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Diverters As Bad as Counterfeiters for Paul Mitchell (September 2010)

Vikki Bresnahan, Director of Product Distribution Control for hairdressing products company J. Paul Mitchell Systems (JPMS), spoke at the recent Product Authentication + Security Summit (PASS) in September. She presented her company’s current product control program and its success in detecting counterfeits and controlling diversion. She said she enjoyed participating in the conference as a delegate. ‘I really enjoyed it. There’s been some great presentations. Of course, I specifically like the ones that dealt with consumer products and counterfeiting. It’s been very informative.’

Current Control System Effective

Paul Mitchell is very determined that its products should only be sold through hairdressing salons, so its challenge is not only to prevent counterfeits but also to prevent diversion of genuine product to the shelves of other retail outlets. The current system of product protection that JPMS uses involves the following: strict contracts with distributors, salons, and cosmetology schools; product coding and per bottle fines; benchmarks and purchase limits; education programs for distributors, the sales force, salons, and consumers; identification of ‘at risk’ salons and cutting off diverters; and advertising campaigns in print, TV, and social media. The per bottle fine for distributors caught with their product on the internet, in drug stores, in mass market stores, or in other unauthorized channels is $150.00. JPMS’s campaign initially resulted in a 40% decrease in the amount of diversion they measured in the open market at mass market retailers like Target, CVS, and others.

The collectors, people in the employ of diverters that go around to salons offering to pay more than the wholesale price, responded with more aggressive tactics, by paying higher prices, and by offering to buy less than case amounts.

Technology Implementation Must Include Distributors

We asked Ms. Bresnahan if she sees JPMS changing the way they use technology in their brand protection program. ‘I’d like to say yes,’ she said, ‘but probably not at this point. Only because we think that what we are doing right now is working. If we start to see a shift, we may have to examine something else. For us the price point that our products are offered at make it very difficult for us to use some of the systems out there because they have significant per bottle cost. They also have cost implications for our distributors to get them to work to the best of our advantage.’ She spoke of some distributors not having very sophisticated inventory and distribution management systems having only internet access and e-mail. The number of these types of distributors decreases as more of them adopt technological innovation and software, but their existence must be considered with the implementation of any new product control program to prevent gaps in the system.

Wish List

When asked what would be the most helpful change for her industry and these problems, she replied, ‘Frankly, I’d like to see better legislation against gray marketers and diverters, because just like counterfeiters they have an impact on the economy as a whole. For the professional hair care industry, it’s taking money out of salon’s pockets. Salons are closing because they rely heavily on retail business. If Target (ed: a major US retail chain) is selling our product and the salons can’t compete, they have to eliminate their retail business or it hits them so hard that they have to close. To me, gray market from a brand owners point of view is nearly as damaging as counterfeiting. I’d like to see some legislation passed [to fight diversion]. Several years ago we tried to pass an anti-diversion law. We spoke to congress, but we were not successful. It would make my life much easier if there were some severe consequences. Because right now my only option for actions against diverters is to go after the salon who is our customer who has engaged in diversion, and granted they are breaching contract; but the person I really want to go after is the person that puts it in Target. Because most of our salons, not all of them, but a lot of them don’t realize what they are doing. Often they’ve been sold a bill of goods by the collector or diverter, and they don’t necessarily realize what they are contributing to.’ Some diverters and collectors have blatantly lied to salons telling them that they are trying to supply unfortunate and unstable regions of the world that JPMS doesn’t supply.

Retail Dollars Important to Salons

The amount of revenue a salon generates on salon-exclusive hair care products depends on how the business is structured, whether more toward service or retail. In either case, the supplemental dollars that the salon makes is significant because the revenue is ‘turnkey’ in the sense it gives a the salon a revenue source that does have the space, labor, and materials costs associated with services.

The ‘for professional use only’ products that are used in the salon - colors, treatment systems, developers, and chemicals - are all packaged and labeled for professional use only. These products are not designed for the consumer to use at home. Other products like shampoos and rinses are also packaged in gallon containers with pumps for the salon to use. These products are less subject to diversion. ‘I don’t think I’ve ever seen a gallon diverted,’ said Ms. Bresnahan.

More Industry Cooperation and Communication Needed

Ms. Bresnahan says she would like to see more open information sharing with her competitors. ‘If I cut off a salon, I would be happy to share that information with them, or if I catch a salon diverting products, I’m happy to share that information. We don’t really have a system to be able to this. There are some legal ramifications and we would have to work within those.’ She said she would also like for diversion issues not be used as a point of competition as some companies make claims to the salons that their products are diverted less. ‘If they are going to use it as a point of competition, be honest. Don’t take data from a one week period showing that Paul Mitchell was up in the open market. A one or two week period in October [is not a representative sample].’ It’s a problem that faces the entire industry and she would like for the industry to work together more to combat it. There is not currently an association for product control or investigators of product control. She said she thinks it would be useful for hair care, cosmetic, and fragrance companies to communicate. ‘A lot of the companies we consider suspect for diversion also carry fragrances, and it would be great to work with some of the fragrance companies to understand their business model. What is the criteria for who is allowed to sell their product? If I come into a beauty supply and they have one whole wall of department store exclusive fragrances, I would like to know if they are supposed to have those or if they are buying them off the gray market. I don’t want to place my product somewhere that has an affiliation with the gray market.’   

Thus far the connection between gray market and organized crime has been anecdotal and based on anonymous information. Sources have told Ms. Bresnahan that some of these companies that work in the gray market also deal in counterfeits and are involved in other criminal activities. She thinks that more information sharing between industry and law enforcement would be useful. She reports unusual purchase patterns and product requests to the National Intellectual Property Rights Coordination Center (IPR Center) in Washington, DC, but feels her tips get little attention because gray market violations are not viewed as crimes.

Distributors Potential Users of Authentication Technology

When asked about attacks on her product protection technology, she said that she would not share details about it because they keep that information proprietary, but, she replied ‘What we’ve been using so far is working and it’s not being tampered with to the degree that it’s not usable. There are also ramifications for tampering with the product.’

Soon the per bottle fine will increase to $200.00 creating an additional incentive for distributors to monitor their salons. This fine is also an incentive for distributors to deploy authentication technologies as well so that they can detect salons infringing upon their agreements. Distributors using these technologies can also demonstrate to JPMS that they are serious about adhering to their contracts.

Contact: www.paulmitchell.com