Designer Brands: Fake or Diverted?

As I stroll the streets of Alanya, Turkey, I see shop after shop of designer fashions, from Michael Kors purses to Nike shoes to Hugo Boss shirts.  The prices are crazy.  Everyone assumes that they are fakes.  The Nike shoes and Michael Kors purses are obvious knockoffs of poor quality.  However, some of the items I see are clearly real. 

I bought a Hugo Boss polo shirt for 5 Euros.  I am quite confident that I didn't get 'ripped off' with a fake.  How do I know this?  One, the hand and feel of the fabric.  This is very high quality fabric.  Second, is the detailing of the construction with all the small quality features one sees in expensive clothing that isn't there in the cheaper clothes.  It has the carefully reinforced collar, biased cuffs, etc.  Third, is the stitching.  Knockoffs are sewn on low quality machines.  The designers insist on more expensive machines and more careful stitching techniques.  Fourth, and the kicker, was that the buttons are Hugo Boss imprinted.  This is not a cheap thing to fake.

These shops have an owner and then helpers who are taught in the methods of the aggressive sell.  And believe me, if you respond to them, they are on you like glue.  For whatever reason, I got approached by the owner and he started talking to me about my clothes and my 'style'.  This guy was actually quite knowledgeable in fashion.  He told me that he could sell me a Hugo Boss shirt for 10 Euro.  As I tried to walk away, he dropped his price to 5 Euros.  So, I stopped and said, 'OK, take it out of the plastic and let me look at it.  I expected it to be an obvious fake.

He did so, I noted all the things above and looked at him with a suspicious eye and said, 'This is real.  Where did you get it?'  He smiled and said, 'From the company who makes clothes for Hugo Boss to be sold in Europe'.  Suddenly, I got it.  This wasn't fake.  It was diverted.  I turned it inside out and, yup, the tags had been clipped.  That was done so that Hugo Boss couldn't tell from which of its many contractors it had come.

So, this is how it works, Company X manufactures Hugo Boss shirts for the designer.  Hugo Boss orders 10,000 of these shirts at $3.00 each, directs them to be drop shipped into various European countries where they are wholesaled for 20 Euros and retailed for 40 Euros.  However, the manufacturer makes 11,000 of them, ships the 10,000 as instructed, clips the tags and sells the 1,000 locally.  So, the 40 Euro designer shirt sells for 5 Euros here.  It isn't a knockoff, it is diverted merchandise.

The designer isn't really even that upset.  If they can identify a specific subcontractor, they will probably drop them for breach.  But, they can't and they understand that the person who buys a 'knock off' Hugo Boss in Alanya, Turkey is not their customer anyway.  They would never buy a 40 Euro Hugo Boss in, say, Milan.  So, it isn't really costing them any sales.

Here is the kicker for me and why I bought it.  I was paying a fair price for ANY polo shirt.  And after careful inspection, this was a very high quality shirt.  Name or not, at 5 Euros it was a deal.  Now, at another shop, they were selling a woman's polo shirt with the Ralph Lauren logo on it.  I inspected it and it was a piece of crap.  It was obviously a fake rather than diverted merchandise and was not worth the price they were asking.  The point is that if you know fashion, you can't get screwed.  Quality is quality whether the name is fake or not.

Now, there is one shop that sells designer fragrances, from Versace to Dolce Gabanna to Chanel.  The owner's kid goes down to the beach and attacks tourists with offers.  By the time I was done talking to him, he was willing to let me have five for 20 Euros - total, not each.  That included, Aqua di Gio for men, Dolce Gabanna Light Blue, Chloe, etc.  In other words, this was 400 Euros of designer fragrances.  Anybody who thinks these are fakes doesn't understand the finances of fragrances. 

Since I was the accountant for the company that manufactured Calvin Klein fragrances, I do understand how the fragrance industry works.  The actual cost to produce an $80 bottle of quality fragrance is around $2 or $3 dollars.  Mostly what you are buying is the cost of formulation and testing.  That, and the name, which in a way is the same thing.  When you buy a 'Taylor Swift' or 'Katy Perry' fragrance, you are not really buying the name so much as you are buying her assurance that this is, in her opinion, a good fragrance.

The other important point to understand is that, in addition to the economies of scale in R&D, there are massive economies of scale in manufacturing.  Even if you are 'knocking off' the design of the box and bottles, you still need to incur the cost of set up.  A bottle that will cost Calvin Klein $0.80 in quantities of 250,000 might cost $5.00 in a quantity of 1,000.  The same is true with printing the box.  In other words, 'short runs' are prohibitively expensive.

For these reasons, I initially concluded that the fragrances this guy was trying to sell me were stolen.  It happens out of the back of trucks and out of warehouses.  I knew a homeless guy who was going around Sunny Isles Beach selling Ralph Lauren polo shirts for $5.00 each.  He was in cahoots with a warehouse guy who was stealing them and then they split the proceeds.  They did get caught eventually, but they got away with it for about six months.  I assumed that these fragrances were coming from the same source.

That may, indeed, be the explanation.  But they may also be diversions with the full knowledge of the contract manufacturer as I believe is the case with my Hugo Boss shirt.

In addition to the designer brands being sold at very low prices, there are also Turkish brands of similar quality being sold at such prices and even less.  Turkish cotton is sublime.  Because of all the contract manufacturing, there is the equipment and expertise to fabricate quality clothes.  And, because the Turkish Lira went into free fall a while ago, your dollars or Euros just buy a whole lot.  So, if you come to Turkey, bring an empty suitcase or no suitcase at all.  Luggage is also very inexpensive here.  Just bring a carry-on and $200 for clothes when you get here.  You will have a very nice wardrobe of good quality clothes.

Turkey 3/13

I guess I officially became a Digital Nomad two years ago.  However, I really just moved to Brest, Belarus for two years.  Since I left on January 8, I have become a true nomad and I am learning things quickly.  I am in Alanya, Turkey until May 15, because there was a sale on a condo (160 USD for 15 days) and I didn't notice that it was non-refundable.  Also, they took the money immediately, so while I have enough cash on hand, I won't feel too loose with my money until April 3 when my next pension comes.

Another thing I have learned is that a balcony overlooking the sea is wonderful when you have a gracious woman to share it with.  Alone, I don't go out there.  It just reminds me that I am alone.  I switch to my new condo reservation (same hotel) on March 16 and at that time, if they want a premium to stay in this apartment, I'll move.  They all have balconies, but most have partial sea views, not the full on view I have here.

Another thing I have learned is that it is pretty easy to get screwed up, visa-wise.  My 90 days in Turkey run out on May 24, but I can't re-enter the Schengen zone (Warsaw in my plans) until May 28.  So, I'm going to do something interesting when my May 15 checkout arrives.  First, I will take a bus to Antalya and stay in a hostel for one night.  That is a two hour and fifteen minute trip.  The next day I will take the 11 hour bus trip to Istanbul and say in a hostel for one night there.  The next day I will take a 3 1/2 hour train to the Edime, Turkey which is right on the border with Bulgaria.  I will stay there at its one hostel ($10).  That will be May 18.

The evening of the next day I will take the night train to Sofia, Bulgaria.  The whole cost, bus from Alanya to Antalya, bus from Antalya to Istanbul, train from Istanbul to Edime and night train from Edime to Sofia will cost a grand total of $35.

I need to stay in Sofia from at least May 19 to May 27.  That is because I cannot stay in the Schengen zone for more than 90 days out of any 180 days.  I was in Warsaw for 50 days, leaving me 40 days.  But my 180 days don't expire until July 6.  That means that I can't enter the Schengen zone until May 27.  If I do at that time, my days from the previous 180 days expire at the same rate as my days in my new 180 days accumulate.  I then must leave Schengen by August 25.

Of course, if Sofia is very nice, I can stay longer and I might.  The hostels and hotels are about the same as in Alanya and slightly less than in Warsaw.  I will be staying in hostels when I get to Warsaw for the simple reason that I want to meet people.  You don't when you stay in an apartment.  At least not as much. 

On August 25 I will go to SE Asia.  I can essentially stay there forever if I want.  Taiwan, Philippines, Vietnam, Malaysia and Thailand all provide me with 90 day stays and I can stay up to 6 months in Vietnam if I want without being taxable.  Malaysia does not tax foreign income.  They all allow 'visa runs' that can refresh 90 days if I am particularly enamored of a place. 

An, as of yet, unanswered question is whether a return of 90 days or more to Europe in the summer is worthwhile.  Actually, the worst months in SE Asia are September and October.  However, those are good months in Kaohsiung, Taiwan, so fleeing the climate is simply not necessary.  The reason would more likely be a desired dose of EuroAmerican culture.

In the meantime, the weather in Alanya is nice enough.  It is usually sunny and the temps are in the 18C to 22C range (64F to 72F) and getting warmer.  The sea is beautiful and the restaurants are good and they are inexpensive.  There is a lot of inexpensive clothes and once I get my next pension check, I will probably buy some clothes to hold me over until Hoi An.  I could do it now by pulling some funds out of my reserves.  However, I have learned from experience that once you do that you keep finding reasons to do it again and the next thing you know your reserves are shrinking instead of growing.  Still, I will probably do some window shopping tomorrow.