Deluxe: How Luxury Lost Its Luster (31 page)

And who became their best customers? The new superrich hip-hop stars such as Sean “P. Diddy” Combs, Jennifer Lopez, and Beyoncé Knowles, decking themselves out in Fendi furs, Fred Leighton diamonds, and anything with a Dior, Chanel, Gucci, or Vuitton logo on it. Logos—particularly luxury brand logos—represent “all the shit we don’t have,” said Def Jam Records founder Russell Simmons. “We’re not ripped-dungarees-rock-n-roll-alternative-culture people. We want to buy into the shit we see on television but we want to put our own twist on it. Part of the fantasy of fashion is about being successful. It’s aspirational. I put this on, I’m getting laid. Not because I’m cool and raggedy but because I’m cool and clean. Because I want to buy into this culture.”

Some brands embrace the bling obsession. Gianni Versace once boasted that rapper Tupac Shakur “wore Versace on the day he walked into prison
and
on the day he walked out of prison.” Dolce & Gabbana dressed Mary J. Blige for a concert tour, and, in
2005
, Louis Vuitton hired hip-hop star Pharrell Williams to design its new sunglasses line. Some cringe silently and ring up the sales. And some speak out. “What can we do?” asked Frédéric Rouzaud, head of Louis Roederer, the last major family-owned champagne house and the makers of the top-ofthe-line Cristal, which rappers swig, as well as sing about, often. “We can’t forbid people from buying it. I’m sure Dom Pérignon or Krug”—both owned by LVMH—“would be delighted to have their business.” In response to this apparent diss, rapper Jay-Z, CEO of Def Jam, took Cristal off the wine list at his clubs in New York and Atlantic City and vowed to change the lyrics in the half-dozen songs in which he references the bubbly. “I view his comments as racist and will no longer support any of his products through any of my various brands,” the rap star declared.

Perhaps the greatest problem luxury brands have created for their companies by going mass, banking analysts say, is financial instability. Before its global expansion to the middle market, luxury was immune to economic cycles. The companies were small and catered to a limited old-money clientele who were rich enough not to be affected by short-term drops in the stock market or economic downturns, and who shopped consistently and bought well. Luxury was a successful niche business. But when luxury changed its target audience to the cost-conscious middle market that shops when flush but stops cold when times get tough, it made itself dangerously vulnerable to recessions—as the industry would soon find out.

In the mid-
1990
s, luxury brand executives saw the Asian economic tiger as a hungry, deep-pocketed new customer base. “Anybody who had a name or wanted to make a name moved into Asia,” Giancarlo Giammetti, then managing director of Valentino, told me. “If you opened one store, the next thing you knew, you opened five.” Gucci had seven outlets in Hong Kong in
1998
, three within a six-block radius. Prada had nine. New York City, in contrast, had just one Gucci and two Prada shops. It was inevitable that “these companies were going to get killed because of their overcapacity” in Asia, said Joanne Ooi, president of East from Seventh Ltd., a wholesale showroom in Hong Kong for Western designers trying to break into the Asian market. “Without tourism, Hong Kong is only a city of six million inhabitants. How is it going to support nine Prada stores?”

But in July
1997
, Thailand’s currency collapsed, triggering a two-year-long economic crisis across Eastern Asian, and luxury took a beating. Valentino’s Giammetti immediately halted the construction of two Valentino stores in Singapore. Zegna closed three of its four shops in South Korea. Yves Saint Laurent pulled out of Seoul’s Galleria department store, and Louis Vuitton shortened store hours in Hong Kong. Gucci’s stock plunged a staggering
50
percent in a month. LVMH lost
45
percent of its stock value from July to October. At Hermès, sales in Southeast Asia dropped by
11
percent and its stock fell by
14
percent. “In South Korea,” British designer Paul Smith told me, “our business [was] gone, completely. Overnight.”

Four years later, the terrorist attacks of September
11
,
2001
, stopped leisure and business travel cold for weeks and diminished it greatly for two years, causing substantial losses for the luxury industry, which relies greatly on travel shopping. LVMH’s net income plunged from €
722
million in
2000
to a mere €
10
million in
2001
. As soon as the industry recuperated from those losses, SARS hit, in effect shutting down Hong Kong, one of its biggest markets in the world, for six weeks. Two years later, the threat of avian flu made luxury executives extremely nervous.

Since luxury has broadened its audience, middle-market brands such as Zara, Gap, H&M, and Banana Republic have taken advantage and moved in next door. “I wonder if Abercrombie being next to Prada on Fifth and Fifty-sixth Street will benefit Prada,” mused Joel Isaacs, president of Isaacs & Company, a real estate firm in Manhattan that specializes in luxury retail placement. “From the view of foot traffic, it might. What I do suspect is that Abercrombie will benefit from Prada.” This retail integration has turned once-chic shopping streets into tourist attractions and driven luxury brands to look for new, more “insider” addresses, such as the meatpacking and financial districts in New York and Melrose Place in Los Angeles, for big-spending luxury customers. Today there is not one bank, gas station, or drugstore on Rodeo Drive. Instead, there are more than thirty-five luxury brand fashion stores, twenty major jewelers, and a half-dozen high-end art galleries along the fifteen-hundred-foot, three-block retail stretch of Rodeo Drive. In
2001
, fourteen million people visited Rodeo Drive and it was averaging $
1
million a day in retail sales. “We don’t want to be on Rodeo Drive anymore,” says Mario Grauso, president of the Puig Fashion Group, which includes Nina Ricci, Carolina Herrera, and Paco Rabanne. “That’s not the shopping experience anymore. You don’t want a busload of tourists out front taking pictures.”

K
RIS
B
UCKNER
pulled his gold Toyota Camry into the parking lot of a strip mall in the Little Tokyo section of eastern Los Angeles and walked up to the Starbucks for our appointed noontime rendezvous. We were going to tour Santee Alley, the street market in downtown L.A. where fakes are sold at wholesale and retail. Buckner is the founder, owner, and head of Investigative Consultants (IC), a private investigation firm that chases down manufacturers and distributors of counterfeit luxury goods. Medium height, the thirty-seven-year-old native Southern Californian was fit and tan like a surfer, his copper blond hair slicked straight back. He was dressed neatly and discreetly in a plain white polo shirt, newish jeans, and a pair of well-worn sneakers—nothing to draw attention. He’s wise and quick, a real gumshoe, with a taut confidence that tells you he’s seen it all.

Buckner grew up in Torrance, California, a charmless American urban sprawl just south of Los Angeles, and spent his teen years surfing the Pacific coastline and working part-time at Becker Surfboards in Hermosa Beach. At twenty-one, he entered the police academy and went on to become a deputy sheriff who walked the beat in Lennox and worked in L.A. County jails, keeping inmates in line. While he was a deputy Buckner qualified for his private investigator’s license, so in
1994
, at the age of twenty-six, he decided to go into business on his own. He set up his office in his home basement, and with his wife and mother helping out—answering phones, handling the books, even doing some undercover work—he took on basic assignments: witness interviews, litigation investigations, husband-and-wife matters. By the time we met in November
2004
, he had ten PIs on staff and four administrative assistants who occasionally do investigative work, too.

The Los Angeles–based designer jeans company Guess was the first client to ask Buckner to go after counterfeiters. Today Buckner represents more than eighty clients, from toner products manufacturers to the Motion Picture Association of America. But his specialty is luxury goods: he handles more than thirty-five brands. Buckner’s method is straightforward: he gets leads from the brands themselves, from informants, and from law enforcement officers who have seen something suspect. He also hears a lot from angry women who take a Gucci purse or a Rolex watch they received as a gift into the boutique for repairs or an exchange and are told it’s fake. Buckner and his team gather the evidence through surveillance, serve “cease and desist” letters, and, if that fails, turn over the case to the LAPD or another law enforcement agency to execute search warrants and make arrests. “It’s like the drug business—dirty like that,” he told me in his raspy tenor. “A lot of people will drop dimes on the counterfeiters.”

We met a few miles away because, as Buckner told me in his car on the drive over to Santee Alley, everyone knows him and if we wanted to see anything, we’d have to arrive quickly and discreetly. With us was Buckner’s associate, Hector Moya, a burlier and quieter sort, also in a casual shirt, jeans, and sneaks. We parked in a lot just off Los Angeles Street and hit the sidewalk at a good clip, heading toward Santee Alley, one and a half blocks up. The ambiance was like an outdoor bazaar in a developing nation: stalls selling everything from T-shirts to confirmation dresses, with designer handbags, jackets, and jeans hanging from the sun-bleached awnings. The banter and the bargaining were in Spanish and Korean. The heavy, pungent aroma of spicy sausages and onions grilling on beat-up carts filled the air; mango skins and watermelon rinds littered the gutter.

I sensed a bit of scurrying. “See that guy running ahead of us?” Buckner asked. A scrawny Hispanic in a white guayabera darted through the crowd a few steps in front, constantly looking over his shoulder. “He’s going to warn them,” Buckner said knowingly. Sure enough, when the kid got to the corner of Santee Alley, he let out a birdlike whistle. “They have spotters on rooftops, two-way radios,” Buckner explained, “to keep a lookout for us.”

When we turned the corner into the alley, the kid had disappeared into the crowd and the first stall we visited was empty. Minutes before, Buckner said, the place had been open for business. Though the front gate was still up, there was no shopkeeper and most of the merchandise had been stashed in duffel bags or big black plastic trash bags. As we walked down the concrete alley, Buckner pointed out a vendor named Ruben. “He was arrested two weeks ago for sales of counterfeit merchandise,” Buckner said. “He was doing a deal in a parking lot nearby.”

We headed toward another stall. A fellow in the street gave the shopkeeper a sign—whistled, then waved his hand. “She’ll throw everything in bags and run it out of here,” Buckner said. Sure enough, when we got to the stall, there were only a few Vuitton watches and handbags still on display. On the floor sat a couple of overstuffed trash bags and big cardboard cartons, sealed. The vendor, a small Asian woman well past fifty, stood at the counter, her hands resting nervously on a scrunched black plastic bag. Buckner’s alert turquoise eyes zeroed in on it. “What’s that?” he asked, and gently slid the sack from under her arm. Inside he found a well-worn Louis Vuitton catalog in Japanese. “They get this from Japanese tourism agencies,” Buckner explained. “Chances are they have the merchandise hidden in the back.”

I
N THE TIMES
of ancient Rome, Greece, and Egypt; the Mayans and the Incas; the American Indians and imperialist China, hallmarks and seals served as marks of origin: you knew who made your goods. In the Middle Ages, craftsmen joined professional guilds that provided marked goods with a seal of quality approval in addition to the craftsmen’s personal stamps or signatures. When the Industrial Revolution arrived in the mid-nineteenth century, goods could no longer be traced back to a single craftsman—they were mass-produced in assembly lines. To distinguish as well as protect their products from the competition, companies trademarked their work and their logos, and trademarks became a guarantee of consistent quality. Since the
1950
s, trademarks and logos have been increasingly used as marketing and advertising tools and have evolved into brand symbols.

Today logos brand people: by wearing or carrying an item emblazoned with a logo, you declare that you are a member of a tribe that subscribes to that particular brand’s message and its ethics—essentially the dreams conjured up for you by the marketing department. Luxury-brand logos convey wealth, status, and chic, even if the bearer of the logo-ed product is a middle-market suburban housewife who bought it on credit. “I think it’s completely impossible [to eliminate the logo] today,” Miuccia Prada told me. “The recognition of the brand is too important. The more you want to enlarge your business, the more you have to use your logo.”

By putting an emphasis on the logo and spending more than $
100
million a year to advertise it, luxury companies made their brands, rather than the actual products, the objects of public desire. Unfortunately, they also created a demand they couldn’t meet, and a product that average consumers craved but couldn’t always afford. How many secretaries, teachers, or sales executives could really buy a new $
500
Prada or $
700
Louis Vuitton handbag
every season
? Counterfeiters stepped in, providing an endless supply of copies at
5
to
10
percent of the genuine product’s retail price. And luxury’s new hungry target audience started buying and buying and buying.

Counterfeiting is about as old as civilization itself. During the last century of the Roman Republic (
100
BC), Romans grew rich and socially mobile, and one of the ways the upwardly mobile could gain acceptance by the patrician upper classes was to possess what old-moneyed Romans possessed. “Wealth itself didn’t confer status,” explains Jonathan Stamp, a classical historian and documentary filmmaker. “You needed wealth plus something else, like objects.” The politician and philosopher Cicero, for example, was an outsider who wanted desperately to be accepted by the establishment, so he spent a staggering one million sestertii on a citron wood table at a time when the average annual salary was a thousand sestertii. Suddenly Rome’s nouveaux riches had to have tables just like it, and since they couldn’t afford the real thing, they had carpenters copy it in lower-quality wood. Sculptors reproduced the great statues of the period in cheaper materials for the new moderately rich masses to use in decorating their homes and gardens. “People were spending money like never before and cared about superficial things,” Stamp said. “All the old social structures had dissolved, and it was bemoaned by the patrician rich: ‘People used to know their place.’”

Counterfeiting has long been a problem for modern luxury, too. Cheap knockoffs of checked and striped canvas Louis Vuitton trunks prompted Vuitton’s son Georges in
1896
to design with the company’s signature logo print of interlocking LVs and Japanese floral symbols. In
1948
, a woman who had paid a small fortune to exclusively own one of Christian Dior’s designs arrived at a nightclub only to find another woman wearing an exact copy. “This is no joke,” the woman wept, “but a tragedy.” The French gendarmes launched an investigation that led six years later to the arrest of a counterfeiting gang. The thieves bribed seamstresses for patterns and models to borrow outfits that they would then copy.

Through much of the
1970
s and
80
s, counterfeiting was a small-time business. The luxury brand watches, sunglasses, and T-shirts sold by merchants on the street were obviously fake; the quality was lousy, the prices cheap. Luxury brands generally didn’t get too worked up over it.

Two things changed the game: the democratization of luxury and the rise of China. When luxury brands went democratic, they thought they could satisfy the middle market with lower-priced handbags and perfume. What executives didn’t count on was middle-market consumers satisfying their craving for higher-end items by buying fake versions that they could pass off as real. At the same time China evolved into a capitalist market economy and the world’s manufacturing center, with a new class of entrepreneurs who saw counterfeiting as a viable business. The convergence of the two—big demand and big supply—was cataclysmic. And it took luxury executives—and executives in most other industries—by surprise.

Since
1993
, the counterfeiting of all goods—from DVDs to pharmaceuticals—has increased by
1
,
700
percent, reports Indicam, an anticounterfeiting coalition based in Italy. The International AntiCounterfeiting Coalition (IACC) in Washington estimates that up to
7
percent of today’s global trade—$
600
billion worth—is counterfeit. In
1982
, the International Trade Commission estimated global losses from counterfeiting and piracy to be $
5
.
5
billion; in
1988
, it was $
60
billion; and in
1996
, it was $
200
billion. In
2004
, the U.S. Department of Commerce estimated that American companies alone lost between $
20
billion and $
24
billion annually. The loss of tax revenue due to counterfeiting is substantial, too: New York City police commissioner Raymond Kelly estimates that the city loses up to $
1
billion in taxes annually.

While everything from Ferraris to mineral water is counterfeited today, fashion is one of the most popular sectors, because it is easy and cheap to copy and even easier to sell. In
2000
, the Global Anti-Counterfeiting Group reported that
11
percent of the world’s clothing and footwear was fake, and the World Customs Organization believes the fashion industry loses up to $
9
.
2
billion (€
7
.
5
billion) per year to counterfeiting. In
2002
, the European Commission reported that trade in counterfeit clothing, footwear, perfume and toiletries reduces the European Union’s gross domestic product by more than $
6
billion (€
5
billion) each year and costs
10
,
800
jobs.

The most popular and lucrative fashion knockoffs are those bearing luxury brand logos. You can buy fake Louis Vuitton handbags, Gucci sunglasses, and Burberry knapsacks in shops on Canal Street in New York and Santee Alley in L.A., in the souks of Marrakech and Istanbul, on the beaches of the Côte d’Azur, in flea markets, on the Internet, even in the living rooms of suburban America, where housewives host “purse parties” to make some extra cash. And people do buy. As a result, counterfeiting has ballooned from the small-potatoes local business of twenty years ago to a global racket today, one that is run by violent crime syndicates that also deal in narcotics, weapons, child prostitution, human trafficking, and terrorism. The FBI believes that terrorists financed the World Trade Center bombing in
1993
with sales of counterfeit T-shirts in a store on Broadway in New York City, according to the IACC. Interpol secretary general Ronald K. Noble told the U.S. House Committee on International Relations in
2003
that profits from counterfeit goods sales have gone to groups associated with the anti-Israel Shi’ite terrorist group Hezbollah, paramilitary groups in Northern Ireland, and Colombia’s main rebel army, FARC. One of the suspects in the March
2004
Madrid train bombings is a known counterfeiter, according the United Kingdom–based AntiCounterfeiting Group.

Investigators even believe that there may be a link between counterfeiting and the September
11
,
2001
, attacks on New York and Washington. The week after the attacks, fifteen hundred counterfeit vendor stalls—some purportedly owned and operated by al-Qaeda—at the Tri-Border Market in South America, where $
70
million of business is done in cash every day, closed shop. And during a raid in early
2002
on a midtown Manhattan luggage store that was run by a man of Middle Eastern descent and sold fake luxury handbags and watches, New York security expert Andrew Oberfeldt and intellectual property rights lawyer Heather McDonald found a flight manual and simulator program and copies of technical schematics of a bridge. They immediately called the Joint Terrorist Task Force, which took over the case. “Profits from counterfeiting are one of the three main sources of income supporting international terrorism,” says Magnus Ranstorp, former director for the Centre for the Study of Terrorism and Political Violence at the University of St. Andrews in Scotland.