The wine and spirits industry did not wait for globalization and the growing power of China to discover the charms of fake and illicit bottles. These days, however, the problem of counterfeit wine is emerging with renewed intensity for the sector. The counterfeiters (often from Asia) really do exist, and some of their products are a potential hazard for public health.
The first installment in this two-part series offers information about which wineries counterfeiters like to target, what materials wineries can protect and the types of anti-counterfeiting technologies that are available.
Counterfeiting in the wine market
Illicit markets are traditionally difficult to analyze, but the case with alcohol is particularly revealing: There are no international statistics regarding customs seizures of illegal alcohol. Regional statistics are also often difficult to obtain, but the World Customs Organization (WCO) seems to be working to improve its documentation of such seizures.
Since wine is generally included in the “food and beverage” category in most countries (particularly the United States and France), the regions concerned may not segment seizure information in order to evaluate high-end wines specifically.
Plus, since counterfeit wines and spirits can be manufactured locally and for local consumption (such as in China and Russia, for example), not all counterfeit specimens come under the purview of customs officials.
For these reasons, statistics and analyses circulating on the phenomenon are based on estimates. This is the case with China, the focal country in counterfeit wine trafficking, where the corruption aspect also needs to be taken into account, and where statistics are often open to question.
A sensitive definition
Rather than use the umbrella term of “counterfeiting,” London-based market intelligence firm Euromonitor International distinguishes the sectors of this illicit market:
•Counterfeiting and illegal brands: illegal alcohol sold as a lawful brand, or branded bottles emptied and refilled with cheap alcohol. Illegal alcohol manufacture (branded or unbranded).
•Contraband: illegal importation of alcoholic beverages or raw materials such as ethanol.
•Illegal craft production: illegal craft production of alcoholic beverages for commercial purposes.
•Substitution: alcohol that is not intended for human consumption (e.g. pharmaceutical alcohol) redirected to the alcoholic drinks market.
•Tax leakage: legal alcoholic beverages produced locally, on which no taxes are paid.
The Organisation for Economic Co-operation and Development considers that an illicit trade in alcohol is based on three premises:
•Counterfeiting of products.
•Products that generate a fiscal loss.
•Products that are unfit for consumption.
The Chinese case: a growing burden on the wine market
Even though 120 countries produce wine, only about 15 countries play a significant role in the globalization of wine. The emergence of China on the international wine scene—as a producer, importer and consumer—has been accelerating for several years.
In 2011 the country’s vineyard acreage was the fourth largest in the world, according to San Francisco, Calif.-based Wine Institute, and plantings continue to increase.
Meanwhile, International Wine & Spirit Research estimates that Chinese wine consumption will reach 715 million cases per year by 2016, and a recent study by Vinexpo shows that China and Hong Kong have become the world’s second-largest market for the most expensive wines. (Nearly 50% of China’s imported wines are from France, which enjoys a strong brand image among Chinese consumers.)
Key issues involved in counterfeiting
According to Ce?sar Compadre, a reporter for the French daily newspaper Sud-Ouest, China has only featured prominently on the counterfeit wine market for the past four to five years, but it is of central significance for this illicit trade, where counterfeit alcohol is destined mainly for the local market. For French exports to China, the main targets are Bordeaux reds and Cognac, with Champagne and white wines being of marginal interest.
Counterfeiters tend to favor high-end European wines, however the growing appeal of U.S. wines in the Chinese market could cause the focus of counterfeiting to be partially redirected. According to the Wine Institute, China is the fifth-largest export market for California wine, and the value of wine exports there increased by 6% in 2013.
China is investing considerable resources to combat the problem of food and drink safety (the South China Morning Post reports that 60,000 individuals were detained during 2013 by a Chinese task force combating counterfeit food and drugs), yet the statistics about counterfeiting in China remain fragmented, and the Chinese organizations in charge of this problem are not always well coordinated. The recent creation of the Food and Crime Investigation Bureau based in Beijing could endow Chinese inspectors with more effective means of enforcement.
How much do consumers know?
According to the International Center for Alcohol Policies, 30% of alcohol consumed worldwide is illicit, and experts from Wine Spect ator estimate that 20% of the wine consumed worldwide is counterfeit.
Anti-counterfeit lawyer Nick Bartman once estimated that approximately 70% of the “imported” wine he saw in China was fake. By comparing production in France and retail sales in China, enologist Frankie Zhao agrees that 70% of Château Lafite Rothschild bottles sold in China are fake.
According to Wine Intelligence, 44% of Chinese consumers do not know whether or not the wine they are drinking is authentic. This factor significantly undermines consumption of the most prestigious imported wines and represents a strong barrier to purchase.
Counterfeit wine in the United States
Credible statistics about counterfeit wines are rare, but a handful of studies paint a clearer and more credible picture of counterfeiting across the globe.
A research study conducted by Marco Turchini (then researcher at the University of Florence in Italy) highlighted the significance of the impact of counterfeiting on local production. According to Turchini’s research, the loss of revenue associated with counterfeit Italian wines is approximately 2 billion euros ($2.7 billion) per year, and the primary international market targeted by this traffic is the United States.
Turchini explains that U.S. consumers lead Italian wine consumption in terms of value, and prices for Italian wine are quite high in the United States, where demand exceeds supply. This encourages the trade in counterfeit wines, which are sold for lower prices, the researcher says.
In the United States there is an important kind of brand counterfeiting that does not involve copying a well-known brand, but rather creating a false brand under an Italian-controlled designation of origin and guarantee (DOCG) such as Brunello. The counterfeiting of Italian brands targeting the United States come mainly from Europe, Asia and Latin America. To a lesser extent, the United States also is reported to shelter the counterfeiting of local Italian wines and/or Italian-related wines.
In another incident of domestic counterfeiting, a significant spirit bottle-refilling operation was dismantled in New Jersey in May 2013. The New Jersey Division of Alcoholic Beverage Control discovered during “Operation Swill” that 29 establishments in the region set up a fraudulent system of refilling empty, high-quality spirits bottles with lower-grade alcohols, which they then resold to customers at the original prices.
The role of the Internet
Unlike in the pharmaceutical industry, there are no global statistics on the sale of counterfeit or illegal wine over the Internet. A study by Günter Schamel, an Italian researcher at the American Association of Wine Economics, highlighted the significance of the trade in empty wine bottles on eBay. Generally speaking, illegal trade follows market trends, and the trade of empty Bordeaux Grand Cru bottles rocketed in 2009-10, the years covered by the study.
Some legal specialists in wine believe there is little incentive to make good counterfeit Bordeaux vintages visible on the Internet, since the use of discreet physical networks for distribution are lucrative. Yet many observers have a tendency to underestimate the importance of the web in China.
The website Yesmywine, for example, offers 5,000 different wines to 6 million registered customers, selling an average of 20,000 bottles per day.
Potential authenticity problems
Wine is a “living” product that evolves over time, and a long period of storage in the cellar risks altering the support of authenticating elements in wine such as isotopes. A protection technology used on wine intended for storage would therefore need to be controllable several years, or even several decades, later.
There is also the problem of a global stock of millions of bottles running out before the protected vintages have worked their way through. A counterfeiter might be tempted to fake an older, well-regarded vintage that was never actually protected.
Still wines can be transported in bulk and bottled at the destination region. This presents a problem of reliability of local intermediaries in anti-counterfeiting measures. Even sending the rolls of labels, the taggants (nanoparticles) or print files containing the security elements can present a risk if these elements are diverted from their intended object. Furthermore, this gives large quantities of authenticators to a potential counterfeiter, who then has the wherewithal to carry out reverse engineering.
Logistics and risks of counterfeiting
Protection of the logistics circuit is more a matter of track and trace. However, Turchini argues that it is possible to distinguish four main weak points at the heart of the wine supply chain:
•Risk of packaging and/or content counterfeiting (especially if an external supplier is used for bottling).
•Risk of packaging counterfeiting depending on the commercial structure and distributor involved.
•Risk of content counterfeiting during storage.
•Risk of packaging and/or content counterfeiting, which may be unintentional, by distribution of counterfeit wines from other networks.
Anti-counterfeiting technologies for wine
Anti-counterfeiting technologies are generally used by experts (customs officials, law enforcement services, private investigators, etc.). The end consumer is rarely involved in the authentication of the bottle he is drinking, although digitization permits a large degree of flexibility within the secure authentication system and who may or may not authenticate the product.
TAMPERPROOFING A tamperproofing device aims to demonstrate that the product has not been modified or substituted since leaving production. However, these devices are generally easy to reproduce. Including authentication elements in these devices, where possible, brings an additional level of security.
OVERT (VISIBLE) FEATURES Technologies provided with overt (visible) features are characterized by their accessibility to the user. “Overt” authentication features include holograms and, more often, optical variable devices (OVDs), variable inks or films, watermarks, secure printing methods, etc. These devices reveal a unique feature when manipulated (concealed image, irisation, embossing, etc.). They are intended to be evaluated by individuals with at least minimum know ledge of what needs to be checked. By definition, the inspector does not use specific or “intelligent” tools for this inspection. Most of these technologies can be used on existing or specific wine labels.
For an unsuspecting public, imitation of these features can easily deceive and give false assurance about the identity of the product. Their cost is highly variable. Near-field communication (NFC) technology can also be used with overt features (e.g. hologram stickers) and enable the accessible product to be authenticated using a mobile device. The NFC further permits a simple authentication to be validated by the end user, with virtually no risk of error of interpretation.
COVERT (CODED OR HIDDEN) FEATURES Technologies provided with covert features are characterized by the need for an expert scanning system, as these technologies cannot be read with the naked eye. The inspector must have the right tool to provide verification (embedded or remote software), and he must be trained how to use the tool.
“Covert” authentication features include hidden or coded imprints, digital markings, taggants (nanoparticles), added materials (chaos), radio-frequency identification (RFID) and certain intrinsic properties of the product material or its packaging.
These features, which generally offer a good level of security, are extremely variable in terms of cost and complexity of integration. If the taggants are easy to add to an ink or dye, integration of an RFID or NFC chip adds complexity to the process. A connection to a database containing references may also prove necessary.
Covert technologies covered are either extrinsic (added to the product or its packaging during the manufacturing process) or intrinsic (they result from risks associated with the material used or the manufacturing process). Within this technological family, the most frequently used form of intrinsic marking is the imaging of a specific zone of the product. This image becomes the product’s authenticating signature.
The “chaos” of materials usually found on the market includes bubbles, particles and fibers. This “chaos” may be obtained by the addition of materials to a product or by using the intrinsic characteristics of this product.
FEATURES INVOLVING SCIENTIFIC ANALYSIS (FORENSIC) “Forensic”-type features include physical markers such as taggants (radio frequency microchips), or biological markers such as DNA and other physical and chemical parameters (isotopes, etc.). Portable analysis equipment or laboratory material is necessary to carry out this type of check properly. For them to be particularly reliable, these elements demand a rigorous and sometimes lengthy protocol for checking.
Forensic technologies are based on scientific analysis, and they necessitate the use of laboratory tools. Great progress has been made in the miniaturization and mobility of these tools. A rigorous protocol must then be put in place to capture the elements used for authentication. In some sectors it may be necessary to take samples, but in the case of wine this would entail the destruction of the product.
TRACK AND TRACE TECHNOLOGIES These technologies come from the logistics industry and make it possible to ensure that goods are traceable. As a result of numerous incidents involving the recall of goods, a diverse range of technologies has emerged in this area of activity. The barcode and RFID are the two most frequently quoted technologies in this environment. The application of radio-frequency identification has been extended as a result of the anti-counterfeiting campaign, since many counterfeiting risks can emanate from the heart of the supply-chain (transporter, importer, etc.) and necessitate not only traceability but also identification by unit.
TAMPER-EVIDENT FEATURES Tamper-evident features are procedures that prevent access to the protected objects. Seals or markers form part of such techniques.
Turchini reveals in his study from the University of Florence that the Italian government created official seals to protect the highest quality wines under the designations DOC and DOCG. Yet such a technique cannot protect against malicious acts by counterfeiters, as the unique character of the official seal cannot be guaranteed.
Finally, the practice of refilling bottles poses a major problem in the development of anti-counterfeiting techniques. This problem arises the same way an empty box from a high-end supplier may be used to repackage a counterfeit product. For the purpose of protecting wines and spirits, the most appropriate technologies for preventing the uncontrolled reuse of packaging are those that cause the destruction of elements by opening the bottle, such as capsules and other coverings.
Selecting anti-counterfeiting technology
When dealing with the counterfeiting problem, a solution is sometimes reached through negotiation between the rights-holders and the counterfeiters. Sometimes this involves a discreet financial compromise, more frequently legal action is required. Yet such strategies for dealing with counterfeiters or unscrupulous importers are rare in the wine business. The outcome of any legal action is especially uncertain, and the process can be slow and costly.
Alcohol counterfeiting is likely to attract large-scale criminal organizations, and the counterfeiting of high-end vintages has been accelerated by price inflation. For example, a Russian factory recently was observed to be manufacturing more than 11,000 illicit bottles of alcohol per hour, according to the Organisation for Economic Co-operation and Development’s task force on charting illicit trade. The group maintains that there is a growing trend toward the industrialization of alcohol counterfeiting techniques in Europe, with raw materials imported from Asia or Eastern Europe and destined for packaging in other territories for local consumption.
Yet there are also smaller scale operations consisting of a few individuals. Generally there are three types of counterfeiters: direct manufacturers, suppliers of empty bottles or illicit alcohol, or intermediaries within bars and clubs.
It can be difficult for winegrowers to keep up with the global scale of structures that are illicit, mobile and not sufficiently pursued by the local authorities. In fact, Chateau Latour confirmed th at “the remote authentication of Grand Cru wines with wine merchants is virtually impossible.”
Since traceability methods are not always imposed on the Chinese importer—and importers themselves are not always adequately monitored—protecting bottles upstream appears to be essential.
In the second installment of this series, in the October 2014 issue, we will examine the technology behind RFID and NFC technology as well as the criteria for choosing an anti-counterfeiting system.
Eric Przyswa, consultant and associate researcher at Mines ParisTech at the Centre for Research on Risks and Crises, conducts research in the area of human security in industrial environments. He also acts as a consultant in this field to institutions and businesses. His works has appeared in academic journals in France and abroad.
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