483 million in tax revenue.

Counterfeits, diversion and theft damage a brand’s value and eat into the manufacturer’s profits, but now some apparel makers are looking to technology to help them fight back.

Using tools such as “smart” labels and other means, brand managers have been able to at least divert criminals away from their product to a degree.

Tag and label suppliers such as Avery Dennison, Checkpoint Systems and others over the past few years have invested millions into research and development to create a slate of sophisticated applications, including indelible and color- shifting inks, infrared, microprinting and even DNA molecules to fool thieves.

Most of the labels can be permanently applied or sewn on and feature software to track merchandise through the supply chain to help them tell if merchandise has been diverted.

Brand damage

While truckloads of merchandise seizures are important, the real damage comes at the expense of a company’s brand image. When knock-offs and stolen goods end up at swap meets and on Canal Street in New York or Santee Alley in Los Angeles, brand image can be weakened, said Paul Chamandy, vice president of new business development for the Paxar Corp., which was recently acquired by Avery Dennison.

“If you got a name, someone wants to use it,” said Chamandy. “The problem is that most of our industry has moved offshore, and product is manufactured far away from the view of brand managers. Couple that with the rising sophistication level of counterfeiters.”

Even some contracted manufacturers that companies entrust are involved, said Chamandy, explaining how they run “third shifts” behind the backs of their customers and sell to whomever for their own profit.

The problem has grown recently as consumers in China and other parts of Asia have become fans of top American and European labels, thus fueling demand for those brands.

The June 25 bust in New York resulted in 29 arrests following a 19-month investigation. The arrests covered three rings believed responsible for importing more than $700 million in counterfeit apparel, footwear and bags over the past two years. (For more on the New York bust, click here.)

One key element to passing off counterfeit apparel as the real thing has been through the use of authentic labels, explained Chamandy. “There’s a huge black market, just for tags and labels.”

That’s why Avery Dennison and others have stepped up security programs for labels using a number of emerging and established technologies and tools such as specialty papers, threads and inks, sequential numbers, holograms, tamper-proof labels, phosphors, source tagging and microprinting. Some of the technologies are the same ones used for U.S. currency. Both suppliers and their customers are reluctant to go into detail about the products, for fear of tipping their hand to counterfeiters “Thieves know how to read too,” said Chamandy.

From DNA to RFID

Champion Thread Co. is bringing the unique technology of DNA science into the picture. The Gastonia, N.C.–based company last month became an exclusive licensee for DNA markers provided by Stony Brook, N.Y.–based Applied DNA Sciences Inc. The system applies plant-based DNA to the thread, which consequently can only be read by special scanners and tools. Under the agreement with ADNA, Champion has the rights to produce woven labels, threads, yarns with ADNA’s technology for four years with an option to renew.

The DNA markers could become a key identification tool used during customs seizures. About 30 percent of all counterfeit seizures in the world are from textile products, according to the Organization for Economic Cooperation and Development.

“With this [technology] in place, we are now better able to service the anti-counterfeiting needs of textile- and luxury-brand owners,” said James Hayward, chief executive officer of ADNA.

Targeting the retailers

Many of the smart labels being developed also address retail theft, which accounts for up to 40 percent of retail losses. One of the trouble areas challenging retailers has been the proliferation of organized retail crime, explained Jim Brodzik, director of apparel market development for Checkpoint Systems, now the number No. 2 tags and labels supplier following the acquisition of Paxar by Avery Dennison.

“What you have are organized rings that are targeting certain brands and retailers going into stores stealing hundreds of garments at a time,” he said. “They are brazen and travel in packs, sometimes five or more in a store. One or two of them will tie up the key people while the others are stuffing things into bags.”

Checkpoint recently released several products aimed directly at fighting organized retail crime. DatatraceDNA is a merchandise-tracking system. ShelfAlert is a wireless system that alerts managers when multiple products have been removed from an area in a short time. Tamper Tags labels are affixed with an industrial-strength adhesive that cannot be removed without damaging packaging, making it less desirable on the black market. MetalPoint is a silent-alarm system that alerts managers when someone enters the store wearing foil-lined clothing or carrying a foil-lined “booster” bag, used to circumvent EAS (electronic article surveillance) systems such as scanners usually placed at entry/exit doors.

Another growth area is source tagging, which is the application of retail security tags done at the manufacturer’s level rather than in-store.

The source-tagging program of Canadian tags and label supplier KMA Global Solutions International Inc. includes security tags that are embedded in products or affixed to packaging at the point of manufacture. The company’s patented NEXTag is a sewn-in tag designed for swimsuits, intimate apparel and jeans.

In May, KMA announced it would increase its production capacity thanks to a newly opened factory and sales office in Hong Kong’s Kowloon district, which handles manufacturing, quality control and distribution of KMA’s NEXTag sewin tags.

The company expects an initial production capacity of 2.5 million units per week at its Kowloon facility, with plans to expand to exceed 250 million units annually by 2010. KMA recently struck a $5 million deal to supply its NEXTags to a large apparel agent in Hong Kong, and the company estimates it will sell up to 70 million of the tags to branded manufacturers as well as private-label manufacturers.

Avery Dennison, its Paxar division and Checkpoint all work with emerging RFID (radio frequency identification) technology, and all point to RFID as not only as an inventory- management tool but as an anti-theft and anticounterfeit tool.”

“Even right now, it can tell you how much product is supposed to come in,” said Brodzik. “It’s at the store level to a limited degree, so it’s only beginning.”

Industry assistance

Despite the availability of technological solutions to combat counterfeiters and thieves, smart tags should be part of a larger company strategy, said Chamandy. “You need lawyers and the support of management. You have to keep on it.”

Brodzik agreed. “The strategies we encourage our customers to use involve employing a moving target. You have to mix up your technologies—move them around to keep the thieves guessing.”

Chamandy also said that suppliers need to keep the costs reasonable, which he believes they are.

Legislators are also helping. Last year, the U.S. House of Representatives followed the Senate in approving an anticounterfeiting bill that makes it illegal to reproduce tags and labels without proper authorization.

In New York, lawmakers now hold landlords liable for renting retail space to counterfeiters.

The American Apparel & Footwear Association has also been active in this effort through its Brand Protection Council. A seminar on intellectual property sponsored by the AAFA will take place on the West Coast this fall. The times and dates are expected to be released in the coming weeks.

And in August, the U.S. Chamber of Commerce will host a week-long event to bring attention on the issue of piracy and counterfeiting.

The event, which will target both consumers and businesspeople, will focus on several industries, including fashion, film and music.

For more information about the U.S. Chamber’s event, e-mail counterfeiting@uschamber.com.