Ulmart plans to expand its online marketplace, and the Russian e-commerce giant says it needs to get ahead of sellers’ offering knockoffs.

Ulmart, Russia’s largest online retailer, intends to guard against fake merchandise by using the technology that lies at the foundation of digital currency bitcoin.

Ulmart is considering using blockchain, a distributed ledger technology, in an effort to stamp out counterfeit items appearing on the merchant’s online marketplace. The move also would reassure consumers they are getting genuine goods by adding brand authenticity stamps to Ulmart’s listings, leading to an increase in the online retailer’s sales, a company executive says.

Blockchain—which advocates describe as an independently validated, distributed and unalterable digital transaction ledger—has the potential to revolutionize the retail industry, according to Brian Kean, Ulmart’s chief international officer. The technology allows companies to track a product’s path from the manufacturer to a fulfillment center or store. Such information enables a consumer to verify that, for example, the iPhone she’s eyeing is, in fact, an authentic Apple product. The ledger also would reflect any product ownership changes from a third-party seller to consumer or from consumer to consumer. Ulmart, No. 30 in the Internet Retailer 2016 Europe 500, plans to have a blockchain program set up by the end of the summer.

“Our marketplace is growing fast, and we want to stay ahead of this problem,” Kean says. “The matter is one of priority.”

The retailer, which is headquartered in St. Petersburg, has 7,000 employees and more than 450 fulfillment centers and order pickup locations in nearly 250 cities across Russia.

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Marketplace momentum

Until recently, web-only Ulmart only sold its own merchandise online, but now about 20% of its business comes from other merchants that sell on Ulmart’s marketplace, Kean says. Ulmart plans to hit an even split between its own products and third-party offerings by 2020, at which point annual gross merchandise value will be $5 billion to $7 billion, he says. The Russian merchant has reported 49.3 billion rubles ($873.5 million) in sales in 2016, up 1.9% from 48.4 billion rubles ($857.5 million) in 2015. Nearly two-thirds of Ulmart’s sales come from consumer electronics, a category that’s a likely target for counterfeiting.

As its marketplace expands, the issue of counterfeit products “becomes more real for us,” Kean says, and the company has noticed more fake items cropping up. He declines to say what percentage of items are found to be fake but say it’s low.

“Given that a seller will offer the item on our platform and have it financially and logistically cleared via our ecosystem, if the item is counterfeited, then the customer will return to us. This becomes our problem,” Kean says. “As we move forward and don’t really see a concerted effort by leading sellers to combat this issue, we realize that we will need to do so in order to A) protect our customers and B) protect ourselves.”

Between 5% and 30% of goods sold in Russia are counterfeit, with the rates varying significantly by category but highest for fashion inventory, Kean says. “As we plan to aggressively roll out our third-party selling platform, we realize that quite fast, we could get swamped [with counterfeit issues],” he adds.

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Kean also estimates that Ulmart loses $25 million to $75 million in annual sales because customers buy cheap knockoffs elsewhere rather than legitimate products on Ulmart’s site.

Over the last few years, people have realized that these features are real breakthroughs in security and reliability.
Paul Brody, principal and global innovation leader in blockchain technology
EY

Ulmart hopes to join forces with major manufacturers by creating a public “ledger of authentication,” where a product would be scanned at the point of manufacture using a blockchain program, which would launch a supply-chain history for the item and trace its journey from the production line to Ulmart and then to the end consumer. Anyone could then point to a bar code or QR code—an image made up of pixelated black and white squares that typically stores a URL or additional information to be accessed by smartphones and other devices—to pull up a product’s history.

Kean doesn’t expect Ulmart’s efforts to be costly, but he can’t estimate the investment because he first has to negotiate with manufacturers to implement blockchain control procedures such as scannable tags or eventually embedded chips. Once the manufacturers set up a scanning system for product authentication, Ulmart will link into that software. Another of Ulmart’s initiatives is to have third-party sellers get their manufacturers to launch the authentication process. While ideally, all items would be authenticated, the mass merchant plans to target certain product and price categories since, in the early stages, the new protocol might be too costly for many manufacturers, Kean says.

Systems based on QR codes and databases can be implemented for between $200,000 and $400,000, says Paul Brody, principal and global innovation leader in blockchain technology at accounting and professional services firm EY, formerly known as Ernst & Young. The price tag can go up if more advanced techniques such as embedding customized chips into products or developing tracking systems on each container are employed, he says.

As the blockchain program catches on, Ulmart will no longer accept non-authenticated products for large, branded items such as an Apple product that comes to the company without any way to authenticate it. But Kean says the same requirement is unlikely to apply to a craft item that comes to Ulmart from a small shop with a handful of employees.

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Ulmart’s information technology and fraud team of four employees plus Kean will oversee the blockchain project, which includes designing and integrating an “authenticated” symbol to feature on anything sold on its platform.

“[This] will make us more reliable and not just grow sales but [reduce returns] from consumers who now have the knowledge to understand that the item for $3 is a knockoff and the one we are selling for $5 is real,” Kean says.

According to a 2016 report released by the Organisation for Economic Co-operation and Development and the European Union Intellectual Property Office, the global trade in fake goods is worth nearly half a trillion dollars each year, or about 2.5% of worldwide imports. The report is based on an analysis of nearly half a million seizures by customs agents between 2011 and 2013.

U.S. brands were hit the hardest and represented 20% of all seizures, the report says. Up to 5% of goods imported into the European Union are counterfeit, and, according to the study, China is the top producer of fakes by far with 63.2% of seized items originating there and another 21.3% from Hong Kong. According to the OECD and EUIPO study, footwear is the item that is most frequently counterfeited, but fake products are common with such luxury items as handbags and perfumes, plus machine and auto parts, pharmaceuticals and toys.

Building out blockchain

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Blockchain is the underlying technology behind online currency bitcoin. Blockchain takes the core bitcoin foundation and seeks to apply the concept to other troublesome issues outside of the financial services sector.

Now, it’s possible for a shopper to look up the serial number on a carton of milk and see the record of it having been sold in Toronto in July, but if it’s November in Shanghai, “you can make a reasonable guess if the product was counterfeit or diverted,” EY’s Brody says.

Blockchain’s “secret sauce” is that it replaces an appointed authority, such as a regulatory agency, with a consensus-based model, Brody says. Transaction approvals and record-keeping become more secure as more participants join the network because copies of any system data are replicated and retained on computers across a vast, decentralized network.

“This makes it impossible to counterfeit data since you can always compare one copy to others and see efforts to change things,” Brody says. This is where the distributed ledger comes in, and accountability significantly improves.

“Over the last few years, people have realized that these features are real breakthroughs in security and reliability,” he adds. “As the internet has become less secure and reliable, the attraction of adopting this technology has increased substantially.”

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Brody points to the wine industry as a retail pioneer in the blockchain space. The impact of counterfeiting is huge for wine producers, plus governments lose out on tax revenue and consumers can be exposed to health and safety risks with “falsified” wines.

EY recently collaborated with startup EzLab to create the Wine Blockchain EY, which certifies the traceability of wine and allows for buyers to receive origin and quality guarantees. A QR code is printed on the bottle’s label and links to records on the winemaker, composition of the libation and details on its processing.

EY currently is talking to several other clients about product tracking ventures, Brody says. One factor that will help spread the use of blockchains is the fact that many consumers own smartphones that can read QR codes, he adds.

“We think more and more anti-counterfeiting and product traceability tools will be put in place by all types of retailers,” Brody says.

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