Drinking in the shadow economy

Alcohol consumption remains constant in spite of price increases, suggesting customers turn to illicit trade

Stuart Whitwell Intangible Business

Drinking in the Shadow Economy: a brand valuation perspective Stuart Whitwell, joint MD at independent brand consultancy Intangible Business

The ‘Drinking in the Shadow Economy’ report by the Institute of Economic Affairs (IEA) has found alcohol consumption remains constant in spite of price increases, suggesting customers turn to illicit trade. This implies government attempts to curb alcohol consumption are directly resulting in increased black market activity. The rise in counterfeit and non-duty paid alcohol loses the British economy approximately £1.2 billion per year on alcohol tax, as well as further uncalculated damages to alcohol brands’ value.

Alcohol counterfeiting is rife, with vodka, wine and even champagne fakes found in the UK. Vodka is the most commonly counterfeited alcohol with brands including Glen’s, Smirnoff and Stolichnaya susceptible to large scale counterfeiting operations. One Leicestershire based outfit distributed 165,000 bottles of counterfeit Glen’s vodka in 2008-2009, which impacts adversely upon the brands’ revenue and value.  The sophisticated black market makes identifying counterfeit alcohol difficult, which erodes consumer confidence in brands, leaving them questioning the contents of drinks bottles.

Media scandals about counterfeit vodka publicise that it is typically unfit for human consumption, containing chemicals that are used in cleaning fluids, anti-freeze and nail polish remover, posing serious side-effects and, in extreme circumstances, death. Bottles of counterfeit Glen’s vodka contained 235 times more methanol than the legal limit, whilst Drop Vodka contained Chloroform, a known carcinogenic.  Brands linked with such lethal consequences can cause customers to lose faith in the legitimate host brand, reducing consumer loyalty and depreciating brand value.

There has also been a rise in illicit alcohol imitating a brand’s design, name or description so consumers mistake it for another brand, so-called ‘passing off.’  In 2010, Diageo accused Intercontinental Brands of passing-off Vodkat as vodka. The blended spirit failed to meet industry standard specifications, but marketed itself similarly to many vodka brands. The ruling, in favour of Diageo, added vodka to the list of drinks names protected by law from lookalike brands which prevents cheaper alternatives from profiting on the back of prestigious and original brands. Counterfeiting and ‘passing-off’ are ‘black market’ activities conducted in a parallel economy, where the regulations and controls that legitimate companies observe are ignored. But alcohol companies also have ‘grey market’ activities to contend with, which involve the sale of legitimate goods through unofficial distribution channels, usually for tax evasion purposes. This non-duty paid alcohol floods the market with authentic branded bottles beneath the market price, consequently diminishing brand value.

To protect their brands and minimise losses from black and grey market activity companies must take action. Trading Standards have increased their vigilance; however with only six cases leading to alcohol duty tax convictions between 2009 and 2012, there is clearly a long way to go. By putting counterfeiters and fraudsters in front of the courts, alcohol brands can be seen to put up a united front against illicit alcohol to protect their brands and the market in which they operate.

An alternative to dealing with counterfeit alcohol is focusing on consumers and encouraging them to buy legitimate brands. By producing packaging that is difficult to replicate, such as holograms and watermarked labels, and educating customers about the benefits of buying legitimate brands, companies may be able to retain or even increase consumer loyalty. For example, Intangible Business worked on a project in the Far East where counterfeit production of a leading imported spirit brand was rife. Their solution was an on-label consumer promotion that was adapted every six weeks, to deter counterfeiters. Prizes were motivational and awarded regionally, with prize-giving events publicised on the local radio. This initiative resulted in a five-fold sales increase over three years, with consumers incentivised to purchase the real brand, instead of the counterfeit spirit which was marginally cheaper.

Under growing speculation that the government will introduce minimum pricing for alcohol and continue steady duty increases, it is important to note the IEA’s report. Flashbacks to the speakeasies of the American Temperance Movement, and projection that high taxation will cause illegal sales of vodka in Russia to rise to 60 per cent by 2014, demonstrates that government regulation and the black market have a closely intertwined relationship. Co-operation is needed between alcohol companies and the government to reach sensible conclusions with regards to these issues, which threaten both public health and brands. Companies should also be alert and innovative to control and limit the damage of the illicit alcohol trade.

Spot the difference - Vodkat have used similar colours, layout, logo and design to other vodka brands

1 November 2012