LONDON, United Kingdom – Late last year, Prada's popular Autumn/Winter 2019 collection of Frankenstein T-shirts, mohair-shouldered sweaters and Sidonie leather handbags were being sold on Italist.com up to 30 percent cheaper than on the Italian luxury brand's own website.

The problem is, Italist isn’t an official Prada supplier, and it isn’t authorised to sell the brand’s goods. Despite Prada sending a cease-and-desist letter to the website, it is still up and running and selling their latest products, including the Resort 2020 collection. The luxury brand is awaiting a response before taking further legal action.

Prada's Head of Marketing Lorenzo Bertelli told BoF that the group "is very proactive in protecting its intellectual property" and Italist was "unauthorised" to sell its products. He added that in the last two years alone, 9,658 websites have had "illicit" contents removed on demand from Prada.

Italist Chief Executive Diego Abba continues to deny that Italist is a grey market vendor, describing it as a site for Italian style. Abba said the business is selling goods at the “Italian price” by using technology to handle the removal of the 22 percent VAT for international customers.

As luxury digital sales increase — estimated to account for 25 percent of all sales by 2025, according to Bain & Company — so too has the number of grey market vendors who legally sell legitimate products via unofficial channels. (This is distinct from counterfeit goods, which are "black" market). The grey market is estimated to be worth up to 10 percent of the €281 billion ($309.5 billion) personal luxury goods market, according to Bernstein's Luca Solca.

The danger is you're devaluing the luxury experience of the goods.

Grey market vendors generally acquire items from boutiques that have excess stock or have over-ordered on popular items at a wholesale price. They then sell those items on for less than the recommended retail price, but still with a healthy profit margin. As BoF reported in 2018, the luxury industry has already been called out for quietly selling products on the grey market in a bid to boost sales, with Vetements Co-Founder Guram Gvasalia calling it the sector's "dirty secret."

The digital grey market holds a very specific threat to luxury brands, not least because it is becoming more sophisticated. “If you go on these sites you wouldn’t think it is any less legitimate than a Farfetch model," said Simon Edwards, a partner in the retail team at law firm RPC.

“The danger is you’re devaluing the luxury experience of the goods. Part of the experience is going into a store and having that luxury experience or if it is online, having it marketed and sold to you in a certain way that maintains that luxury feel,” he added.

Farfetch and other official e-tailers operate as platforms for boutiques to sell to consumers. They also have direct relationships with brands like Gucci and Burberry who also sell on the site.

Italist.com is just one of thousands of websites that use high-end photography, products from top brands and significant marketing prowess to mimic the model of authorised e-tailers to lure discount-driven shoppers in the high-margin luxury industry.

Luxury houses are rightfully worried. A senior legal advisor to one luxury conglomerate told BoF that the online boom in grey market sales is a substantial concern, especially because previous attempts to control the practice by buying back and destroying unsold stock has led to a sustainability backlash by customers.

Targeting the grey market specifically is difficult, as trademark rights are typically exhausted once the product has been sold.

The Italist site has sharp imagery, an in-house magazine of style advice, and a 117,ooo-strong Instagram following filled with mid-tier influencers like Gresy Daniilidis wearing Gucci, Versace and Isabel Marant. It even produces an annual list of its biggest selling brands similar to search platform Lyst's reports.

But Italist's prices undercut Prada's own website and official wholesale distributors like MyTheresa and Net-A-Porter. A rose-patterned cotton skirt priced at €790 on both Prada's website and www.net-a-porter.com, was available on Italist for €692, later reduced to €508.

Their biggest market is the US. “We basically ask the boutique if they can sell it to us. It’s again a little bit different [to the Farfetch model]; they’re selling to us, and we’re selling it to the customer,” Abba said, adding they are different from a reseller because the transaction is simultaneous. There are pitfalls; the consumer must pay for shipping, duties and VAT on any returns which official e-tailers typically handle.

“It’s difficult to say our website is different to a brand website or versus [an] authorised retailer website. It’s difficult to say it doesn’t have the same aura.... The way we present it, the way we present the box, the way we tell retailers to pack the box is very in line with the industry. And we are very transparent with which collection and which season you are buying.”

When asked about the cease-and-desist notice from Prada, Abba — a former Bain executive — said Italist doesn't have a relationship with them: "the problem for the brand is that they do impose geo-pricing, they impose different pricing, and we offer the Italian price and sometimes that can create friction."

Prada aren't the only brand to be impacted by Italist's practices. Products from Celine, Saint Laurent, Golden Goose, Moncler and Gucci, all in-season and at a discount, are currently listed on the site. There's a wide selection, including 23 web pages devoted solely to Burberry items.

On many levels the grey market is nothing new. But the increasing digitisation of the luxury sector makes it easier to hide and legally more difficult to fight.

“The legal purchasing of product and making commerce out of it, clearly online has made it simpler and you can reach a lot of people. It’s true for Burberry and lots of brands,” Burberry Chief Executive Marco Gobbetti said. “What are we doing? I think we have to be as careful as we are with the physical stores, and we have to be very careful with our digital distribution.”

Despite the brands' best efforts, the grey market has been quick to adapt.

Targeting the grey market specifically is difficult, as trademark rights are typically “exhausted” once the product has been sold. That means resellers are within their rights to sell them again. EU trademark law however, is more aligned to luxury brands rights and gives them greater scope to sue if the luxury “aura” isn’t maintained.

Luxury brands typically rely on their ability to claim trademark infringement to close down or at least curb grey market sales. Brands like Prada do this by claiming a breach of their selective distribution system contract, an agreement between a brand and a supplier or boutique which sets out how a product must be sold. This may include the prestigious look and feel of the store, the layout of the product and the training of staff. When a product is sold on a grey market website that is not part of the network, brands argue that consent has not been provided to sell products this way as it removes the aura of luxury that characterises those products and damages the inherent quality.

So, brands will often pursue their own boutiques and distributors.

Companies will generally start with an audit to understand which goods appear on grey market websites and therefore which distributors or boutiques may be involved, according to RPC’s Henry Priestley.

"In terms of remedies, it's likely that the contracts will have termination rights for these types of breaches and the brands will likely have a claim for damages, but whether a brand would want to terminate a distributor and sue them would depend on a number of commercial and legal factors, including the severity of the breaches and their duration,” he added.

Despite the brands’ best efforts, the grey market has been quick to adapt.

“Grey market vendors are taking these cases on board and working to make what they’re selling appear more luxurious, particularly in their website designs,” said Cassandra Hill, a managing associate of law firm Mishcon de Reya’s intellectual property team. “They look to see how they can make them appear to be more high-end and therefore more difficult to say it’s damaging for our clients’ brands,” she added.

The reality is the grey market is a major issue for anyone operating in the luxury sector.

If something had a retail price of £2000 but was offered for sale for £20, that extreme is easy to argue, said Hill, whose team has represented clients including Gucci and Christian Louboutin. "It really is all about the context in which the goods are being sold. Where is the line that crosses from luxury to diminishing luxury? That can sometimes be a difficult line to judge."

Other opportunities to close the sites come if they are infringing other intellectual property owned by a brand such as use of copyrighted imagery from the brand website or a brand's registered trademarks like logos. Italist doesn’t do this. Similarly targeting the web host of the online site by letting them know that the website is infringing their intellectual property and could force a closure. Educating customers on the likelihood of counterfeit goods on unauthorised sites and implementing territorial restrictions on return policies and guarantees can also be effective in curbing grey market demand, according to Priestley. Italist said it vets its boutiques for quality, inspects their contracts to verify sourcing is legitimate and requires them to sign contracts that affirms merchandise is new and authentic.

Prada said it is tightening up its supply chain and making sure boutiques receive the number of goods proportionate to their actual needs. A handful have been cut off, while others have been sent warning letters. The brand’s senior management are also assessing their wholesalers’ reliability and sales performance, with a view to further reducing their footprint and ending grey market sales entirely in the coming three years.

But where there are price differences across markets, intellectual property lawyers warn opportunists will continue to take advantage.

“The reality is the grey market is a major issue for anyone operating in the luxury sector. It’s very damaging commercially to their sales and to the value of their product, but also the reputation of their brand," said Mike Sweeney, senior legal counsel at technology and brand protection firm Incopro.

“There are murmurings blockchain may be helpful in [the] coming months and years in terms of tracking the products, but frankly it’s still too early to say."

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