Do Fake Sales Boost Michael Kors' Revenues?

Counterfeit street sales aren’t excuses anymore for singers or movie producers to justify their lack of sales because CDs and DVDs have left the streets. You can blame Spotify or Netflix. Or even YouTube. The illegal organizations behind the sales of fake goods on the streets have evolved and started studying the market and their customers. Yes, they may be illegal, but they are smart. Fake Adidas and Nike hoodies are trendy out there, and so are Real Madrid and Chelsea jerseys. What draws the most attention, however, are the bags. Louis Vuitton and Michael Kors bags have no competition and you can find a plethora of models for a fraction of the cost in stores.

 A few days ago, we read that the New York-based company Michael Kors acquired the high-end shoe brand Jimmy Choo for a disclosed deal of $1.2 billion, a third of what you would have to pay to own the New York Yankees. Founded in 1981, Michael Kors went bankrupt in 1993. As you can see, they rose from the ashes in very good shape because only very healthy businesses can invest so much money to diversify their portfolio of products. On the other hand, Jimmy Choo was founded in 1996, only 3 years after Michael Kors’ first strike. Both are in the physical retail sales business, one of the worst performers in the past few years. Not for MK apparently.

 Back to the street. Here you can buy bags, but not a pair of Jimmy Choo’s. The existence of different sizes in the shoe market is likely the reason, otherwise you’d find these highly desired items too. Not to mention the bad hombres behind the fake bags must have their own Quality & Assurance department because their manufacturing results are flawless compared to a genuine product. Prices can go as low as $20 for experienced hagglers whilst the same model at a Michael Kors official store would be at least 10 times the price. Or 50 times at Louis Vuitton. This wide difference is the key because the day you could afford an original model, the chances of you eventually buying a Michael Kors bag instead of a Louis Vuitton one, are tremendously higher.

 Let’s now picture an actual fact: there are many people hanging their fake bags out there. Think about it, isn’t it a lot of free advertising? Despite the existence of counterfeit items, what else is better in terms of brand awareness than having as many customers as possible showing off their acquisitions in the street, at the mall, or at work? I’m sure the executives at Michael Kors don’t care as much as we think about those fake copies, and that they actually like that this is happening. They are aware that not all of those illegitimate copies are sales that could’ve materialized into the company because not that many people can afford them. They’re also aware that eventually some of them will buy a real one. Even though the company recently announced the closure of a hundred stores to save $60 million and boost online sales, Michael Kors’ revenues are now three times larger than they were in 2013 and going north.

Although selling duplicates in the underground market is illegal, it’s interesting to see how one company whose intellectual property is being stolen can actually benefit from that. It is not the first case – when Windows 98 was released in 1998, DRM systems that protect software from illegal copies being made weren’t as strong as they are today, and it was pretty common to know someone in your neighborhood (this is when kids still played outside) from whom you could get a pirated Windows copy. Because of that, Bill Gates said:

‘About 3 million computers get sold every year in China, but people don't pay for the software. Someday they will, though. As long as they are going to steal it, we want them to steal ours. They'll get sort of addicted, and then we'll somehow figure out how to collect sometime in the next decade’ 

We all can agree that time seems to have proven him right. Counterfeit copies possibly contribute as an external player to accelerate what the Austrian-American economist Joseph Schumpeter coined as ‘creative destruction’; that is, bad products and even entire companies are destroyed by the most innovative companies in the market, which develop high-quality products that improve what you can find on the market. If Michael Kors bags are sold on the street it might be because their designs are clearly the best and fairly priced; equally, if Windows is still the top-seller operating system after 20+ years, well… You know the answer.

From Alexander the Great whose spears were longer that his enemies’, to Kevin Mitnick who indirectly made our computers safer after being FBI’s most wanted hacker in the 80s, there is no doubt that one way or another, companies or countries that don’t innovate won’t have a prosperous future.