Prague University of Economics and Business
Master’s Thesis
2021 Bc. Karolína Novotná
Prague University of Economics and Business
Faculty of Business Administration
Master’s Field: International Management
Title of the Master’s Thesis:
Counterfeit Make-Up Products – Threat for the Market, Companies and Customers
Author: Bc. Karolína Novotná
Supervisor: Ing. Martin Machek, Ph.D.
D e c l a r a t i o n o f A u t h e n t i c i t y
I hereby declare that the Master´s Thesis presented herein is my own work, or fully and specifically acknowledged wherever adapted from
other sources. This work has not been published or submitted elsewhere for the requirement of a degree programme.
Prague, August 25
th, 2021 Signature
A c k n o w l e d g e m e n t
I would hereby like to thank the supervisor of my thesis, Ing. Martin Machek, PhD. for the valuable recommendations, and the support he had provided
during the whole time of writing my thesis.
Title of the Master´s Thesis:
Counterfeit Make-Up Products – Threat for the Market, Companies and Customers
Abstract:
The goal of this thesis is to explore whether conscious use of counterfeit make-up products can negatively affect the way how consumers perceive the quality of genuine branded products and the brand associations they relate to the luxury brands. Moreover, the shopping intentions of consumers who had bought illicit make-up in the past, the main factors that drive their shopping intentions were analysed together with the risks consumers might perceive prior to the purchase. To find answers to all research questions, a review of the relevant literature together with both qualitative research and quantitative research were conducted. The primary research in form of two focus group discussions included 13 respondents in the age range from 18 to 35 years old, who had knowingly purchased counterfeit make-up products in the past. To further complement the key findings from the group discussions, an online survey was conducted. In total, 233 respondents from 15 to 50 years old replied to the structured questionnaire. The key findings disproved the assumption that both perceived quality and brand associations are negatively affected by the use of fake cosmetics. The main purchase intention that consumers consider is the lower price. The majority of consumers perceive the performance risk, only a couple of respondents were considering health risks connected to the use of the illicit make-up.
Key words:
Counterfeit products, make-up, change in perception of the genuine brand, purchase intentions, perceived risks
Table of Contents
Introduction ...1
1 Theoretical part ...3
1.1 General Definition of Counterfeit and Pirated Products ... 3
1.1.1 Key Drivers of International Trade in Counterfeits ... 5
1.1.2 Key Countries of Provenance ... 7
1.1.3 Key Product Sectors ... 9
1.1.4 COVID-19’s Impact on Trade with Counterfeit and Pirated Products ...10
1.2 Luxury Products Specifics ... 11
1.2.1 COVID-19’s Effect on Luxury Products Segment ...11
1.2.2 Digitalization of the Luxury Products Segment ...12
1.2.3 Counterfeits of Luxury Products ...14
1.2.4 Consumers’ Purchase Intention Towards Counterfeit Luxury Products ...15
1.3 Cosmetics Industry Overview ... 18
1.3.1 Luxury Cosmetics Segment ...19
1.3.2 Counterfeit Products in the Cosmetics Industry ...20
1.4 Customer-based Brand Equity ... 22
1.4.1 Five Categories of Brand Equity ...24
1.4.2 Brand Knowledge ...27
1.4.3 Factors Affecting the Customer-Based Brand Equity Dimensions ...29
2 Empirical Part ... 31
2.1 Methodology ... 31
2.1.1 Research approach ...31
2.1.2 Research Strategy...32
2.1.3 Rationale Research Structure...33
2.1.4 Goals and Research Questions ...33
2.1.5 Research Methods ...34
2.2 Focus Group Discussion ... 36
2.2.1 Overview ...36
2.2.2 Focus Group Planning ...37
2.2.3 Recruitment...37
2.2.4 Focus Group Questioning Plan ...39
2.2.5 Conducting the Focus Group Discussion ...39
2.2.6 Data Analysis ...40
2.3 Online survey ... 40
2.3.1 Target Group ...41
2.3.2 Design of the Questionnaire ...41
2.3.3 Collection of Data ...42
2.3.4 Sample Representation ...43
2.3.5 Characteristics of the Respondents ...44
2.4 Evaluation of Questionnaire Results ... 45
2.4.1 Economic-Focused Model Questions ...45
2.4.2 Status-Focused Model Questions ...47
2.4.3 Authenticity-Focused Model Questions ...49
2.4.4 Counterfeit Make-up Product Purchase Intentions ...51
2.5 Key Findings from the Focus Group Discussions ... 54
2.5.1 Perception of Luxury Make-up Products ...54
2.5.2 Purchase Intentions towards Counterfeit Make-up Products ...55
2.5.3 Counterfeit Make-up Product’s User Experience ...56
2.5.4 Risks Connected to the Use of Counterfeit Make-up Products ...58
2.5.5 Change in the Perception and Associations of the Genuine Luxury Brands...60
2.5.6 Identification of a Counterfeit Mascara ...61
2.6 Summary ... 62
2.7 Limitations of the Research Method ... 64
2.8 Possibilities for Further Research ... 65
Conclusion ... 66
References ... 68
List of Appendices ... 77
List of Figures
Figure 1: Leading countries hosting domains for selling counterfeit goods in 2018... 7
Figure 2: Differences in provenance economies in counterfeit and pirated trade between 2013 and 2016 ... 8
Figure 3: China and Hong Kong's aggregated share (%) of seized counterfeit goods by U.S., EU, and Japanese customs authorities ... 8
Figure 4: Value of fake goods seizures worldwide in 2016, by product ... 10
Figure 5: Luxury Goods Market in billion US$ ... 11
Figure 6: True-Luxury Consumers Net Appetite ... 12
Figure 7: Luxury Goods Market Sales Channels Shares ... 13
Figure 8: Journey of a typical luxury goods shopper ... 13
Figure 9: Structure of choice in consumer's minds ... 16
Figure 10: Growth in the worldwide cosmetics market over 10 years (in %) ... 19
Figure 11: Prestige cosmetics & fragrances market in billion US$ ... 20
Figure 12: Dimensions of Brand Knowledge ... 28
Figure 13: Country of Residence of Respondents... 44
Figure 14: Comparison of genuine and fake mascara 1 ... 97
Figure 15: Comparison of genuine and fake mascara 2 ... 97
Figure 16: Comparison of genuine and fake mascara 3 ... 98
Figure 17: Comparison of genuine and fake mascara 4 ... 98
List of Tables
Table 1: Levels of Consumer Loyalty ... 25Table 2: Factors affecting the dimensions of consumer-based brand equity ... 29
Table 3: List of participants of the first focus group discussion ... 38
Table 4: List of participants of the second focus group discussion ... 39
Table 5: Sample representation of the population ... 43
Table 6: Age distribution of respondents ... 44
Table 7: Average monthly income of respondents... 45
Table 8: Evaluation of Economic-Focused Model – Question 1 ... 45
Table 9: Evaluation of Economic-Focused Model – Question 2 ... 46
Table 10: Evaluation of Economic-Focused Model – Question 3 ... 46
Table 11: Evaluation of Economic-Focused Model – Question 4 ... 47
Table 12: Evaluation of Status-Focused Model – Question 1 ... 48
Table 13: Evaluation of Status-Focused Model – Question 2 ... 48
Table 14: Evaluation of Status-Focused Model – Question 3 ... 49
Table 15: Evaluation of Authenticity-Focused Model – Question 1 ... 49
Table 16: Evaluation of Authenticity-Focused Model – Question 2 ... 50
Table 17: Evaluation of Authenticity-Focused Model – Question 3 ... 50
Table 18: Evaluation of Authenticity-Focused Model – Question 4 ... 51
Table 19: Number of respondents who purchased counterfeit product ... 51
Table 20: Point of purchase of counterfeit products... 52
Table 21: Purchase intentions of consumers buying counterfeit products ... 52
Table 22: Negative side-effects of counterfeit make-up products ... 53
Table 23: Negatively affected perception of the genuine brands ... 53
The cosmetics industry has seen dynamic growth over the past few years. Despite the worldwide economic slowdown caused by the COVID-19 disease, the make-up industry was able to overcome the drop in sales and ever since the pandemic restrictions had loosened, the sales grew up and even exceeded the pre-covid values in 2021. (Gleason- Allured, 2021)
However, the success of the industry had attracted illicit producers, who started selling counterfeit versions of well-known luxury brands. Such goods seem to be exact copies of genuine products, sometimes with a slight change in the brand’s name pronunciation.
Unacquainted consumers are in most cases not able to recognize whether the product is authentic or not at the first glance. Unfortunately, they often find out they had bought fake make-up after using it, as these products have different colours, lower pigmentation, or coverage. In the worst-case scenario, fake cosmetics can even cause severe health complications.
The international trade in counterfeit goods is a growing issue, which has already reached a global dimension. According to a study published by OECD-EUIPO in 2019, the volume of international trade in counterfeit and pirated goods could amount to approximately USD 509 billion, which represents 3.3 % of world trade. The continuous significant growth is observed since 2013 and it was even reported during a period of slowdown in overall world trade. (OECD-EUIPO, 2019)
The range of fake products is very broad and can vary from footwear and clothing, leather goods, electrical equipment, watches, medical equipment to perfumes and cosmetics and many more. (Statista, 2021a) Particularly pharmaceutical products, food and beverages and cosmetics can induce serious health issues to the consumers. Counterfeits can be potentially harmful not only to customer´s welfare but can also cause significant financial losses to companies and therefore affect the whole market. Most of these goods are produced in China or Hong Kong and exported all around the world, mainly the United States of America, France, Switzerland, Italy, Japan, Korea, and the United Kingdom. (OECD-EUIPO, 2019)
Furthermore, with the growing importance of social media and online shopping platforms, luxury brands are more than ever forced to build strong relationships with their consumers to convince them to remain loyal to the brand and buy their products. The best way to do so is by investing in their marketing communication and building a strong brand. Research has shown that luxury brands with strong brand equity have a significant competitive advantage
over other brands, as they have higher brand awareness, stronger customer loyalty and positive brand associations. (Allaway, Huddleston, Whipple & Ellinger, 2011)
The goal of this thesis is to evaluate whether the use of counterfeit make-up products has a negative effect on the perception of genuine luxury brands. Hence, the following research questions were set: Does the use of counterfeit make-up products negatively affect the Brand Associations of genuine luxury brands? Does the use of counterfeit make-up products negatively affect the Brand Associations of genuine luxury brands?
Moreover, the shopping behaviour of consumers that had knowingly purchased a fake cosmetic will be studied to define the main reasons why consumers buy such goods and whether they consider any risks prior to the purchase. Based on these findings, two research sub-questions will be answered: What are the main drivers that affect consumer’s purchase intention towards counterfeit make-up products? What risks do consumers consider during the decision-making process when buying counterfeit make-up products?
To fulfil the goal of the thesis and find answers to the research questions, the thesis is divided into two main parts. The theoretical part is based on the relevant literature review and consists of four sections. The first section defines counterfeit and pirated products in general, introduces the most relevant statistics about the international illicit trade and describes key countries of the provenance of fake goods.
In the second section, luxury branded products are described together with the digitalization of the luxury segment and how it affects the sales and shopping behaviour of consumers.
Furthermore, the main purchase intentions towards counterfeit luxury products are explored.
The third section deals with the cosmetics sector and how the counterfeit versions of make- up are affecting the whole industry. Moreover, examples of the most common imitations of luxury make-up are introduced.
In the last section of the theoretical part, the concept of customer-based brand equity is described. Each dimension of CBBE is closer introduced together with the benefit that it might bring to the company.
The empirical part of the thesis describes the methodology together with the key findings of the conducted research. The author decided to use the qualitative approach as the primary research method in the form of two focus group discussions and complementary quantitative research methods in the form of a structured online survey to further validate the findings from the group discussions.
1 Theoretical part
1.1 General Definition of Counterfeit and Pirated Products
The World Trade Organization defines a counterfeit product as: “Unauthorized representation of a registered trademark carried on goods identical or similar to goods for which the trademark is registered, with a view to deceiving the purchaser into believing that he/she is buying the original goods”. (WTO, n.d./a)
One of the most understandable definitions is the one by Lai and Zaichkowsky (1999), which defines counterfeits as: “illegally made products, that resemble the genuine goods but are typically of lower quality in terms of performance, reliability, or durability.”
The Council of the European Union (1999) further develops this definition in the EU Council Regulation (EEC) No. 241/1999 by specifying that trademark symbols (such as logo, label, sticker, instruction of use etc.), as well as the packaging materials that bear the trademark, can also be considered as counterfeit products. The same Regulation also refers to pirated goods, which are goods that are exact copies of original products made without the consent of the holder of the copyright.
Piracy is defined by the World Trade Organization as: “Unauthorized copying of materials protected by intellectual property rights (such as copyright, trademarks, patents, geographical indications, etc) for commercial purposes and unauthorized commercial dealing in copied materials.” (WTO, n.d./b)
Both terms are frequently used interchangeably in the literature since, in the essence, they both describe the illegal reproduction of authentic products. Nonetheless, for the purpose of this thesis, the definition and the term of counterfeit products will be used.
The international trade in counterfeit and pirated products is dynamic and constantly evolving phenomenon. According to the two studies published in 2016 and 2019 by European Union Intellectual Property Office (EUIPO) and Organisation for Economic Co-operation and Development (OECD), the figures of the scale and scope of trade in counterfeit goods are constantly growing, which indicates that the issue is becoming more and more serious every year. The first report shows, that in 2013 the international trade in counterfeit and pirated products represented up to 2.5% of world trade and up to 5% of imports in the EU from third countries. (OECD-EUIPO, 2016) In 2016, the international trade with such products reached 3.3% of world trade and up to 6.8% of EU imports from third countries, accounting for EUR 121 billion per year. (OECD-EUIPO, 2019) Moreover, the EUIPO estimated losses in sales in the European Union in 11 sectors due to counterfeiting. The lost sales accounted in total to more
lost over 671 000 jobs and in addition to that the Member States lost EUR 15 billion per year in tax revenue. (EUIPO, 2020)
Counterfeit products can be divided into two subgroups, from the consumer’s perspective.
(Wilcox, Kim & Sen, 2016) If the consumer is not aware of the fact, that he is purchasing fake goods, we can talk about deceptive counterfeiting. This most commonly happens in case of purchasing automotive parts, consumer electronics or pharmaceuticals, in these situations, we can call the consumer a victim of counterfeiting. Non-deceptive counterfeiting implies, that the consumer is fully aware of the origin of the good and intentionally purchases fake products. This form is particularly prevailing in the market of luxury brands, where consumers can in most cases distinguish the counterfeit from the original genuine brand. The most obvious differences tend to be in price, the quality of the product and the distribution channels. For the purposes of this thesis, the non-deceptive counterfeits will be of interest and studied further. (Wilcox, Kim & Sen, 2016)
Most of the counterfeit products come from Asian countries (Global Intellectual Property Center, 2016), where consumers can purchase fake goods even in fake luxury fashion boutiques. (Thomas, 2018) In the city of Renhuai in China, two boutiques were opened in 2018 and at the first sight, customers were only able to differentiate these shops from the original ones thanks to the misspelt branding, such as “Plada” instead of “Prada” or “Loius Vuitton” instead of the iconic brand “Louis Vuitton”. Both of these boutiques were closed by the authorities within a few days. However, these international brands suffer large losses in sales every year on account of counterfeits. (Thomas, 2018) The country of origin of the majority of the counterfeit products will be further studied in a separate chapter.
Producers of counterfeit products mostly aim at copying commercially successful, frequently luxury branded products, which generate the highest profits. (Cheng, Teng & Liao, 2018) Moreover, in todays’ innovation-driven economy, Intellectual Property (IP) comprises one of the key differentiators among competitive markets. Looking at the macroeconomic level, long-term economic growth is mainly driven by IP protection and enforcement. (OECD-EUIPO, 2016) Therefore, any product that will add high economic value to the rights holders, is most likely to become a target for counterfeiters.
The infringements of the intellectual property of tangible products can be divided into trademarks, patents, copyright, and design rights. A trademark can be a name or symbol that differentiates the product from others on the market. Trademark is in most cases used to prevent competitors from using a similar mark, however, it is not able to fully ban them from producing a similar product and selling it under a different brand. A copyright is a set of exclusive rights that provide protection to the authors of “original works of authorship”.
(Parr, 2015, p. 30) It can be related either to literary and dramatic works, musical works, works of visual art, dramatic works, or films both published and unpublished. Copyright applies
automatically from the moment the author or performer creates the work and does not need to be registered, unlike trademarks. The protection is, however, time-bound, in most cases for the life of the author plus 50 to 70 years. (Global Intellectual Property Center, 2016) Nonetheless, copyrights only prevent others from directly copying the work, but they cannot prevent others from making the work on their own. (Parr, 2015) Patents are covering any inventions in the field of technology, which come up with new innovative ways and are applicable within the specific industry and are usually issued for 20 years by the Patent and Trademark Office in the given country. Products with a patent yield more opportunities to enjoy the economic benefits of licensing (Parr, 2015, p. 23) Lastly, industrial designs include any ornamental design or aesthetic aspect of a product. It can either be a 3D feature – the shape or surface of the good, or a 2D feature – patterns or colours of the good. (Global Intellectual Property Center, 2016)
Intellectual property rights are very important for the competitiveness of the EU’s economy since 45% of the EU’s GDP in 2019 was attributed to IPR-intensive industries, which corresponds to EUR 6.6 trillion. The largest share of the total EU GDP holds trademark- intensive industries, followed by design-intensive, patent-intensive, and copyright-intensive.
Besides GDP, IPR-intensive industries increasingly contribute to employment by generating 29.2% of all jobs in the EU during the period of 2014-2016. (EPO-EUIPO, 2019)
1.1.1 Key Drivers of International Trade in Counterfeits
Market with counterfeit and pirated products, like any other market, consists of demanders and suppliers of these products. Demanders can be both individuals (consumers), as well as firms, where counterfeit and pirated goods are used as components in their production process. As mentioned in the previous section, demanders can either purchase counterfeit goods non-intentionally or intentionally – division into deceptive or non-deceptive counterfeiting. (Wilcox, Kim & Sen, 2016) Some literature also distinguishes between primary and secondary submarkets. (OECD-EUIPO, 2016) In the primary submarket, individuals or firms demand genuine, non-IP-infringing goods, suppliers can, however, deceive consumers that their products are authentic. This can be influenced by many factors, such as the physical appearance of the product and the ability of the consumer to identify the counterfeit or pirate nature of the good. In the secondary submarket, consumers knowingly demand counterfeit and pirated products.
Several studies have shown various attitudes that can affect the demand for counterfeit goods. One of the most frequent drivers are the economic benefits of counterfeit products.
(Norum & Cuno, 2011) Since fake goods are in most cases sold for a significantly lower price yet can still bring a certain social status to the consumer. Moreover, some consumers seem to prefer illicit goods over genuine goods because of the low investment risks, connected
industry. (Staake, Tiesse & Fleisch, 2009) These products can bring the desired prestige that the genuine luxury brand suggests. (Phau & Min, 2009) Some consumers are also more likely to opt for a counterfeit product if they feel peer pressure. (Albers-Miller, 1999) This pressure can be even more significant with the growing power of social media and beauty or fashion influencers. Such phenomenon can be mainly observed in the Chinese collectivistic culture, which is one of the biggest consumers of counterfeit products in the world. However, peer pressure can act as a negative influence on the purchase intention towards counterfeits.
If the close surroundings of the consumer have expert knowledge on the difference between genuine and fake products, it can lead to a negative consequence. (Phau & Min, 2009) There has been a limited number of studies dedicated to the supply-side of counterfeit products, mainly due to the limited access to illicit producers and therefore the difficulty to get the necessary information about the activities of counterfeit product manufacturers.
(Staake, Thiesse & Fleisch, 2009) Nonetheless, there are several similarities between the suppliers of counterfeit and legitimate products. First of all, they both aim to maximize their profit, they also face similar challenges, such as cutting down production costs and finding the right distribution channels for their goods. Counterfeiters, however, have one significant advantage over legitimate manufacturers. They do not incur research and development costs, costs for marketing and advertising or costs related to environmental and safety regulations. (OECD-EUIPO, 2016) Nonetheless, they also face the risk of prosecution in case their activities are detected during seizures and raids to drive the illicit actors out of the market. (Staake, Thiesse & Fleisch, 2009)
Apart from the aforementioned primary reasons, OECD (2008) identified the following three factors that affect the supply of counterfeit products:
• Market opportunities.
• The technological and distribution challenges associated with an undertaking.
• The risks involved.
The market opportunities depend largely on the size of the market and the margin that can be earned on the IP-infringing products. The higher the margin, the stronger the incentive to enter the specific market.
The second factor refers to how technically feasible is the production and distribution of counterfeit and pirated products. Sales and distribution channels comprise very important factors, if they are rather complex and difficult to monitor, it can provide more occasions for the infringers to infiltrate the channel.
Lastly, the risks involved refer to the legal frameworks which provide the institutions and IP rights holders with possibilities to confront the infringers. These laws need to be enforced by public authorities for them to limit the supply of counterfeit products.
Moreover, the economic developments in recent years might have impacted the environment and cause the trade in counterfeit and pirated products to thrive. This includes the growing importance of IPR-intensive industries or the rapid growth of e-commerce. (OECD-EUIPO, 2016) Many counterfeit business models are built on the distribution and the promotion of their products through the internet. (EUIPO, 2020)
Figure 1 shows the share of leading countries hosting domains that were selling counterfeit or pirated goods worldwide in 2018. The United States was hosting 56 per cent of the domains, the second-most domains selling counterfeit goods were hosted in the Netherlands with a 15 per cent share, followed by Turkey with an 8 per cent share. (Statista, 2021a)
Figure 1: Leading countries hosting domains for selling counterfeit goods in 2018, source: Statista, 2021a
1.1.2 Key Countries of Provenance
In today’s globalized world, potentially any economy can become the provenance of counterfeit and pirated trade. A provenance economy is any economy that was reported by a customs agency as a source of a good violating the IP rights. (OECD-EUIPO, 2016) Even though the scope of the countries of origin might be broad, the study performed by OECD and EUIPO (2019) shows, that some economies tend to dominate the international trade in counterfeit and pirated goods. Figure 2 shows how the provenance economies have been
Figure 2: Differences in provenance economies in counterfeit and pirated trade between 2013 and 2016, source: OECD-EUIPO, 2019
For many years, China remains the key country of provenance and key exporter with the estimation of 72% of counterfeit products that have been shipped to three world’s largest markets for these products, the EU, Japan and the USA. (Global Intellectual Property Center, 2016) However, as we can see from figure 2, China’s share has been decreasing while Hong Kong’s (China) shares have been progressively increasing within this specified period.
Figure 3: China and Hong Kong's aggregated share (%) of seized counterfeit goods by U.S., EU, and Japanese customs authorities, source: Global Intellectual Property Center (2016)
Figure 3 shows how significant sources of global illicit physical trade China and Hong Kong comprise. The aggregated share of seized counterfeit goods by the U.S., EU, and Japanese customs authorities of these two countries comprise 86% of the overall seized fake products worldwide. (Global Intellectual Property Center, 2016)
Hong Kong mainly acts as a transit spot for fake products originating from China. Hong Kong’s busy air cargo plays a significant role in the illegal supply chain for all counterfeit goods exported to the EU. Turkey is the third-largest country of origin, which has been linked to Bulgaria and Belgium through the trade-in of counterfeit products either by air or by post.
Singapore has been reported to be a significant exporter of fake goods mainly to Germany, Belgium and Italy. They have been shipping mostly mobile phones and their accessories.
(EUROPOL-EUIPO, 2017) The main finding of EUIPO’s study of “The economic cost of IPR infringement in the smartphones sector” (2017) estimated that in 2015, the legitimate industry had sold 14 million smartphones less across the EU than it could have, were there no counterfeit smartphones. This comprises approximately 4.2 billion EUR loss in the EU marketplace caused by the presence of counterfeit smartphones. These numbers, however, represent only a small fraction of the overall losses caused to all industries by counterfeit and pirated products.
Most of the fake goods arrive at the EU external borders from third countries via sea, air, or land routes. The majority of the goods are then reshipped to other countries in the European Union to diversify the routes and dissemble the country of origin of the goods. To be able to monitor the circulation of the goods arriving at the EU from third countries, the European Union Trademark Regulation was introduced in 2016. EU customs are now able to act in relation to goods in transit to another country or under a storage procedure in a free zone.
(EUROPOL-EUIPO, 2017)
Many countries have set up free trade zones (FTZs) to boost their economic activities and make use of the benefits of free trade. The advantages for businesses operating in the FTZ economy include savings in taxes and customs duties, more flexible labour rules oppose to countries with customs territories, fewer restrictions on corporate activities and opportunities to improve distribution channels of goods to more diverse markets. For the host countries, FTZs can be beneficial as well, since they can attract foreign investments, create more job opportunities, and therefore increase their export performance. These potential benefits, however, apply only to those activities that would not have been established in the customs territory of the host country. Despite the economic benefits that free trade zone agreements bring to the host economies and businesses, there is also a higher possibility that they can be misused to smuggle counterfeit and pirated products or money laundering, due to lighter regulations. This occurs when zones are considered to be foreign entities that are outside the scope of domestic policing activities. Private entities operating the zones primarily try to maximize the profitability of the zone businesses and expand zone occupancy, but they usually have little capacity to execute law enforcement activities. (OECD-EUIPO, 2018) 1.1.3 Key Product Sectors
As it was previously mentioned, if a given product holds a trademark, patent, design right or copyright that brings economic value to the right holder, such product is likely to attract infringers. This implies, that the scope of counterfeit products is very broad and can include
almost all types of goods, ranging from common products to luxury segment. Figure 4 shows the seizures of counterfeit and pirated products in the top 10 industries.
Figure 4: Value of fake goods seizures worldwide in 2016, by product, source: Statista, 2020a
In 2016, the most common segment for counterfeit products worldwide were shoes, followed by clothing, leather goods, electrical equipment, watches and perfumes and cosmetics.
(Statista, 2020a) The trade with fake products within the European Union increasingly includes everyday products, such as cosmetics, shampoos, tubes of toothpaste, toys, medicines as well as food and beverages. (EUROPOL-EUIPO, 2017)
1.1.4 COVID-19’s Impact on Trade with Counterfeit and Pirated Products
World Health Organization has monitored a growing volume of fake medicines, COVID-19 tests, and personal protective equipment such as facemasks or hand sanitisers linked to the coronavirus pandemic. Counterfeit medicines are in most cases not precisely formulated and might contain dangerous ingredients. Unfortunately, such fake products could lead either to unsafe behaviour caused by the false promise of protection or even worse to further illnesses or death. To provide a helping hand to governments, the OECD and the EUIPO have been providing evidence about the scope and the trends of the trade that might put local economies as well as public health at risk. (OECD, 2020)
1.2 Luxury Products Specifics
Luxury products are defined as non-necessities of life that are excellent in quality, exquisite in craftmanship, unique in design, yet very expensive. (Wu & Zhao, 2021) According to the Statista’s Consumer Market Outlook 2020, the global luxury goods market is expected to grow from $285.1 billion in 2020 to over $388 billion in 2025, which represents a compound annual growth rate of 6.4%. (Statista’s CMO, 2020) This growth might be decreased a bit by the COVID-19 pandemic, however, with the growing demand of millennials and Generation Z and the ongoing maturity of the digital channels, the cutbacks should not affect the segment in the long term. (Statista’s CMO, 2020)
Figure 5: Luxury Goods Market in billion US$, Source: Statista Consumer Market Outlook 2020
As the luxury products are in many cases purchased to satisfy their symbolic meaning, that implies that the product itself is not so important for many consumers. They only care about showing off the brand and its image. (Gabrielli, Grappi & Baghi, 2012) Moreover, luxury goods should be accepted, recognized, and admired by others to have the added value over non- luxury goods. (Nia & Zaichkowsky, 2000)
1.2.1 COVID-19’s Effect on Luxury Products Segment
Luxury products were one of the first segments to encounter the negative effects of COVID- 19, as its initial outburst spread through China, one of the world’s biggest consumers of luxury goods. Chinese consumers accounted for approximately 90% of global luxury market growth in 2019. The second crucial challenge for this segment came when COVID-19 reached Italy, where many international luxury brands have their headquarters, factories, and key suppliers.
COVID-19 affected not only their operations but also the world economy overall. (D'Arpizio, Levato, Fenili, Colacchio & Prete, 2020) With the national lockdowns, travel restrictions and the national economy’s slowdowns, purchases of luxury goods and services decreased by up
The study conducted by BCG (2020) shows, that approximately 57% of respondents do not plan to make the luxury purchases and investments they had planned before the COVID-19 crisis, mainly due to the fact, that 43% of respondents expect the recovery after the crisis to be rather slow.
Figure 6 shows how much will the luxury spending in personal luxury change over the next 6 months compared to the spending before the outburst of COVID-19 disease and how much it will change in 2-3 years from now. Personal luxury products include leather accessories, apparel, watches and jewellery and perfumes and cosmetics. In the short run, there is a decrease in all categories, however, the biggest drop can be seen in hard luxury products such as jewellery, watches or handbags. On the contrary, cosmetics have seen one of the lowest drops in the short term and are expected to rebound the most in the next 2-3 years from now, together with casual wear. (BCG, 2020)
Figure 6: True-Luxury Consumers Net Appetite, source: BCG (2020)
Nonetheless, it is difficult to predict the impact of the COVID-19 crisis on the world economy more accurately, with the pandemic still developing. The overall impact will depend on the responses of individual governments. (D'Arpizio, Levato, Fenili, Colacchio & Prete, 2020) 1.2.2 Digitalization of the Luxury Products Segment
Despite the fact, that the luxury sector was very reluctant to adapt online shopping channels, the COVID-19 pandemic made the companies as well as consumers consider shifting their habits. (Deloitte, 2020) According to Statista’s Consumer Market Outlook 2020, the share of online sales of luxury goods is expected to grow from 11% in 2020 to 14% in 2023.
Figure 7: Luxury Goods Market Sales Channels Shares, Source: Statista Consumer Market Outlook 2020
However, as figure 7 shows, the physical stores will not be replaced by e-commerce completely by any means, as the purchase of luxury goods still needs to be accompanied by luxury services to make the shopping experience more special for the customer.
Digitalization might, however, have a significant influence on the shopping journey of the consumer. Several brands, such as Louis Vuitton, Chanel, Gucci or Fendi have already launched their online portals and increased their activities on social media with high-quality content. Figure 8 represents the results of the recent study performed by McKinsey, which shows, that only 22% of shoppers are purely offline luxury shoppers. The rest of the consumers are in some way influenced by one or more digital touchpoints. In other words, they either research the product online before buying the product in-store or purchased the goods online outright. (Statista’s CMO, 2020)
Over the past few years, the beauty luxury products sector became one of the top three categories that are sold online, together with apparel and accessories such as handbags and watches. A study done by A.T. Kearney shows, that luxury cosmetics have almost twice the internet penetration as compared to mass-market cosmetics. This means, that consumers seeking luxury make-up are more likely to choose e-commerce channels. (Statista’s CMO, 2020) Furthermore, this makes the segment more appealing to counterfeiters.
During the pandemic, e-commerce make-up products’ sales grew by 40%. Many stores started offering the option of buy online, pickup in-store, which quickly gained popularity.
Ulta store saw 277% growth in this service. The top five e-commerce merchants during the pandemic were Amazon Market, Sephora, Ulta, Amazon Direct and Macy’s. (Fink, 2021) Moreover, new beauty tech services have grown in their importance during the pandemic.
Several beauty companies implemented augmented reality to their online shopping platforms so that consumers can virtually try on different make-up products or even hair colours.
Consumers got used to interacting with beauty brands on social media, mainly through live streams or video tutorials. A growing number of customers started purchasing beauty products directly through social media. This phenomenon is called social commerce and in 2020 accounted for almost 12% of all online sales in China. (L’Oréal, 2020)
1.2.3 Counterfeits of Luxury Products
Counterfeit and pirated luxury products have become a widespread phenomenon in the past decade. This might be caused by the fact, that the internet has given the infringers more opportunities to reach customers and counterfeiters often view dealing with fake goods as a relatively low-risk crime. (FBI, 2016) Moreover, the situation with IP-infringing products has come to the stage, where layman consumers are not able to tell the difference between authentic and counterfeit products. (The Financial Express, 2016)
The managing director of Benefit Cosmetics UK, Ian Marshall said: “The moment you produce a good product, some clever man in China is going to mimic it. The problem is, they cannot replicate the ingredients.” (Sunday Times, 2015)
With the growing influence of social media on the day-to-day life of society, consumption of status products is no longer the privilege of wealthy people only. People from all economic levels wish to buy and display products that project the image of wealth and status. However, not all consumers can afford to pay what these products cost. That is the reason why the market for counterfeit and pirated luxury products has grown so much over the last two decades. (Perez, Castaño & Quintanilla, 2010)
How is it possible that consumers still demand counterfeit products, even if they know that such activity is a behaviour that violates laws and in many cases is illegal? Many consumers fight a moral dilemma. To overcome such a dilemma, they often use several justification strategies, such as perceived individual outcomes and benefits. (Eisend, 2019)
Research conducted by Cheng, Teng & Liao (2018) deals with how moral reasoning strategy can affect consumer’s purchase intention of counterfeit luxury goods. Morality can be defined as: “principles and norms that are independent and autonomous from group conventions given the generalizable nature of justice, fairness, and equality”. (Rutland, Killen & Abrams, 2010, p. 281) Despite the fact, that theoretical hypothesis claims that consumers are less likely to opt for counterfeit luxury products because of moral recognition, the study by Cheng et al.
showed, that such hypothesis is not statistically significantly related to the purchase intention.
Even though consumers recognize the moral hazard, they find the perceived benefit of lower prices more appealing and decide to purchase the fake version of the luxury product. (Chen, Teng & Liao, 2018)
Consumers might feel “pushed” to purchase counterfeit luxury products by their social surroundings. Especially in cultures where social brand image is very important, individuals might be determined to buy the status to associate with their social class or even gain approval from the social class above them. (Nia & Zaichkowsky, 2000) Moreover, recently people have become more sensitive to interpersonal rejections, which can be also caused by the growing importance of social media.
The following chapter will further introduce a framework that sums up reasons why consumers demand the counterfeits of luxury products.
1.2.4 Consumers’ Purchase Intention Towards Counterfeit Luxury Products
To better understand consumers’ purchase intention, the Journal of the Academy of Marketing Science investigated what choices consumers make before buying certain goods with a luxury label. Based on their study, there are three categories of choices, which are shown in Figure 9. (Geiger-oneto, Gelb, Walker & Hess, 2013)
Figure 9: Structure of choice in consumer's minds, source: Journal of the Academy of Marketing Science, 2013
These three structures reflect whether the consumer categorizes brand types based on the status the given good confers on their owners, the economic reasons or whether they value the authenticity of the selected product. The outcome of this research helps to segment and target decisions for some range of goods and services and was further developed. (Geiger- oneto, Gelb, Walker & Hess, 2013)
Status-seeking consumers with lower occupational prestige are more likely to purchase fake luxury goods in order to increase or sustain their social status. On the contrary, people, whose level of occupational prestige is higher most strongly avoid purchasing counterfeit luxury goods, first because they want to distinguish themselves from the individuals who need to “buy” their status or second because they take into consideration the quality of the good relative to the price paid. (Geiger-oneto, Gelb, Walker & Hess, 2013)
Consumers concerned about the price of the good will decide based on how expensive the product is. People with lower incomes will then have to evaluate whether they value the status the product might bring them over the functionality of the good. Rationally thinking consumer, who is value-conscious would prefer the non-luxury product since it’s quality will be much better than in the case of counterfeit product. Value consciousness is defined as a concern of the price paid relative to the quality received. (Geiger-oneto, Gelb, Walker &
Hess, 2013)
Lastly, based on the authenticity-focused model, consumers will either prefer genuine products only, in which case they will opt for an authentic luxury version or non-luxury version
of the product, or the authenticity will not matter to them, and they will choose to buy the counterfeit good. (Geiger-oneto, Gelb, Walker & Hess, 2013)
1.2.4.1 Neutralization Theory
Why would consumers expose themselves to the various risks connected with a counterfeit product? Kian Yeik Koay for The Asia Pacific Journal of Marketing and Logistics (2018) suggested a new perspective and introduced the neutralisation and perceived risk theory.
Based on these theories, consumers try to persuade themselves, that their illegal behaviour is acceptable because it makes them feel more confident and improves their social status.
Sykes and Matza (1957) outlined five techniques of neutralization that can be used to cope with the sense of guilt related to their inappropriate shopping behaviour. These techniques include denial of responsibility, denial of injury, denial of victims, appeal to higher loyalties and condemnation of condemners. (Koay, 2018)
The denial of responsibility tactic involves consumers excusing the deviant activity and moreover, they tend to blame other factors which are outside of their control. This will therefore increase the purchase intention of fake luxury products. (Sykes & Matza, 1957) This can be demonstrated on the example of students, who buy counterfeit luxury make-up because they are not able to afford the authentic one as they are not working. (Koay, 2018) Denial of injury technique involves the offender believing, that as long as the infringement does not have a significant harmful effect on others, consumers will be more likely to opt for counterfeit products. (Koay, 2018) It follows, that in order to reduce the demand for fake products, consumers should be more educated on the negative effects of counterfeiting on the economy, individual companies as well as on the wellbeing of consumers.
Another neutralization technique is the denial of the victim. Some consumers think of purchasing fake luxury products as an act of revenge on large corporations as if they were taking from the rich (luxury brands) and giving to the poor (themselves). (Koay, 2018) Their purchase intention toward counterfeit luxury products will be therefore positively affected.
The appeal to higher loyalties involves the delinquents neutralizing any internal or external controls set up by the society to appeal to a group of friends or family members. This can sometimes result in the feeling, that the person is caught up in a dilemma between deviating from the social obligations or claiming a friendship. (Sykes & Matza, 1957)
Fifth and last neutralization theory is the condemnation of the condemners or in other words a rejection of the rejectors. (Sykes & Matza, 1957) Instead of the offenders feeling guilty for committing the deviant act, they tend to blame those who are not in favour of their behaviour. They then often use phrases such as “since everybody else is also buying, why
1.2.4.2 Perceived Risk Theory
Contrary to the neutralization theory, perceived risk theory negatively affects the purchase intention towards counterfeit luxury goods. (Koay, 2018) Several studies discovered, that there are four different types of risk that might influence the behaviour of the delinquent.
These include social risk, performance risk, psychological risk, and prosecution risk.
When consumers purchase counterfeit products, that might affect the way others look at that individual, such situation is referred to as a social risk. Performance risk pertains to the probability that the product will not work as it is supposed to. Psychological risk refers to the possible mental stress that the consumer might suffer from the use of fake products. Lastly, prosecution risk is a possibility that the offender will be penalized because of the use of the counterfeit luxury product. (Koay, 2018) Obviously, these risks will affect every individual in a different way, for some cases only specific risks will be applicable.
1.3 Cosmetics Industry Overview
The cosmetics market has been dynamically evolving over the past few years. Before the year 2020, the global cosmetics market has been growing by approximately 5% each year compared to the previous year’s sales. (Statista, 2021b) In recent years, consumers have been spending more money on cosmetics than they have in the past. That might be caused by the growing beauty community on social media, that share the latest trends and hence influence regular make-up consumers to purchase the newest products and try out different techniques. In Europe, the consumption value of cosmetics reached 79.84 billion euros in the year 2019. The largest consumption value of personal care products and make-up in the same year was reported in Germany with a value of approximately 14 billion euros, followed by France at 11.44 billion euros and the United Kingdom at 10.66 billion euros. The Czech Republic stands in twentieth place with a consumption value of 734 million euros.
(Statista, 2020b)
However, Figure 10 shows how the COVID-19 pandemic crisis affected the beauty segment.
The annual growth of the global cosmetics market fell to -8%. (L’Oréal, 2020)
Figure 10: Growth in the worldwide cosmetics market over 10 years (in %), source: L'Oréal (2020)
Nonetheless, with the pandemic restrictions loosening and the intense marketing activities of beauty brands, demand for make-up products started increasing again in 2021, which caused sales to grow and to even exceed the pre-covid values in the second quarter of 2021.
(Gleason-Allured, 2021)
Main worldwide players on the cosmetics market are L’Oréal, with sales over 33.43 billion USD, followed by Unilever (sales of 22.49 billion USD), Estée Lauder (sales of 15.90 billion USD), Procter & Gamble (sales of 13.90 billion USD), Shiseido (sales of 10.09 billion USD) and lastly Coty (sales of 8.65 billion USD). (L’Oréal, 2020)
1.3.1 Luxury Cosmetics Segment
The prestige cosmetics & fragrances market is the second largest segment in luxury goods, right after the luxury fashion in terms of cumulative spending. As figure 11 shows, the segment is expected to grow to $100.6 billion in 2025 at a CAGR of 5.9%. (Statista’s CMO, 2020)
Figure 11: Prestige cosmetics & fragrances market in billion US$, Source: Statista Consumer Market Outlook 2020
The luxury cosmetics and fragrances market has been fairly stable in the past, with Estée Lauder and L’Oréal making up over 50% of the whole market. However, with the growing importance of social media and the evolvement of e-commerce channels, the barriers to enter the market have been significantly lowered and new brands are emerging. (Statista’s CMO, 2020)
The newly published report by Global Cosmetics Industry Magazine (2021) shows that beauty sales has shown an increase of 66% YOY in the second quarter of 2021 and a 6% rise compared to the 2019 pre-pandemic situation in the same period. In the U.S. the most popular products were tinded moisturizers or foundations and concealers. Due to the loosening of COVID-19 measurements, such as wearing masks in public outdoor spaces or away-from-home activities, lip products grew by almost 100% YOY. (Gleason-Allured, 2021)
1.3.2 Counterfeit Products in the Cosmetics Industry
In 2012, one of the leading global cosmetics company Estée Lauder has accused Target Australia of selling counterfeit versions of their popular M.A.C make-up brand. It turned out, that Target Australia was not an authorised retailer of M.A.C cosmetics and that the products were sourced by a local supplier from a legitimate wholesaler overseas. After closer investigation, it turned out, that customers were purchasing fake make-up for only about 60%
of the recommended retail price. (Jacob, 2012)
Currently, one of the most famous cases of counterfeit make-up products in the past few years has been Kylie Cosmetics. Famous model Kylie Jenner had to deal with several counterfeiters and third-party resellers with her beauty line. (Weiner, 2018) Her fans have frequently reached out to her on her social media accounts, informing her about fake
websites claiming to be the official reseller of Kylie Cosmetics. (Twitter, 2021) The counterfeits of her iconic liquid lipsticks have caused serious lip swelling and rashes. (Denton, 2017) There are plenty of fake designer clothes, shoes and handbags being sold for only a fraction of the real market price in the famous tourist locations. (Sunday Times, 2015) However, while consumers who buy a replica of Michael Kors handbag risk that it will only last them a couple of weeks before it falls apart, consumers who purchase counterfeit cosmetics are putting their health at risk.
Several studies and tests discovered that counterfeit cosmetics often contain dangerous ingredients, such as arsenic, beryllium and cadmium, high levels of aluminium as well as many bacteria. These ingredients can cause serious rashes, acne, psoriasis, or eye infections. (FBI, 2016)
What can be even more alarming is the fact, that the illicit market offers not only cosmetics for external usage, but there are also injectable anti-ageing solutions or wrinkle fillers available on the market. Unfortunately, some of the physical health problems caused by fake cosmetics can be irreversible and not even qualified doctors can repair the damage on the skin. (Hartford Courant, 2019)
Apart from counterfeit products, consumers might encounter another potentially harmful segment, the resale of genuine products on the “grey” market. Such products are also sold for only a fraction of the recommended retail price and can be harmful to the health of the individual, even though they are no fakes. Distributors often resale these goods without the full consent of the brand and consumers, therefore, have no chance to find out how old the product was or whether it was stored under the correct conditions. (Sunday Times, 2015) There are several reasons why genuine cosmetics or perfumes become part of the grey economy. Firstly, the goods might have been pulled out of the transport for whatever reason and spent a couple of days in a lorry outside in cold or extremely hot weather. Such goods are considered to be devalued and cannot be sold in the official stores. Secondly, it can sometimes happen, that the goods have a small deficit from the manufacturing process.
Nonetheless, due to the very high standards that the luxury cosmetics products must fulfil, such goods can be resold to some third-party for an extremely low price. Lastly, every make- up product has its expiration date. Once it is expired, these goods should be taken off the shelves in stores and destroyed. This, however, does not always happen and in some cases, such goods are sold online or in market stalls. (Sládková, 2020)
Consumers nowadays wish to belong to a superior class by showing off wearing luxury brands, producers want to have their goods perceived as luxury there are luxury magazines or even
TV shows. Nonetheless, there is confusion about what really makes the product or service luxury. (Kapferer & Bastien, 2009)
Several online retailers took advantage of the naivety of consumers shopping online. Since these consumers are very price-sensitive, thousands of websites offer tempting discounts, which in comparison with the prices on the official distributor’s website seem more tempting.
Consumers in many cases do not know how to differentiate a fake product from the genuine one and unfortunately only find out that they have bought a counterfeit version of the product after they start using it and encounter some side effects. (Sunday Times, 2015) How can consumers make sure that they are buying genuine products when shopping online?
The most secure way is to only shop from the website of the official distributor (such as Sephora, Douglas, FeelUnique.com and others). In other cases, they should try to find out as much information about the product as possible. Most importantly, what is the country of origin of the product? Does it fulfil all EU health requirements and norms? How are the products stored? For what countries were the products originally intended and made for?
Even if all the information is not available on the website, the seller should be able and willing to answer all questions of the consumer. (Sládková, 2020)
1.4 Customer-based Brand Equity
As it was defined in the previous chapters of this thesis, counterfeit products can largely affect the reputation of genuine brands. Moreover, counterfeiting represents one of the most relevant issues to the market of luxury goods. In order to affirm or disprove this assumption, it is necessary to identify the customer’s perception and brand equity of genuine luxury brands.
In today’s competitive world and with the growing importance of short-term paid promotions, companies were forced to find more ways to increase the profitability of their businesses as well as the loyalty of their customers. (Myers, 2003) It is crucial for the marketers to not only create the name or logo for the brand so that the consumers are able to identify it but even more importantly to give a reason to why the customers should care about the brand. (Král, 2016) That is why brand equity became and continues to be one of the main areas of interest to all marketing managers.
Brand equity was originally introduced in the 1990s, with David Allen Aaker and Kevin Lane Keller being the leading researchers in this field, who introduced the two most comprehensive frameworks for measuring brand equity. Various research being conducted nowadays are still based on their initial definitions and implications. That is why the author of this thesis decided to include the initial definitions of both authors and further develop them with more recent studies.
Brand equity can be measured from two perspectives. The first way, which will not be further analysed in this thesis, focuses on the financial aspect, namely on stock prices or brand replacement. (Myers, 2003) The second approach is the consumer-related view. This attitude is in the marketing literature often divided into two subgroups – consumer perceptions and consumer behaviour. Since in this thesis, brand equity will be examined from the consumer’s perspective, the following two definitions will form the basis for the research.
The initial definition was introduced by one of the leading authorities on brand equity from the University of California at Berkeley David Aaker (1991, p. 27): "Brand equity is a set of brand assets and liabilities linked to a brand, its name and symbol, that add or subtract from the value provided by a product or service to a firm and/or to that firm ́s customers."
Aaker further develops this idea and claims, that all firms’ assets and liabilities are directly linked to the brands’ equity and in case the company would decide to change their name or logo it could affect or even destroy its position on the market. (Aaker, 1991)
This mainly applies to luxury products, which are in most cases associated with an exclusive brand image and superior brand equity and that is why the brand strategy plays a key role in the luxury market. (Gabrielli, Grappi & Baghi, 2012) Brand equity is moreover very important for marketers in order to make better strategic decisions about target market definition as well as the positioning of their product on the market and choosing the right marketing mix. (Keller, 2013)
Customer-based brand equity (CBBE) occurs with brands customers are familiar with and to which they hold some strong and unique brand associations in their memory. (Lassar, Mittal
& Sharma, 1995)
Aaker’s definition was further developed by Kevin L. Keller (1993), who defines customer- based brand equity as: “the differential effect that brand knowledge has on consumer response to the marketing of that brand”. In other words, customer-based brand equity helps to better explain the reactions of customers to different elements of the marketing mix for the brand in contrast to their reactions to the marketing mix of other “no-name” versions of the same product. Furthermore, we can say, that the power of a brand lies in what consumers have learnt, felt, seen, and heard about the brand. (Stahl, Heitmann, Lehmann
& Neslin, 2012) Company managers should therefore highly consider making changes in their brand, as was previously discussed.
Brand equity can bring value both to the customers and the company. Customers can gain valuable information about the products and brand as such. It can also make the decision- making process much faster and more efficient since consumers often tend to base their
decision on previous experience or familiarity with the characteristics of the product or brand.
(Zhou, 2011)
Providing value to the firm consists of generating higher cash flow by enhancing brand loyalty.
Customer loyalty can bring numerous benefits to the brand, such as it allows companies to increase their margins by charging premium prices for the product while being able to reduce spending on promotion. Most importantly, brand equity can add a competitive advantage, in form of the possibility to attract new customers or recapture the old ones, which in some sectors can act as a barrier for entry of new competitors to the market.
(Allaway, Huddleston, Whipple & Ellinger, 2011) 1.4.1 Five Categories of Brand Equity
According to the book Managing Brand Equity written by David A. Aaker (1991), the relationship between assets and brand equity largely depends on the context. However, Aaker managed to divide them into five following categories, which will be further introduced in a separate subchapter:
1. Brand Loyalty 2. Brand Awareness 3. Perceived Quality
4. Brand Associations in addition to Perceived Quality
5. Other Proprietary Brand Assets – Patents, Trademarks, Channel Relationships, etc.
During the years other scholars introduced some additional elements to brand equity, such as brand image, trade partners, brand heritage or legal protection. (Král, 2016) For the purposes of this thesis, the initial five categories will be described.
Yoo and Donthu (2001) found out in their study, that the first four elements of the framework indeed do have a strong effect on the brand equity of a company. However, the fifth component of the framework – Other Proprietary Brand Assets is not relevant and does not have any effect on the consumer-based brand equity and therefore will not be further analysed in this thesis.
1.4.1.1 Brand Loyalty
Brand loyalty comprises one of the most important components of brand equity. It represents the attachment of the consumer to the brand. In other words, it is the likelihood, that the consumer will switch to another competitive brand. (Christodoulides, Cadogan, & Veloutsou 2015) If the consumer is indifferent about the brand of the product and only makes the purchase decision based on the price and features of the product without considering the brand name, such consumer will not bring much equity. On the contrary, loyal consumers
who purchase the goods because of the brand bring value to the brand equity of the company.
(Sasmita & Norazah, 2015) A company that is able to gain loyal consumers can benefit from competitive advantages such as lower marketing costs and less price-sensitive consumers.
(Yoo, Donthu & Lee, 2000) Brands such as Apple or Coca-Cola, called “love marks”, have a strong base of fans which allows them to charge a premium price due to their strong relationship with the consumers. (Král, 2016)
Brand Loyalty has several levels with different marketing challenges, which are presented in the table 1 below.
Level of loyalty Characteristics of consumer
Switcher Non-loyal consumers who are indifferent about the brand and its name play very little or no role in the purchase decision.
Habitual buyer Satisfied or at least not dissatisfied consumers. Will not switch to other brands unless the competitors introduce apparent benefits for switching. Might be difficult to reach.
Satisfied buyer with switching costs
Satisfied consumers who have switching costs (including time, money or performance risk associated with switching). To attract these buyers, competitors need to overcome the switching costs.
Likes the brand The consumer is connected to the brand based on emotional feelings that might be difficult to trace to anything specific. Based on a long-term relationship with the consumer.
Committed consumer Committed consumers who are proud to be using the product of the specific brand. They are most likely to recommend the product to other users.
Table 1: Levels of Consumer Loyalty, source: D. A. Aaker (1991, p. 44-45) and P. Král (2016, p. 125)
These levels are mainly theoretical, in the real world they can be combined or there can be new levels defined. Nonetheless, it is important to take into consideration the difference between individual consumer’s approaches to the brand and how loyalty can affect brand equity.
1.4.1.2 Brand Awareness
Brand awareness shows how well is the consumer able to recognize the brand under different conditions when making the purchase decision. (Král, 2016) In general, most people tend to prefer familiar products, since such products eliminate different risks (such as that the product does not perform as expected, it was not worth its price, or it does not fulfil the emotional expectations of the consumer). Brand awareness can be gained via correctly chosen marketing communication channels – nowadays mainly through online advertising or television. Consumers can hence get more information about the product features and quality and assure its credibility before making the purchase decision. (Sasmita & Norazah, 2015;
Rossiter, 2014)
