Deluxe: How Luxury Lost Its Luster (34 page)

Back in
2003
, Gucci discovered that Wal-Mart was selling counterfeit Gucci handbags and wallets as authentic in several of its stores around the United States. Gucci hired New York lawyer Steven Gursky, of the Gursky Group at Dreier LLP, to pursue Wal-Mart for “willful blindness,” a practice in which the store buyer does not ask the wholesaler or middleman the origin of fake goods and then sells them as the real thing. It happens all the time: Gursky has handled willful blindness cases against Wal-Mart, Costco, and others on behalf of Tommy Hilfiger, Calvin Klein, Diesel, and Nike, to name a few. Generally, middlemen sell anything and everything they can get their hands on. “We’ve had cases where the vendor last sold the retailer toasters and now it’s designer clothing,” says Gursky, “and the buyers don’t find this odd.”

In the Gucci case, the middleman—actually a middlewoman—had attended the Las Vegas Off-Price Specialist Show, the largest American trade show devoted to selling odd lots of apparel and accessories at reduced prices, and picked up an order of Gucci handbags and wallets for a song. She testified later in the case that she believed the goods were authentic because she heard the people in the booth speaking Italian and assumed they were employees of Gucci. In fact, they were Israelis speaking Hebrew and had bought the wallets and purses at a factory in Romania. They were later arrested in Miami for selling other counterfeit goods. As they were already facing criminal and civil charges in Florida, Gucci decided to go after the middlewoman and Wal-Mart. Both settled on the eve of the trial in June
2005
. “The sale of counterfeit merchandise by a reputable retailer is much more insidious than on Canal Street because often on Canal Street people assume what they are buying is fake,” said Gursky. “But when you walk through doors of a $
200
billion retailer, you believe that what they are selling is real. And sometimes it’s not. The truth is, Wal-Mart is much more concerned about the buck than reputation—theirs as well as the trademark holder’s.”

Most luxury companies now have lawyers on retainer who spend each day surfing the Web, looking for fakes for sale. Companies such as AAA Replicas (www.aaareplicas.com) make Vuitton and Hermès knockoffs to order for $
200
to $
400
apiece. Amazon.com and eBay are two favorite places for counterfeit wholesalers to dump their stock. Amazon and eBay themselves cannot be held liable because they simply host a transaction between buyer and seller. But luxury brands are hoping to change that by making the Web sites liable for enabling the business. In
2004
, Tiffany sued eBay in New York’s federal court based on that principle, claiming that
80
percent of Tiffany products offered on the site were fakes. In
2006
, LVMH filed a similar suit in Paris, stating that up to
90
percent of Vuitton and Dior items on eBay were counterfeit. By early
2007
, both suits were still pending.

Many of the street-level hawkers in Europe and the United States—the guys you see with watches and bags spread out on blankets on street corners, or in trash bags slung on their backs on Riviera beaches—are Senegalese belonging to a two-million-strong Islamic sect called the Mouride brotherhood. They are illegal immigrants who sell Gucci watches and Vuitton baseball caps at a
400
percent markup, then send the cash—millions of dollars—back to Toube, their home base in Senegal and one of the fastest-growing cities in Africa. There, the money has contributed to constructing television and radio stations, a university, and one of the world’s largest mosques, with an eighty-seven-meter tower covered in $
10
million worth of imported marble. Rarely are Mourides prosecuted for peddling counterfeit goods. Like purse-party ladies, Mourides are, in the minds of cops, small-time dealers.

Counterfeiting flourishes because it is a high-return, low-risk business: Counterfeiters can earn millions and are rarely caught. “The markup is like heroin,” says Oberfeldt. “Say I buy one ounce of heroin for $
18
,
000
. Diluted one to ten, I now have $
180
,
000
worth. However, conspiracy to commit a crime and criminal possession of narcotics is an A–
1
felony in New York. If I’m caught with any part of that ounce of heroin, I’m looking at eight to twenty-five years, and life if it’s a multiple offense. It’s mandatory sentencing. It’s almost like murder.

“If I brought in $
18
,
000
worth of handbags in from China”—which would retail for at least
10
times more—“you’d put me in jail overnight, maybe. And I’d call my lawyer and be out in the morning. Ninety-nine percent of the people caught in New York state selling counterfeit goods do not go to jail. The judges do not have the laws to sentence. The highest-level crime to be charged with in New York State is trademark counterfeiting, which is a C felony, like stealing a nice car. They never rat out their bosses. They just laugh at the cops.

“If you sell that heroin,” he continues, “you’ll have the DEA, the FBI, New York State and city police, Customs, and the IRS all looking for you—and you’ll go to jail forever. If I sell counterfeit goods, all those people except the DEA
could
chase after me, but can’t do anything once they get me. So most don’t get involved.”

Like the drug business, counterfeiting has become a professional racket run by organized crime. In New York in the
1980
s until the mid-
1990
s, gangs—like a group of Asian American kids called the Born to Kill Gang—were in charge. “If we showed up to do a raid, women would take counterfeit watches, shove them up their shirts, and say, ‘I’m pregnant, don’t touch me!’” remembers Oberfeldt. “Once I saw a three-month-old baby in a milk crate that sat on top of a case of M-
80
explosives. The gangs came after us with bats, they’d slash our tires, throw knives and significant explosives. It was terrorism. They tried to intimidate us. We videotaped them and locked them up and we got a lot of street cred when we manned up from ten to forty men and kept going.”

Today Canal Street is run by grown-up gangs from China, like the Fukienese gang, as they are known in New York, whose members come from Fujian, a province along China’s southeastern coast just across the straits from Taiwan. They speak a Fujian dialect among themselves and run the north side of Canal Street, west of Broadway. And they freely let the police seize goods rather than get arrested for fighting back. The network is tight. Like in Santee Alley, they all have direct-connect Nextel radio: if a police car turns a corner, the message is relayed down six blocks instantly and everything is shut down. They use homeless people as lookouts, giving them walkie-talkies. Random killings don’t happen. “It’s bad for business,” notes Oberfeldt.

But things can get dangerous. During a two-day sweep in November
2004
, New York police arrested fifty-one members of two violent gangs and charged them with a host of crimes ranging from racketeering to trafficking in counterfeit goods. Police seized $
150
,
000
in cash and $
4
million in counterfeit merchandise carrying the names of Chanel, Gucci, and Coach. U.S. Attorney David N. Kelley told said the gangs “achieved their dominance through unflinching use of violence and fear.” During their reign, a man who was suspected of cooperating with police received “a beating with pipes until his bones snapped,” Kelley said. A rival gang member was shot in the head and survived only because the bullet miraculously shattered against his skulls.

Buckner tells me that Los Angeles is less violent than New York, but dangerous nevertheless. When I visited his office in southern L.A., he showed me surveillance photos of a Hispanic vendor selling counterfeit merchandise in Santee Alley. The guy—a real muscled-up thug—had the number
18
tattooed on his fingers and his cheeks, signs that he is a member of the Eighteenth Street Gang, an L.A. gang that pays tribute to the Mexican mafia. Buckner has also seen guys with Hezbollah tattoos and pictures of Sheikh Nasrallah, the organization’s political leader. Are they actually members of Hezbollah? No one knows for sure. What Buckner does know is that he has to watch his back. “We’ve had our tires slashed, our car windows broken. We’ve had surveillance on our office and on us to find out what we are up to,” he said. “One of our men was driving a van in Santee Alley when gang members smashed the window and cut up his face.”

To help crack down on the sale of counterfeit DVDs in Santee Alley, the Motion Picture Association of America donated ten cameras that were installed in and around the market in
2004
, and the luxury companies profited from the initiative. That year alone, the Los Angeles Police Department seized $
32
million worth of fake DVDs, watches, handbags, T-shirts, and more. “As we are a relatively new retail area, it’s been the lawless frontier out there,” admits the L.A. Fashion District’s Kent Smith.

Some luxury corporations have decided to go after the counterfeiters more fiercely by pursuing big judgments; in January
2004
, a New York judge ordered the thirteen Chinese and Vietnamese plaintiffs to each pay a record-breaking $
18
million—totaling more than $
500
million—to Cartier. The gang had a virtual monopoly on the counterfeit watch market in the United States and had been sending up to $
100
,
000
a day back to their headquarters in Asia since
1988
. Following the judgment, Cartier filed seizure orders on their houses, cars, and bank accounts. “We want to really hit them where it hurts: in the wallet,” a Richemont executive told me.

Other countries are fighting the counterfeiting trade by targeting individual customers and retailers. In France, for example, tourists caught bringing counterfeit goods into France can receive a €
300
,
000
fine (approximately $
390
,
000)
and up to three years in prison. And in Hong Kong, customs officials formed a task force of two hundred officers to stamp out counterfeiting and piracy on the retail level. In two years, the number of stores selling fake DVDs, software, and electronics in Hong Kong dropped from one thousand to one hundred. By
2004
, there were only sixty. Counterfeit vendors in the Temple Street market in Hong Kong have been forced to move their bogus Vuittons and Guccis from the storefront tables to back rooms. Fake watch vendors closed up on Hong Kong’s busy Nathan Road. Today, a hustler may hit you up on the sidewalk, but he has to take you down back alleys and up dark stairwells into rooms with steel doors to sell you a very good fake Rolex for a mere $
45
.

That’s all well and good, says Oberfeldt, but in his view the wrong tack. “The only way to stop counterfeiting,” he says, “is to get people to stop buying all this crap just to have these logos. We have to take it into our own hands.”

H
ANDEL
L
EE
is the modern American dream. His grandfather, for whom he’s named, was a Chinese diplomat who worked as an adviser for the American ambassador in Beijing. Anticipating Mao’s communist revolution, Lee’s grandparents and his newlywed parents fled China in
1949
. They lived in Japan for several years and eventually settled in Washington, D.C., where Lee’s father served as the deputy assistant secretary for science and technology for the Commerce Department and his mother worked as an artist. Lee was raised in the comfortable Washington suburb of Bethesda, Maryland, attended the University of Virginia, and earned his law degree at Georgetown. He joined the prestigious law firm Skadden, Arps in New York, and in
1991
was sent to Beijing to open its office there—“not long after June
4
,” he points out, referring to the
1989
Tiananmen Square student protests two years earlier. “It was an interesting time, very quiet.” He soon became the go-to man for Americans who wanted to do business in China. When I went to Shanghai for the first time in April
2004
, he was my go-to man, too.

Lee invited me to lunch on the sunny rooftop terrace of M on the Bund, the trendy Western restaurant and preferred hangout for jet-set expats. When I arrived at one o’clock sharp, Lee stood to greet me, his manners as impeccable as his dark Armani suit. Lee is soft-spoken, straight-shooting, and seemingly honest: all things you do not associate with either lawyers or powerful businessmen. His strengths are knowledge—of the situations, the players, the hiccups—and patience. Both are as essential to doing business in China as air and water are to life.

“When I first came here, I planned to stay two to three years,” he told me as we tucked into mesclun salads with smoked duck breast. “But every day you see something new and you hear something new—a new thought.” In
1995
, Lee had a new thought of his own: to open a gallery dedicated to contemporary art. “There was fresh new artistic expression that no one had seen in China, and the only places you could catch it was at art happenings, in underground art villages or in artists’ studios,” he said. “China has been an amazing civilization for five thousand years but that’s because of its culture, not its military power. During the last sixty years, the most dynamic artists left or weren’t allowed to show their work, and that was a tragedy.”

In
1996
, Lee opened the Courtyard, one of China’s first privately owned contemporary art galleries, across from the east gate of the Forbidden City. The inaugural fete was a blowout, “with nine ambassadors and long-haired artists,” Lee remembered with a laugh. “The police came, and they were shocked and surprised by the scene.” Government officials, he said, “were afraid it could have been unhealthy art.” And with just cause. “There was a lot of political content in the work,” he admitted. Though Lee had all the permits required, the government shut down the gallery the next day. It took eight months to get permission to reopen.

In
1999
, Lee decided to take the concept to Shanghai, but on a bigger, grander scale—“a place with a gallery and a restaurant,” he said. During a Christmas call to a family friend, he mentioned his idea.

“You should look at our building,” she offered.

Three years earlier, her family had purchased from the government a
1916
granite neoclassical building on the Bund that had served as the Union Insurance Company and later the Mercantile Bank of India. But the family had never figured out what to do with it.

A few days later, Lee checked out the place.

“I can do a whole building dedicated to setting the standards for contemporary art, luxury, and society in Shanghai,” he thought to himself.

He wrote up a proposal that included restaurants, luxury retail, and an art gallery and presented it to the owner.

“This is fantastic,” she told him, and gave him carte blanche.

He dubbed it Three on the Bund, after its address, and hired renowned architect Michael Graves to turn the proposal into reality.

Then he called Giorgio Armani.

I
T TOOK THREE THOUSAND YEARS,
but luxury has finally circumnavigated the world: it began in China and has now returned there, for consumption as well as production. And it is marching onward to India and Russia. The potential customer base is phenomenal. In
2006
, China officially had three hundred thousand millionaires, Russia eighty-eight thousand, India seventy thousand. In
2004
, Moscow had thirty-three billionaires, more than any other city in the world. “This is the century of emerging markets,” Tom Ford told me. “We are finished here in the West—our moment has come and gone. This is all about China and India and Russia. It is the beginning of the reawakening of cultures that have historically worshipped luxury and haven’t had it for so long.”

When luxury business arrived in China in the early
1990
s, the market was nearly non-existent. Forty years of communism and the Cultural Revolution had wiped out what was known as Chinese luxury, including the traditions of fine silk, delicate porcelain, and handcrafted wood furnishings. The Chinese didn’t even have a word for luxury. They used the phrase
ming pai,
which means “famous brands.” “When we opened here on Nanjing Road in
1995
, people were pushing bicycles,” Louis Vuitton president and CEO Yves Carcelle told me at the inauguration of the Louis Vuitton Global Store in Plaza
66
in Shanghai in September
2004
.

At first, luxury brands opened stores in safe places like the lobby of the Palace Hotel in Beijing and the Plaza
66
luxury shopping mall in Shanghai to show off their wares. “It’s cheaper than a billboard,” said Paul French, a director of business consultancy Access Asia. “Just stick in some purses and some girls.” In contrast to the rest of the world, the Chinese luxury market for much of the
1990
s was male-driven:
90
percent of sales were to men, and male-oriented brands such as Boss, Dunhill, and Zegna thrived. Government officials and civil servants in Beijing, bankers and real estate barons in Shanghai, and manufacturing entrepreneurs in the northern provinces wanted all the trappings of Western businessmen. They bought Givenchy suits, Vuitton and Dunhill briefcases and money satchels, Rolex watches for themselves, and Cartier baubles for their wives and mistresses.

But in the early
2000
s, Lee saw the luxury customer base broadening and believed that the market was mature enough to support a luxury retail-and-restaurant development. “Imagine that the luxury consumer is the top
5
percent of the population,” he said. “In Shanghai, that’s
900
,
000
people, in Beijing, it’s
750
,
000
—and that’s not counting expats who are white-collar executives with nice packages. There are a half-million expats from Taiwan and Hong Kong alone.” But rich locals weren’t the only potential customers for Three on the Bund. “In Shanghai, you see secretaries dressed, out at night,” Lee told me. “They save up and buy their Louis Vuitton bag. My secretary has a Prada bag. She displays it prominently on her desk and she’s saving up for another one. And Beijing and especially Shanghai are the shopping Meccas for the wealthy from the north—Shenyang, Qingdao, and Harbin,” he continued. “Most are private businessmen, in manufacturing and real estate—they buy an entire building at a clip. There are
250
,
000
millionaires in Wenzhou alone. They buy in cash. They have crew cuts and Dunhill bags stuffed with cash. They bring in their wife or girlfriend, say, ‘What’s the best?’ and throw down the money.”

Armani’s presence in China in
2004
was minuscule compared to that of his competitors: a Giorgio Armani boutique in the Peninsula Palace Hotel in Beijing, Emporio Armani stores in Dalian and Wenzhou, and an Armani Collezioni in Shenzhen. For Lee, Armani was a natural choice for Three on the Bund. “He changed our aesthetic of contemporary fashion, and I thought it was important to bring him into China in a big way,” Lee said. “He’s vigorous and bigger than life, and that’s important for China, the cult of the person. At the opening of Chanel, someone asked where Coco Chanel was. Armani would make a big impression on the Chinese.”

When completed, Three on the Bund included a Giorgio Armani boutique; Emporio Armani; Armani Fiori (which sold orchids and calla lilies shipped from Holland); Armani Dolci (with Italian-made chocolates); two multibrand high-fashion boutiques; an Evian Spa; four restaurants, including Jean Georges Shanghai; and the Shanghai Gallery of Art. It would be the launchpad not only for Armani in China but also for the sort of Western-style retailing that luxury brands had cultivated and mastered in the rest of the world. “It’s the moment to open here,” Armani told me the day of the inauguration. “You can see things are happening. Last night when we went to dinner here in Shanghai, I was surprised by the way the people were so well turned out. Even Paris doesn’t have this atmosphere, this spirit.”

Armani made the most of his maiden voyage to the Middle Kingdom. He visited the Forbidden City, where Chinese tourists swirled around him, snapping photos. He was the guest of honor at a cocktail reception at the Italian ambassador’s residence, with hundreds of impossibly hip Chinese twentysomethings dressed in Dior corset dresses and Armani suits, chattering endlessly, champagne in hand. In Shanghai, he staged a fashion show for a thousand people in a tent on the Pudong side of the Huangpu River, followed by a party in the Shanghai Gallery of Art at Three on the Bund with an abundant supply of good Chianti and heaping platters of carpaccio and prosciutto. Hundreds of young, beautiful Chinese danced to techno as American actress Mira Sorvino, British socialite Lady Helen Taylor, and Taiwanese movie idol Chen Chang—“the Johnny Depp of China,” one girl swooned—held court in the VIP section. “Everything is alive here,” Bao-Wen Chen, a forty-one-year-old Shanghainese investment banker, shouted to me over the booming music well after midnight. “There’s a culture of young people who want to learn about luxury and fine dining. Shanghai is not New York or Hong Kong, but it’s not far behind.”

Three on the Bund kicked off the renovation of the elegant former banking district along the river, turning it into a luxury brand alley like the avenue Montaigne and Rodeo Drive in a matter of two years. In the first six months, sales of Armani at Three on the Bund were
50
percent more than Lee’s initial predictions. Three-quarters of the clientele at Three on the Bund were local Chinese, and they dropped an average of $
400
to $
500
per visit. Chinese women began to take an interest in luxury goods: sales went up, and luxury brands began to putting more women’s clothing and accessories in their stores. By
2004
, women accounted for
40
percent of luxury goods sales in China, up from
10
percent in the
1990
s. “In other provinces, they say people will buy food with their last penny, but in Shanghai, we’d buy clothes,” local shoe designer Denise Huang told
Vogue
shortly after the Armani opening in
2004
. Hong Huang, publisher of the luxury goods magazine
I-Look,
concurred: “A girl will spend a month’s pay on a handbag. No one would do that in New York or London, but these girls have confidence. They know more money, more opportunity is coming for them.”

Fashion magazines became the country’s most important source of information on luxury goods. There are Chinese versions of
Elle, Cosmopolitan,
and
Vogue,
each which sell about half a million copies every month, primarily on newsstands. When
Vogue China
debuted in September
2005
, it sold out its initial run in five days. The second printing sold out in three days. “The best-selling brands here are Chanel, Dior, and Louis Vuitton,”
Vogue China
editor Angelica Cheung told me. “Most Chinese buy luxury as a status symbol rather than taste. They like logos. They want people to know they are carrying something expensive. You see people walk into stores and say, ‘Where is this brand from? Italy? Must be good!’ They can’t pronounce the names and they don’t know where it comes from. They just want it because it’s expensive.”

Brands began to expand into secondary and tertiary cities of six to eight million, such as Hangzhou, Guangzhou, Chengdu, and Xi’an. By the end of
2006
, Louis Vuitton had fourteen flagships on Mainland China, including one in Xi’an, and had plans to open two to three new stores each year for several years to come. “We are still underrepresented in China,” Vuitton managing director Serge Brunschwig said in
2005
. “China’s an underdeveloped market with good potential.” Giorgio Armani grew from five stores in April
2005
to fifty-three in
2006
, and planned to open another twenty-three in
2007
. By the end of
2006
, Greater China was Armani’s second largest wholesale market in Asia, after Japan. Salvatore Ferragamo had thirty stores in China by early
2006
and scheduled another ten to fifteen in two to three years. Calvin Klein had twenty-four freestanding stores for its various lines in early
2006
with plans to open another eighty to ninety stores by
2008
. Valentino opened its first mainland China store in
2006
in the secondary city of Hangzhou, along the famous West Lake near Dolce & Gabbana and Giorgio Armani. Most are doing very well. Since its arrival in Beijing in
1992
, Louis Vuitton has “never lost any money in any store in China,” boasted Vuitton’s China CEO, Christopher Zanardi-Landi.