This chapter sets the scene by presenting the global alcohol industry: its main players, its international trade flows as well as its specificities in terms of marketing and distribution as in some countries the state plays an important regulatory role. It also clarifies what the illicit alcohol refers to and presents the specificities of this market
Illicit Trade in High-Risk Sectors
Implications of Illicit Alcohol for Public Health and Criminal Networks
Report
Illicit Trade
Table of contents
Share
Facebook
Twitter
LinkedIn
2. Markets for alcohol
Abstract
Industry structure
The world alcohol market is a trillion-dollar business, with revenues growing annually from USD 1.2 trillion in 2012, to USD 1.7 trillion in 2019.1 With Covid-19-related lockdowns curtailing social and recreational activities, revenues eased to an estimated USD 1.5 and 1.4 trillion in 2020 and 2021, respectively. Growth is expected to resume, however, with revenues forecast to top USD 2.2 trillion in 2025.
The industry comprises three principal segments, with beer the largest (USD 552 billion in sales in 2021), followed by spirits (USD 468 billion) and wine (USD 306 billion), respectively.2 The three segments account for over 90% of total sector sales.3 The beer market is moderately concentrated, with the 10 largest companies accounting for over 70% of market share, while the 10 largest wine producers account for less than 15% of the market (Table 2.1).
Table 2.1. Largest alcoholic beverage companies, by volume and by segment, 2020
|
Segment/company |
Headquarters |
Market share (%) |
|---|---|---|
|
Beer 1 |
|
|
|
Anheuser-Busch InBev |
Belgium |
30 |
|
Heineken |
Netherlands |
11 |
|
China Resources Snow Barrels |
China |
6 |
|
Molson Coors Brewing |
United States |
5 |
|
Carlsberg |
Denmark |
7 |
|
Tsingtao Brewing Company |
China |
5 |
|
Ashai |
Japan |
2 |
|
Beijing Yanjing Beer Group |
China |
3 |
|
Kirin |
Japan |
2 |
|
Constellation Brands |
United States |
1 |
|
Spirits2 |
||
|
Diageo Plc |
United Kingdom |
9 |
|
Pernod Ricard SA |
France |
6 |
|
Hite Jinro |
Korea |
4 |
|
Shunxin |
China |
3 |
|
Thai Beverage |
Thailand |
3 |
|
Wine3 |
||
|
EJ Gallo |
Belgium |
3 |
|
Constellation Brands |
United States |
1.7 |
|
The Wine Group |
United States |
1.5 |
|
Treasury Wine Estate |
Australia |
1.2 |
|
Viña Conch Y Toro |
Chile |
1 |
|
Castel Frères |
France |
1 |
|
Accolade Wines |
Australia |
1 |
|
Pernod Ricard SA |
France |
<1 |
|
Grupo Penaflor |
Argentina |
<1 |
|
Fecovita Co-op |
Argentina |
<1 |
Notes: 1 See www.t4.ai/industry/beer-market-share.; 2 See (IAS, 2020[1]); 3 See www.zippia.com/advice/largest-wine-companies/.
Trade
International trade is an important source of revenue for the industry. In 2019, alcoholic beverages valued at USD 88.2 billion were traded across borders, which represented about 5% of production (Table 2.2). In the case of wine, about 10% of production was exported compared to 7% of spirits and 3% of beer. Wine and spirits each account for about 40% of total alcohol exports, whilst beer is about 20%. The degree to which products are exported depend in part on the tariffs imposed by countries on imports. These tariffs, which differ significantly among countries, averaged 24.3% in the case of wine, while they exceeded 30% in the case of spirits and beer. EU countries were the largest exporters in all product categories, with the United States a top exporter in 3 categories (spirits, beer and vermouth), and Mexico a large exporter of sprits and beer. Australia and Chile were top wine exporters, while Singapore and Japan were leading exporters of spirits and “other” fermented products (e.g. cider and rice wine), respectively.
Table 2.2. World exports of alcoholic beverages, 2019
(Billions of USD, except as noted)
|
Beverage |
Exports |
Average tariff |
Leading export countries |
|---|---|---|---|
|
Wine (HS 2204) |
35.7 |
24.30% |
France, Italy, Spain, Australia, Chile |
|
Spirits (HS 2208) |
33.9 |
30.90% |
United Kingdom, France, Mexico, United States, Singapore |
|
Beer (HS 2203) |
16.5 |
32.70% |
Mexico, Belgium, Netherlands, Germany, United States |
|
Cider, etc. (HS 2206) |
1.5 |
29% |
Japan, Italy, Sweden, Canada, Germany |
|
Vermouth (HS 2205) |
0.6 |
30.40% |
Italy, France, Spain, Germany, United States |
Source: Observatory of Economic Complexity (https://oec.world/).
Marketing and distribution
The marketing and distribution of alcoholic beverages varies across countries, and can be complex, as governments play an important regulatory role. According to a 2018 WHO report, some 141 countries that took part in a WHO survey operated licensing systems for alcoholic beverages (86% of the total surveyed); about half (55%) had licensing at every level of the alcohol market (i.e. import, production, distribution, retail sales and export) (WHO, 2018[2]). Two additional countries reported subnational licensing for at least one level of the alcohol market.
Government supply and retail restrictions, often characterised as “monopolies”, which can exist at all levels of the supply chain, were operational in a sizeable number of countries, with fifty countries reporting the use of such control at least one level. Monopolies involving imports (36 responding countries) and retail sales (35 countries) were most common for spirits, while monopolies for imports (33 responding countries), production (32 countries) and distribution (31 countries) were most common for beer. The number of reporting countries with a monopoly over exports (26) did not differ by beverage type. Of the countries with monopoly control over at least one level of the alcohol market, 19 (38%) had a monopoly at all levels.
Some countries employed a combination of licensing and monopoly systems, with 47 reporting a licensing system and a monopoly over at least one level of the market. It was, however, more common for countries to use licensing alone (94 countries). In some countries, such as the United States, controls at the state level were in addition to those imposed at the federal level (Box 2.1).
Box 2.1. Regulation of US market for alcoholic beverages
In the United States, a unique three-tier system governing the distribution and sale of alcoholic beverages is in place. Manufacturers (tier 1) sell to licensed wholesalers, distributors or control boards (tier 2), which, in turn, sell to licensed outlets (such as bars, restaurants and liquor stores) (tier 3). Federal excise taxes are collected from the manufacturer when goods change hands, or, in the case of imported goods, from the importer when products exit bonded facilities. Distributors and control boards act in co-operation with the federal and state governments to help ensure that taxes are collected. Tier entities ensure that parties purchasing the beverages are of legal age. The system is not, however, totally closed, as some manufacturers are able to sell at least some of their production directly to consumers, either on their premises or through mail, Internet or telephone orders. Supporters of the three-tier system note that it provides a number of important benefits, including: i) regulatory benefits, by helping to ensure that laws and regulations governing the distribution of products are followed; ii) economic benefits, by helping to ensure that taxes are faithfully collected; and iii) public health benefits, by lowering the risk that counterfeit or tainted products are introduced into the supply chain.
Licit and illicit products
Before turning to the analysis of illicit trade in alcohol, it is important to clarify what distinguishes licit alcohol from illicit alcohol, and how the markets for alcohol are structured.
“Licit” alcohol includes those products that are manufactured and adhere to regulatory requirements and are subsequently recorded and distributed in an approved manner, and two types of products that are not recorded: i) informal alcohol, which are beverages that may be sometimes produced legally outside of formal production channels and whose production and consumption tend to follow cultural and artisanal practices and ii) licit items which consumers legally transport from one jurisdiction to another, for their personal use, such as duty-free.
“Illicit” items, on the other hand, may not be produced according to regulations and standards, may be produced and traded outside of legal channels, or they may be legally produced in one jurisdiction but traded outside of the formal alcohol market in another. As a result they are not officially recorded and evade tax, excise, customs or intellectual property legislation (Skehan, Sanchez and Hastings, 2016[3]). Illicit products, which are not recorded, include those i) on which taxes might not be paid, ii) which might not be fit for human consumption, or iii) which might otherwise undermine legitimate business and trade.
Examples of illicit trade include:
Contraband or smuggled alcohol, which are products with original branding that have been illegally imported or smuggled into a jurisdiction and sold without payment of tariffs or excise taxes,
Counterfeit alcohol, which are fraudulent imitations of legitimate branded products that violate the intellectual property rights (IPR) of legitimate producers (see Box 2.2).
Products that are not produced in accordance with legal requirements and may therefore pose health risks,
Products sold with false or misleading packaging (including the sale of alcohol in bottles which have been refilled with substitute products).
“Third shift” alcohol, which are genuine products produced clandestinely at licensed facilities (and are not properly recorded)
Surrogate alcohol, which are products that are legally produced for other purposes and not intended for human consumption, but are nonetheless imbibed (such as hand sanitizer, mouthwash, aftershave or cologne, rubbing alcohol, windshield washer fluid or an antifreeze).
Box 2.2. Counterfeit alcohol
Counterfeit alcohol is alcohol that is deliberately and fraudulently mislabeled as a registered trademark. Importantly, such counterfeiting refers only to a registered trademark, and does not included a large volume of mislabelled illicit alcohol that might still deceive consumers (and pose their health at risk) but does not infringe any trademark. For example a bottle of an unbranded, substandard alcoholic beverage offered on illicit markets with a label “vodka” is clearly illicit, yet it might not infringe any trademark, hence not be counterfeit.
The market for alcohol (licit and illicit) is also characterised by the manner in which is treated officially, namely whether the production is recorded or unrecorded:
The recorded alcohol market segment includes legally produced and traded beverages that are reflected in official statistics and are subject to regulation. Most commercially and legally traded branded beverages are recorded.
The unrecorded alcohol market segment, by definition, is not reflected in official statistics and is not subject to the same regulations as the recorded market. Some unrecorded products are licit, but, for various reasons, escape being captured in records. Such products include alcohol purchased through legal cross-border shopping for beverages recorded in the country of purchase but not in the country of consumption, and legal informal alcohol, which is licit but not recorded. It also includes ‘surrogate’ alcohol, legally produced for other purposes, often not potable, yet consumed.
E-commerce
E-commerce has boomed across many countries, far exceeding overall growth in traditional retail sales. Overall, sales of goods and services by businesses to consumers (B2C) over the Internet increased by 82% worldwide between 2016 to 2019, with a Covid-19-associated boost of 25.7% in 2020, to USD 4.2 trillion.4 By 2025, e-commerce retail sales are currently forecast to rise to USD 7.2 trillion, which would represent about 24.5% of total retail sales, as compared to 17.8% in 2020. Alcoholic beverages demonstrated particularly high growth in online sales during the pandemic and are expected to continue to accelerate in the future, at growth rates greater than e-commerce in general. After growing by 11% in 2019, a November 2020 assessment forecast that the value of alcohol e-commerce would increase by 42% in 2020, across 10 core markets, to reach USD 24 billion.5 By 2024, e-commerce sales in these 10 markets, plus an additional 10 “markets to watch” were expected to grow to USD necessity 40 billion.6
While the increase in online sales, including online sales of alcohol, has been attributed in large part to consumer responses to lockdowns, it is expected that interest in online purchasing will strengthen as brand owners increasingly invest in the channel. In the United States, online “off-trade” sales,7 which increased by 80% in 2020 alone (albeit from a low base), are expected to grow by six-fold from 2019 to 2024, increasing market share from 1% to 7%. Increased awareness by consumers of the availability of alcohol online, combined with relaxation of regulations in some jurisdictions to facilitate online sales and home deliveries are also factors supporting the e‑commerce growth.8 Some 44% of alcohol e-shoppers, for example, only started buying alcohol online in 2020. The growth in e-commerce sales contrasts with the overall market for alcoholic beverage, which dipped in 2020 and is not expected to reach pre-Covid levels until 2023 (IWSR, 2021).
Another factor fuelling growth in e-commerce sales is the growing number of business entities establishing an Internet e-commerce presence. As a matter of survival in the face of massively decreased “on-trade” sales in, for example, restaurants closed during the pandemic, smaller wineries in the United States, and likely elsewhere, developed websites to promote sales of their products in response to the pandemic (Guynn, 2020[4]). In support of their online endeavours, they also utilised YouTube and Instagram Live to promote sales, while using Facebook and Goggle ads to expand their customer bases and attract customers. At the same time, sales sharply rose at retail wine sites early on in the pandemic, and through mobile shipping apps like Drizly, Doordash and Instacart. At Wine.com, revenue quadrupled to more than USD 1 million a day in the early months, with the retailer responding by hiring 500 people and tripling its marketing spend.
Before the pandemic, the extent to which illicit alcohol has been sold on the Internet has been limited, reflecting the strict controls over production and distribution of alcohol in general, at least in the more highly regulated markets. With the loosening of regulations during COVID-19 and the active development of Internet sales by producers and retailers, however, opportunities for trafficking in illicit products will likely become more attractive for counterfeiters. Examples of e-commerce fraud for wine and whiskey has emerged in a number of markets, including the well-regulated US marketplace (Box 2.3). The cases are illustrative of the nature of e-commerce fraud; establishing the overall scope of misuse of the Internet to facilitate illegal sales of illicit alcoholic beverages is unknown, but one can presume the scale could be significant and growing.
While public and private stakeholders have taken many actions to combat illicit trade in e-commerce, significant challenges remain, as criminal networks have been able to react quickly and dynamically to avoid detection and circumvent law enforcement. In response, governments and industry are constantly examining their policies to mitigate illicit trade online. As identified in (OECD/EUIPO, 2021b[5]) there are several areas that need to be addressed in this regard. This includes such issues as the difficulties in dealing with a vast landscape that includes millions of sellers, or enforcement gaps and limited institutional capacities exploited by counterfeiters and criminal networks. It also includes issues related to adequately screening cross-border movements of counterfeits, many of which are shipped in small parcels and letter packets.
Box 2.3. Examples of illicit trade in alcohol on-line
In China, one Internet merchant selling a range of premium champagne products on Tmall, a site operated by Alibaba, was found in 2019 to have been selling counterfeit Dom Perignon Luminous Millesime Brut 2002 champagne. 1 Moët Hennessy, the brand owner, uncovered the fraud after buying and inspecting two cases of the champagne. The company found that the product had inconsistencies in wine label design, font size, vintage discrepancy between label and cork, shoddy typos on its back labels, and false use of luminous labels. The extent of the fraud could not be definitively established. The company, which paid RMB 43 000 for the two cases, sought relief in a court case, and was eventually awarded RMB 80 000, which was one-third the RMB 500 000 requested. In making the award, the court noted that information supplied by the Internet platform suggested that limited quantities of fake products had been sold; it also noted that because the scale of the fraudster’s fake wine operation could not be determined, there was no evidence to prove the loss to Moët Hennessy.
In Italy, authorities working with Europol disrupted a major fraudulent operation in 2018, in which empty bottles of high-quality wines were refilled with low quality beverages and marketed on a large e-commerce platform as genuine ones that were “on sale”.2 The wines were sold globally in Belgium, France, Germany, Italy, Spain and the United States.
In the United States, Buffalo Trace Distillery, which produces high-end bourbon has been subject to a number of online counterfeiting scams. In 2017, the company launched a USD 500 000 campaign to fight against online counterfeiting, which ended up with the conviction of at least one counterfeiter of the high-priced bourbon.3 In 2021, the company issued a public warning to customers over an increasing number of fraudulent and counterfeit whiskeys being sold online. Some customers complained that they had never received their order; others received bottles that used plastic toppers rather than the metal toppers used on the genuine product.4 Despite taking legal actions to have offending sites shut down and sending notices to social media companies, the situation continued to be of concern. The counterfeiters were effectively evading the ban in most US jurisdictions against shipping alcohol directly to consumers. The majority of the scams, it was noted, involved foreign websites.
In the United Kingdom, a whiskey auction site discovered suspicious bottles during routine authenticity checks in 20175. Enforcement authorities visited the seller’s home where they discovered a counterfeiting operation with a scale of sophistication purportedly never before seen in spirits. Alongside a genuine collection was a large-scale fraudulent set-up where hundreds of old bottles were being refilled with cheaper, younger liquids.
Notes:
References
[4] Guynn, J. (2020), “Coronavirus wine: Wineries turn to online sales to avoid getting crushed by the COVID-19 pandemic”, USA Today, May 27, https://eu.usatoday.com/story/tech/2020/05/27/wine-sales-move-online-coronavirus-quarantine-wine-delivery/5241525002/.
[1] IAS (2020), The alcohol industry: An overview, Institute of Alcohol Studies, http://www.ias.org.uk/wp-content/uploads/2020/12/The-alcohol-industry-%E2%80%93-An-overview.pdf.
[5] OECD/EUIPO (2021b), Global Trade in Fakes: a Worrying Threat, OECD Publishing, https://www.oecd.org/publications/global-trade-in-fakes-74c81154-en.htm.
[3] Skehan, P., I. Sanchez and L. Hastings (2016), “The size, impacts and drivers of illicit trade in alcohol”, in Illicit Trade: Converging Criminal Networks, OECD Publishing, Paris, https://doi.org/10.1787/9789264251847-10-en.
[2] WHO (2018), Global status report on alcohol and health, World Health Organization, Geneva, https://apps.who.int/iris/rest/bitstreams/1151838/retrieve.
Notes
← 3. Hard seltzer, cider, perry and rice wine account for the remaining 10%.
← 4. See www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/ and www.emarketer.com/content/global-ecommerce-forecast-2021.
← 5. The 10 core markets (Australia, Brazil, China, France, Germany, Italy, Japan, Spain, United Kingdom and the United States) account for about 90% of total e-commerce sales.
← 6. The “markets to watch” are Mexico, Colombia, Argentina, Netherlands, Israel, Nigeria, Kenya, South Africa, Singapore.
← 7. Sales to retail outlets, as opposed “on-trade” sales to restaurants, bars, etc.
← 8. The relaxation in restrictions in online sales were in some instances introduced as temporary measures.