How Wine Fraud Affects Global Wine Market Research Paper Sample

Fake Wine is a World’s Problem

Counterfeiting is a traditional problem that has been known to any society for over the past 2,000 years. Regardless of the amount of resources allocated to fight this vice, counterfeiting of products and brands has become one of the major challenges of global market and trade. The issue has been complicated with the fact that the wine industry has continued to grow with emergence of new players like China, Singapore, and Japan. The growth has brought with it many challenges like wine fraud, which has negatively influenced the global wine market. Today, among the major challenges to this market is the increased cases of counterfeit wine. The high demand for wine against its limited supply has become the main drive for wine fraud and major complicated matters. With these challenges, it is without any doubt that wine fraud negatively influences the global wine market.

The thriving wine industry has become the main breeding ground for counterfeits and wine fraud. As the price of wine and brand bottles continues to rise, wine counterfeits have become inevitable due to its high demand. Globalization has opened up international markets and thus, expanded trade and markets for wine products. The market of counterfeit products can be categorized into two groups, namely the primary market and the secondary market. The primary counterfeit market is where consumers unknowingly purchase counterfeit product. For example, a consumer buys a fake Champagne believing that it is a genuine one. On the other hand, secondary counterfeit market is such a market where consumers knowingly purchase a counterfeit product for because it is cheaper and easily affordable. This has made it difficult to fight wine frauds due to the different laws and rules governing fraud and counterfeits in various countries. According to the research conducted by Robinson (2010), such factors as the increased demand for wine, the limited amount of fine wine, and the emerging markets for wine are the main driving force for wine fraud.

Thus, such factors as the increased demand for wine, improved technologies that makes it easier to counterfeit and other facts like emerging markets, powerful worldwide brands, weak international and local enforcement, and globalization have been attributed to the increased counterfeit wines on the global market. The present state of wine market causes worry among the wine producers as their business is quite negatively impacted by wine fraud. According to economic research performed by Taylor (2016), 30% of wine consumed globally is counterfeit, and approximately 15% belongs to the highly regulated markets such as in the United States and Europe. In his dissertation paper, Robinson (2010) has estimated the counterfeit wine market in the USA is $30 million every year, while that of global fine wine market is estimated at $3 billion every year. However, the global economic value of counterfeiting is estimated at $650 billion per year (Chaudhry & Zimmerman, 2009). Thus, looking at the new findings and analysis of the global wine market, one can find various ways, in which wine fraud has influenced the global wine market.

Overview of the Global Wine Market

The global wine market is very dynamic. Today, several new wine producing countries have emerged on the global markets, thereby increasing the competitive nature of the international wine market. With the new players like China, Japan, and Singapore joining the list of international wine producers and consumers, the wine industry has grown tremendously. Silverman Castaldi, Baack, and Sorlien (2002) indicate that as early as in 1998, the global market for wine was already estimated at 6.8 billion gallons. However, this volume has greatly increased, and today’s trend outlook of the global wine market is very dynamic. According to a report by BNP Paribas (2015), over the past 20 years, wine export has doubled, and new producers like South Africa, New Zealand, Chile, and Australia have increased their export volume by 370%. There is currently a tough competition for the global wine market among the leading producers, with Asia market emerging as the most competitive one. France is still the leading producer of wine by volume, and 84 out of 100 of the top wine brands are French (BNP Paribas, 2015). The global wine market research indicates that there is a decline in wine sales on the traditional, and wine exporters currently shift their focus to the emerging markets like China, African and Asian countries (Singapore Wine Vault, 2015). The growth rate of the global wine market has been predicted at 2.86% in regard to wine revenue and 1.36% in terms of production from 2015 to 2019 (Singapore Wine Vault, 2015).

According to the research done by Morgan Stanley, the global wine trade has continued to grow and it is currently at US$30 million every year (Kierath & Wang, 2013). The supply demand analysis of global wine trade shows that presently, there is high demand for wine, while supply is low (Kierath & Wang, 2013). Furthermore, the research by Mustacich (2015b) shows that import demand is currently driven by China, Germany, and the United States, the countries that consume more than they produce. Consumption estimates for China are predicted to reach 400 million cases by 2016, which is far higher than the forecasted production by the Chinese government (Kierath & Wang, 2013). According to the research done by Kiereth and Wang (2013), the Chinese wine consumption has doubled over the past five years, creating a large deficit in terms of supply. In this regard, China’s wine import has grown rapidly, and now, one out of five bottles consumed in China is imported. The demand for bottled wine has also been on the increase. Accordinggly, the export trend for bottles has been positive and the price of the bottle continues to fall (Kierath & Wang, 2013). Moreover, due to this high demand for wine against low supply, there are increased wine prices from the authentic producers, which has created new opportunities for counterfeit producers.

The Evidence of Wine Fraud

Many experts have stated that it is challenging to identify counterfeit wines accurately (The Associated Press, 2013). Therefore, counterfeit products have become increasingly difficult to analyze and discover. This is attributed to the emergence of new technologies and the ways of developing the products that are difficult to distinguish from the authentic ones (Simpson, 2011). Illicit market for wine is also difficult to analyze. Moreover, just a few research studies have been done in this area. Pryzswa (2014) outlines some of the issues that make it difficult to analyze counterfeit market and products. According to Pryzswa (2014), the challenges of analyzing illicit wine trade are the complexity of illicit markets and the lack of international statistics on the custom seizures of counterfeit wines. Another challenge is the fact that regional statistics of counterfeits wines are difficult to obtain from many countries. Forth, counterfeit wine can be produced locally, and if not, exported makes it difficult to obtain custom statistics on the volumes of its exports. Finally, the lack of adequate information in the internet on the distribution of counterfeit wines as well as different laws and rules governing counterfeits in different countries has further complicated the matter.
Wine fraud encompasses different aspects of activities involving wine market and trade. To analyze the evidence of wine fraud clearly, a brief definition of some key terms is necessary. Counterfeiting and illegal brands refer to illegal wines sold as lawful brands (Pryzswa, 2014). Illegal brands can also mean branded bottles that are refilled with non-authentic wine (Pryzswa, 2014). On the other hand, contraband wine refers to the illegal importation of wine and/or raw materials for producing wine (Pryzswa, 2014). Other terms include illegal craft production that involves illicit craft of production of wine for commercial purposes (Pryzswa, 2014). On the other hand, substitution refers to selling wine, which that was not intended for human consumption, to consumers (Anderson, 2004). A good example is selling wine meant for pharmaceutical purposes. Finally, tax leakage and evasion refer to wine that has been produced locally and no tax was paid (Pryzswa, 2014).

According to OECD, as reported by Pryzswa (2014), wine fraud can be classified in three categories: counterfeiting products or brands, products that result into financial loss, and finally, wines that are not fit for the human consumption. This research has showed that 30% of alcohol consumed globally is illicit, and 20% of wine consumed globally is counterfeit (Pryzswa, 2014). It also revealed wine fraud in three major players in the wine industry, such as the UK, China, and the USA. Thus, the survey conducted in the UK had showed that 18% of respondents admitted to have consumed counterfeit wine (Pryzswa, 2014). The study also showed that 25% of wine sales were illegal, and illegal wine sale in Midlands alone was valued at 180,000 euros (Pryzswa, 2014).
Another market research by Taylor (2016) showed that China’s wine market has created a high demand for empty wine bottles. Fraudsters in China are reported buy empty bottles at high price in order to refill them with less expensive wine (Taylor, 2016). A report on wine fraud shows that Chateau Laffite Rothschild 1982 wine is priced at $5,900, while its empty bottle is priced at $1,500 on the black market (Taylor, 2016). This practice of obtaining a genuine bottle and refilling it with counterfeit wine has been on the rise globally, and it is an evidence of wine fraud (Mercer, 2014).

Another evidence of wine fraud can be seen by the number of lawsuits involving counterfeit wine products. For example, Rudy Kurniawan was convicted to ten years in prison due to the charges of counterfeiting wine brand (Mercer, 2014). As Mercer (2014) states, over 500 counterfeit wines were destroyed in Texas. Similarly, European wine exporters have increasingly advocated bottle smashing after the authentic wine has been consumed to prevent any attempt of refilling.

The Size of Counterfeit Market

In order to determine the impact of wine fraud on global wine market, it is important to discuss the size of counterfeit wine market. Many experts have stated that it is impossible to determine the size of the counterfeit wine market accurately because many sales occur privately, and counterfeit trade is woven into a legal market. Furthermore, many producers do not report the case of counterfeits because they fear scaring their customers away (The Associated Press, 2013). In 2008, the United States estimated the value of global counterfeit market at $500 billion, with an estimate growth rate of 1,700% over the past 10 years (Chaudhry & Zimmerman, 2013). However, the approximate size of counterfeit wine market is at $30 million, with an estimate growth rate 5% over the last 5 years (Robinson, 2010).

Wine Fraud Impact on the Global Wine Market

There is little research done on the impact of wine fraud on the global wine market. Similarly, few scholarly articles on this research have been identified. This inadequate research work on wine fraud and its impact on the global wine market make this research report important to the wine industry. According to Chaudhry and Zimmerman (2013), product fraud affects various players on the market, including producers, consumers, wholesalers, and retailers, home country, host country, and IPR owners (Chaudhry & Zimmerman, 2013). It also affects export and import trade, leads to the lack of trust between different trading countries and the loss of revenue. As the growth of counterfeit market increases, a more negative impact is realized on the global wine market. There are a number of negative impacts of wine fraud on the global wine market.

The Reduction of Market Size

First, wine fraud leads to the reduction of market size for authentic wines. According to numerous research studies, many producers of wine shy away from the markets that produce counterfeit wines. Thus, Chaudhry and Zimmerman (2013) show that most producers avoid host countries, countries where counterfeit products are manufactured out of fear that the products from these countries may be counterfeited. This leads to a shrinking market size for authentic wine. As counterfeit market size increases, there is a direct decrease of the market for authentic wine. According to a research by Wu (2015), the wine industry only thrives when there is a big market size for wine. Therefore, as the market size is reduced due to wine fraud, it has a negative impact on the global wine market. Furthermore, wine fraud in host countries blocks new players from entering the market, thereby shrinking the global market for wine. For example, the same study shows that the size of authentic wine in China has reduced in the last ten years due to increase in counterfeit wines (Wu, 2015).

Loss of Direct Sales

Secondly, wine fraud leads to the direct loss of sales to the producers of authentic wine at all levels of wine market. Counterfeit products remain to be one of the leading causes of loss of sales to authentic wine producers. Research has shown that Argentina has suffered a reduction of 43% on the number of sales due to the increased counterfeit market for wine (Wu, 2015). Similarly, Vineland estates, one of the leading sellers of ice-wine to China, has seen a reduction of total sales of ice-wine by 5% just over 5 years (Robinson, 2010). This has been attributed to the growth of counterfeit wines on the global market. In addition, Canadian ice-wine has also reported a great reduction on sales due to this vice since its legitimate sales have dropped by 50% on the global market due to counterfeits (Robinson, 2010). This reduction of sales has a potential impact on the global wine market because the low number of sales of authentic wine reduces the global size of wine market, with some markets closing down. Similarly, the market capitalization is determined by the number of sales on the market. Therefore, the reduced sales lead to the low market capitalization of wine.

Size of Consumer Market

Wine fraud leads to the reduction of the size of consumer market since the increase in counterfeit wines often leads to consumer distrust. Similarly, since many consumers lack the ability to identify between counterfeit and authentic wines, they often avoid the brand all together. Therefore, many producers find it hard to regain consumer trust. This leads to a reduction of the consumer market size. For example, France has lost a large percentage of consumer market in China due to the numerous reported cases of counterfeit wine (Chaudhry & Zimmerman, 2009). In this regard, many Chinese consumers have resorted to other brands, which led to a reduction of consumer market (Wu, 2015).

In addition, wine fraud leads to consumer anxiety that tends to affect the global market for wine directly. The research on consumer behavior conducted by Robinson (20100 shows that consumers tend to avoid brands that are associated with counterfeits all together due to fears of poor quality and health risks. Moreover, another research offered by Mustacich (2015a) also shows that because consumers have no ability to distinguish true wine from counterfeits, they find it safer to avoid the brand. This leads to the reduction of consumer market, thereby negatively affecting the global wine market. According to Chaudhry and Zimmerman (2013), the French consumer market has reduced by 5%, and this has been attributed to the rise of counterfeit wines. Similarly, the U.S consumer market for authentic wine abroad has decreased by 2% due to the rise of counterfeit wine (Taylor, 2016). Taylor (2016) has also reported that the consumer market size for authentic wine has a negative growth rate of 0.9% due to the high growth rate of counterfeit wine, which he estimates to be at 10%. Furthermore, the reduction of consumer market for authentic wine is caused by the stiff competition from the counterfeit wine.

Financial Impact

Wine fraud has led to financial loss among various players on the market, which in turn negatively affects the global wine market. In addition, the fraud influences the producers of authentic wine by reducing their revenue cost. The producers of authentic wine lose revenue from sales and increased cost of combating wine frauds. According to the research by Chaudhry and Zimmerman (2013), producers spend great amount of money in combating counterfeits thereby raising the cost of production for their wine. This leads to high price for authentic wine that becomes unaffordable to many consumers. In addition, high cost of wines leads to low sales, thereby reducing producers’ revenues from sales.

Producers also spend money in lawsuits because of counterfeit wines and the necessity to combat the market of counterfeit wines. The money spent on cases related to the illegal practice could have been channeled into production to increase the overall production of wines for the market. Furthermore, producers suffer financial loss from the stiff competition by counterfeits’ producers. Therefore, due to the high volume of counterfeit wine on the global market, many producers of authentic wine face stiff competition for the market share. For example, French wine has reduced the market share in China due to the increased competition from the producers of counterfeit wine (Wu, 2015). Mustacich’s (2015a) finding shows that there is one counterfeit bottle of French wine in China for every authentic bottle of French wine.

Similarly, consumers also suffer financial loss due to wine fraud. The consumer, being one of the key players on the global market, has a direct influence on the global wine market. When consumers suffer financial loss, it directly affects their purchasing power for authentic wine and consequently, the global market for wine. It is evident that any increase in counterfeit wines leads to the high price of authentic wine due to high cost of production attributed to anti-counterfeit measures like bottle protection and packaging. A good example to demonstrate the effect of counterfeit on the prices of other products is the increase in the price of champagne. The price of the product has increased tremendously on foreign markets due to high volume of counterfeit wine.

Governments also lose revenue due to wine fraud like counterfeit wine and contraband wine as well as tax evasion by the locally produced counterfeit wines. According to Chaudhry and Zimmerman (2013), government have a direct influence on global market for wine based on the fact they are responsible for enacting trade laws and setting up tariffs and taxes that impact this market. Good examples are laws governing export and import trade as well as those providing fair competition among wine producers. However, wine fraud makes the governments of many countries lose revenue in numerous ways. One, local producers of counterfeit wine always do not pay taxes. Secondly, counterfeit wines often scare away foreign investments, leading to the loss of revenue that the government would have obtained from taxing the companies.

Import and Export Market

Counterfeit wine reduces revenue from import and export trade of wine. For example, French wine companies have reduced their sale volume in China due to the high level of counterfeit wine. This has reduced the total amount of money that French wine companies pay China in taxes. Finally, governments spend a significant amount in combating counterfeit wine business. In this regard, wine fraud has reduced the amount of money that governments allocates to expand global markets. For instance, more money and resources used in combating counterfeit wine would have been channeled into constructing better road transport systems that would help open up international markets for wine. More to say, transport is one of the major challenges of global markets, while better road, sea, and air transport will significantly open up wider markets for wine. Thus, wine fraud leads to loss of revenue that would have been used to develop various transport systems for the regional and international markets.

Tax Evasion

Another area of wine fraud involves the evasion of tax by local producers as well as foreign producers. This has a negative impact on the global wine market because it leads to unfair competition. Producers that deal with contraband wines flood the market with cheap wines, thereby affecting the authentic wine producers. In this case, many authentic producers of wine withdraw from other markets because of the unfair competition that is caused by wide disparity in wine prices. A research by Pryzswa (2014) on consumer behavior has showed that consumers, in most cases, do not care on the authenticity of the wine they buy; rather, they mention low price as their main drive for purchase of a particular wine. For instance, a research done by Wine Intelligence indicated that 44% of Chinese consumers cannot identify whether the wine they consume is authentic (Pryzswa, 2014). This factor weakens the consumption of the authentic wine, thereby creating a barrier to their purchase (Pryzswa, 2014). Another research study indicates that there is an increasing growth of contraband wines in many countries, thereby directly affecting the regional market (The Associated Press, 2013). Thus, the research findings by Anti-counterfeit Nick Bartman also indicate that an estimate of 70% of the imported wine in China is counterfeits (The Associated Press, 2013).

Supply and Demand Chain Market

Wine fraud also affects the supply demand chain of the global wine market due to the influx of counterfeits wines to the market. This has led to a high supply of wine on the competitive markets like China, Singapore, South Africa, and other parts of Asia. The high supply of wine on these markets means the traditional authentic wine producers have to face stiff competition. The increased supply of wines has opened up other markets and widened the size of consumer market. There are cases where authentic producers of wine have had to withdraw from the market due to high supply of wine that has led to lower prices (Silverman et al., 2002). According to Pryzswa (2014), the current size of counterfeit wine is estimated at $30 million with an estimated growth rate 5% annually. This has reduced the global market size of authentic wine by a great margin.

Moreover, the high supply of locally produced counterfeit wine has affected the local markets. For example, the high volume of counterfeit wine produced locally in China has taken the local market from the foreign producers like France and the United States. The research showed that the top three Chinese domestic producers had held a market share of 49% by 2009 (EU SME Centre, 2011) (Silverman et al., 2002). In addition, wine fraud, such as tax evasion by local producers, leads to cheap wine products on the market, thereby affecting the global market in terms of supply and demand of authentic wine. This also leads to the barriers to entry into the market by other authentic wine producers that fear that they will not be able to compete with low cost wine producers.

Wine fraud has several impacts on import and export market. First, counterfeit wines have led to the reduction in the import export trade as locally produced counterfeit wines flood the local market, thereby reducing the volume of authentic wine imported (Adams & Franson, 2013). Secondly, counterfeit wines lead to increased tariffs for wine, which leads to the barrier to entry to the local market by foreigners. Third, contraband wines lower the price of wine in the country, thereby putting pressure on the authentic producers to lower their prices in order to remain competitive. Moreover, counterfeits wines cause an unfair competition on the global market because of different tariffs imposed on different wines (Wu, 2015). For instance, authentic wine producers often are subjected to high tariffs as compared to the producers of counterfeit wine.

Brand and Reputation

Wine fraud has also negatively affected the global wine market by negatively influencing brand and reputation of the authentic wine. The global wine market, as indicated by Wu (2015), is directly influenced by the brand and reputation of the global payers on the wine market. Unfortunately, several brands have lost their reputation and brand image mainly because of counterfeit products. Research on consumer behavior shows that consumers tend to avoid brands that are affected by counterfeits (Chaudhry & Zimmerman, 2009). This is sad, noting that authentic wine producers in the market work extra hard and invest a great amount of their resources in building brands that give them an advantage over other competitors. However, the counterfeits wine producers steal their brand names and destroy their reputation through the production of counterfeited cheap, low quality wines. This results in the loss of goodwill, the loss of revenue, customer loyalty, and the brand dilution (Chaudhry & Zimmerman, 2013).

Brand protection is essential for an organization to remain competitive on the global market. Therefore, wine fraud poses a great risk to the global market because some businesses will be forced to withdraw from a particular market due to their tainted reputation. This leads to a negative growth of the global market. In addition, authentic wine producers spend more money in brand protection, thereby reducing the amount of money allocated for market research (Chaudhry & Zimmerman, 2009). Brand dilution also leads to the slow global market growth rate as it increases the barrier to entry into new markets.

Positive Impacts of Wine Fraud

Global Market Expansion

However, even with the many negative aspects associated with wine fraud, it also has positively affected the global wine market. The growth of the global wine market can be attributed to the influx of counterfeit wine on the global market. Research findings by Chaudhry and Zimmerman (2013) show that there is an exponential market growth for wine and it is estimated at 10% annually. Wine fraud has contributed to this growth in several ways. One, counterfeit wine has opened up markets for the middle class consumers. The main goal of counterfeiting is to increase the volume of a brand, reduce the price of purchasing, and avoid taxes, thereby selling at a lowering price to cover large consumer base.

Research by Gilman, Goldhammer, and Weber (2011) has shown that wine, until recently, has been a drink for the wealthy consumers only because of the high price for the authentic wine. However, counterfeit wine has led to production of cheap affordable wine that has expanded the size of the consumer market. Research by Mustacich (2015b) shows that countries that were long considered as the middle class consumers like China, Singapore, South Africa, and most countries in Asia and Africa increasingly see a growth in wine consumption. For example, China has seen a 50% growth in wine consumption over the last 5 years, and this growth is projected to reach 70% by 2019 (Chaudhry & Zimmerman, 2009). Adams and Franson (2013) observe that China’s growing middle class increasingly consumes premium wines while the wealthiest consumers go for the best authentic wines.

Counterfeit wine producers are also able to manufacture cheap wines that offer attractive price to the middle-income earners, which has expanded the global wine market. Furthermore, counterfeit wine producers have increased the demand for authentic wine by the middle-income consumers (Gilman, Goldhammer, & Weber, 2011). For instance, the research by Anderson (2004) shows that most middle-income consumers, after consuming the counterfeit wines, desire to taste other more expensive wines, thereby creating the market for authentic wines. In addition, counterfeit wine causes stiff competition in the market share, forcing authentic wine producers to reduce their prices (Wallace, 2008). For example, the cost of high-end authentic wines was reduced by more than 20% in late February 2012 (EU SME Centre, 2011). The reduction in price was attributed to factors like increased volume of counterfeit wines and market turmoil experienced in Europe (Staake & Fleisch, 2008).

Market for Empty Wine Bottles

Secondly, wine fraud has created a market for wine bottles. This is evident on the China counterfeit market that has created a high demand for the empty bottles of authentic wines (Taylor, 2016) (Staake & Fleisch, 2008). Fraudsters are said to be willing to part with several hundred of dollars just in order to acquire the empty bottles so that they could fill them up with counterfeit wines. Market research indicated that grand protection solution growth rate of 12.6 % was likely to remain so for a number of years after 2014 (Taylor, 2016).

Conclusion

In conclusion, wine fraud is still a growing problem for the global wine market. Evidently, wine fraud will continue to be on the rise in the coming years. In this regard, more researches are being conducted on the impact of wine counterfeiting on the global wine market. Several factors have been attributed to the increased consumption of counterfeit wines on the global market. These factors include the increased demand for wine, improved technologies that make it easier to counterfeit wine, and other facts like emerging markets, powerful worldwide brands, weak international and local enforcement, and globalization. The measurement of the size of the counterfeit market for wine is not easy. However, the estimate for the global market size of fine wine is at $3 billion, while the counterfeit global market size for wine is estimated at $30 million.

The negative impact of wine fraud includes the reduction of market size for authentic wines, the direct loss of sales for the producers of authentic wine at all levels of wine market, the reduction of the size of consumer market, financial loss among various players on the market, and the reduction of revenue from import and export trade of wine. In addition, import and export market is negatively affected, which leads to the negative effects for the supply demand chain of the global wine market. On the other hand, wine fraud has a few notable advantages to the global impact, including opening up of markets for the middle class consumers, and creating a market for wine bottles, which is a direct consequence of wine fraud.