Why You Should Think Twice Before Shopping Costco's Beauty Section

This story was originally published on May 31, 2016.
Last month, we wrote a story titled "20 Surprising Beauty Buys You Can Find At Costco." Soon after, we started receiving emails from brands we featured asking to be removed from the slideshow. They went a little something like this: “Hi love! Can you take us out of this slideshow? Costco isn’t an authorized retailer of ours. Thanks so much!” Several nearly identical messages later, those 20 surprising buys had been whittled down to four, and our Hm, something’s not right radar started to go off.
Yes, these specific products were clearly being advertised and sold on Costco’s website — we have the screenshots to prove it — but it's not an approved retailer for them. This practice, known as diversion or gray-market production, siphons as much as $63 billion of U.S. industry sales a year. And for the consumer, it means they may end up buying a product with dated packaging at best, and at worst, a counterfeit.
The Legality Of It All
The gray market refers to products that are sold through unofficial or unauthorized distribution channels. This often occurs when collectors (like one of the largest in the U.S., Quality King) get their hands on products from distributors that have legitimate contracts with brands or manufacturers, and then redistribute them outside of their intended channels. The collectors often offer salons or retailers up to 10 to 15% more than what they've paid for the products.
“There is a network of ‘collectors’ across the globe who acquire products from a variety of sources [and], in turn, resell these goods to mass markets,” explains Jason Lumsden, SVP of sales at OPI.
While consumers may not notice all this — they are, most of the time, just happy to get a good deal — brands are very aware of the issue. Both Target and eBay have been called out for diversion practices. (We reached out to Target for comment and received the following statement: "At Target, we are committed to offering our guests high-quality products and to following the law. The products you are referring to are authentic and are legally purchased and sold.")
As a result of these practices, Costco is very familiar with the inside of a courtroom, having had lawsuits from Yves Saint Laurent, Calvin Klein, and Omega brought against it for diversion and selling counterfeit items. (We reached out to Costco for comment, and someone from its corporate communications office — who requested anonymity — sent us this cryptic message: “Due to the nature of our supplier relationships, we prefer not to comment on availability.”) But brands haven’t been able to make solid, successful cases against these retailers because reselling products isn’t technically illegal.
“Legally speaking, the law doesn’t recognize channels in and of [themselves],” explains Pat Parenty, president of L’Oréal’s Professional Products division. “The minute that [a product] leaves your warehouse, the minute the truck pulls away, whoever’s buying from you owns those goods.”
Stranger Danger
While this is a long-standing problem for brands, why should you, the consumer, care? Well, as Parenty points out, you don't know where these products are coming from. "[Customers] don’t know the chain of custody, so they don’t get to know how fresh the product is, where it’s been, or where it was stored," he says. "The biggest problem is, they don’t get the expertise from the salon. The stylist doesn’t get a chance to diagnose their hair and share... the right products to use."
On top of that, brands often restrict the redistributors' supply enough to lower their inventory, which often causes them to turn to counterfeiting.
"Counterfeits are dangerous because the people who are making the products are taking shortcuts in how they're made," says Candice Li, VP for global public affairs and membership of the International AntiCounterfeiting Coalition, a D.C.-based nonprofit organization. "They might be adding harmful things, it might be made in very unsanitary conditions, [or] child labor may be involved in the making of some of these products.”
Plus, the product you’re buying could be expired — or be a completely different product altogether (like a body lotion in a shampoo bottle). “At the end of the day, all counterfeiters really care about is your money,” says Li. “They don’t care if they give consumers a bad product — or no product whatsoever.”
Essentially, counterfeited products are on a whole other level of stranger danger. Many of them are manufactured in China, according to Li. With counterfeits, companies have a little more pull in terms of taking action against distributors. The law protects the consumer, and retailers are required to remove the product immediately, or they become liable for any issues that may occur. In a case just last month, one woman was sentenced to 18 months in prison and has to pay MAC almost $1 million after being busted for selling counterfeit products out of her home.
Brands Taking Precautions
To ensure their products end up where they're intended to be, some big brands like L’Oréal draw up contracts with distributors. “You can control your brand's channel distribution by having all of the people you’re dealing with sign a contract agreeing [where] the product is intended to be sold,” Parenty says. “They’re never violating a law when they decide to sell outside of the channel; they’re only violating the contract... but because there’s a contract, that allows us to terminate that relationship.”
Another tactic brands use is coding their products, so that they can keep track of which distributors they go to. “If we were to walk into [a store] and go to the hair-care aisle…if there was a bottle of Redken shampoo, we can pick up that bottle, take it, buy it, and send it back to our diversion control in Ohio,” Parenty says. “They decode it, and we know exactly what distributor and what salon bought it, and we have a policy to either terminate or restrict the sales to those salons... It’s like whack-a-mole; we find them, we cut them off.” This happens every single day, he adds. Last time he checked, L’Oréal has terminated business with about 8,000 salons and 40 major distributors over the past 18 years.
For smaller companies — like all-natural skin-care brand Suki — the policing process is harder. Founder Suki Kramer tells us that her company mostly relies on customers and word of mouth in order to tackle the issue. It has even bought its own products from third-party distributors in order to take them off the market. Kramer would rather pay out of her own pocket than risk the brand's reputation. “Unfortunately, it’s our problem because we want to do right by our customer and give them a good product," she says. "We try to police ourselves, but it’s really hard to do. We’re a small company; we can’t keep up with all of it."
Shop Smart
Since we're not talking about products you're showing off or toting around — but rather lipsticks, shampoos, and cleansers that you're applying to your face, hair, and body — you should be especially wary as to where they’re coming from. Before you purchase anything, Li advises keeping in mind the three Ps: price, packaging, and point of sale.
Price: Li notes that while counterfeiters are starting to become savvier — pricing items closer to the cost of the original product so they don’t draw too many red flags — if the deal seems too good to be true, it probably is. If you know that MAC doesn’t typically participate in promotions or discounts, and a MAC foundation that normally retails for $50 is suddenly going for $20, it’s probably best to steer clear.
Packaging: Make sure to double-check the bottle, jar, or tube with the real deal to be on the safe side. “There are still some counterfeit products that have misspellings on the packaging, or the color is kind of off, or the logo looks kind of skewed,” Li says.
Point of Sale: Thinking of buying a product from a stand in the mall or from someone with a blanket on the street? Probably best to keep it moving, regardless of the discounted price the vendor might have lured you in with.
And, with more and more people shopping online, the internet has pretty much become a "plagiarism" playground. "The internet is a great tool for counterfeiting because [the counterfeiters] don’t need to be in the U.S., they don’t need to be on that street trying to sell you that blush or that perfume; they can just be online, and you can’t see who they are or where they are. And so, they’re able to put up really professional websites that look like, 'Hey, I can trust this website,'" says Li. "And you might think you’re getting a good deal, but what you’re getting in the mail is [probably] nothing — so now they have your money and your bank account information."
At the end of the day, your best bet is to go directly to the brand to purchase your product of choice, or to check its website and see who its authorized retailers are. Everyone loves a good bargain — but if it’s at the cost of our conscience or puts our health at risk, is it really worth it?
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