The Real Threat of Counterfeit Wine From Wholesalers

Over the past five years or so some members of the alcohol beverage industry have voiced concern that counterfeit alcohol is such a potential problem that increased vigilance is necessary to keep unlicensed and counterfeit products from entering the supply chain and eventually making their way to the consumer.

While America’s wine, beer, and spirit wholesalers have been most vocal in warning of this potential problem, what has gone unsaid is that it is the wholesaler that is most likely to trade in counterfeit alcohol.

While the Wine & Spirit Wholesalers of America have been most vocal in decrying the threat of counterfeit alcohol, they fail to mention that it is the wholesaler, their members, that are most likely to deal in counterfeit alcohol.

In this context, we are not talking about the rare occasions when a doctored or counterfeit bottle of very rare wine moves from a counterfeiter’s hands to an auction house. In these cases, rare as they are, we are generally talking about a few bottles of very rare wine that authentic examples would result in thousands of dollars in bids. Rather, we are talking about mass-produced fake bottles of well-known and relatively modestly priced products.

Distribution of fake Cuervo, Yellowtail, Makers Mark, or Sam Adams doesn’t occur in the United States for the most part. But this isn’t due to the fact that these modestly priced, high production, popular brands are almost always distributed from producer/importer to wholesaler to retailer (via the three-tier system). The reason there is no trade in counterfeit items such as these is due to the fact that they are produced in large enough quantities at their source so that there is no excess demand for these products that outstrips supply that might result in and attract counterfeiters.

Equally important is that neither retailers nor wholesalers undertake quality control measures that might spot counterfeit products. Wholesalers take delivery of palllets of product from producers or importers, place the pallets in their warehouse, then remove them when they fulfill orders from restaurants and retailers. They don’t test for producer integrity. Neither do retailers test for product integrity when they take delivery from wholesalers.

In fact, only by purchasing a product directly from the producers assures that a product is what it says it is. This fact demonstrates why wholesalers would be the most likely source of counterfeit alcohol making its way to consumers.

By definition, “counterfeit” products originate outside officially regulated and licensed chains of custody and possession. The greatest danger occurs when large quantities of counterfeit alcohol make their way into official and licensed channels of distribution. It is only at the wholesale tier where such a thing could happen.

Retailers are generally required to purchase their inventory from wholesalers. Yet, the nefarious retailer could go outside that chain and procure counterfeit alcohol from a skilled bootlegger/counterfeiter. However, in order for large amounts of counterfeit alcohol to enter the supply chain in this fashion, you would need a counterfeit producer to undertaken numerous illegal transactions with numerous retailers. The risk is greater when a larger number of illegal transactions are undertaken.

However, one large transaction from counterfeiter to wholesaler results in the counterfeit product moving into multiple retail establishments. So, in fact, what we see is that the real threat of counterfeit alcohol moving into the supply chain comes from an alcohol regulatory system that puts includes the mandated use of a wholesaler—the Three-Tier System.

It’s notable that when wholesalers discuss and warn of the danger of counterfeit alcohol, they assume nefarious intent on the part of retailers who want to go around the three-tier system. The wholesaler imagines retailers selling in person or online alcohol they actively procured from an illegitimate, unlicensed source. But there is nothing inherent in the operations of wholesalers or the three-tier system that somehow prevent wholesalers from being the nefarious actor. In fact, wholesalers are equally likely to be bad actors as are retailers or producers. Moreover, because the largest wholesalers who have permits in multiple states effectively operate numerous, separate, state-based businesses, the risk of one wholesaler in one state being caught trading in counterfeit alcohol means it is likely just that one branch of the larger company will be penalized or shut down. When a retailer, which generally only operates in one state and one store, is caught dealing in counterfeit alcohol they risk their entire operation being shut down.

The bottom line is this: The existence of a “three-tier system” in no way protects against counterfeit wine entering the supply chain. Moreover, it is the wholesaler that is most likely to be the source of large amounts of counterfeit wine entering that chain of supply.

Finally, the best defense against this happening is giving retailers the ability to bypass the wholesaler and purchase directly from the producers. Not only does this give the retailer greater confidence that they are not dealing in counterfeit alcohol due to the illegal acts of a wholesaler, it also gives retailers the opportunity to broaden the inventory they offer customers beyond the generally meager selection of products the wholesale tier offers in any given state.

 

 

 

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11 Responses

  1. Joel Butler MW - August 3, 2021

    Palates? Seriously…
    Pallets, indeed… Though the homonym does make for some amusing mental imagery!
    Joel

  2. Robert Prough - August 3, 2021

    I have read about your personal disgust of wine wholesalers previously-many “wine writers” do.
    You failed to document anything at all. Are you just bored?

  3. Save Ag - August 4, 2021

    The 3 tier system seems so wrong, like something that would be found in a communist county where the state owns all businesses. The little winery or mobile custom crush grower with a few hundred cases should be able to sell directly to the local country store.

  4. Jim L. - August 4, 2021

    A rant, with no proof or actual facts to back up what you write, is merely wasted space. You know, like a letter to the editor with no signature which quickly finds its way to “File 13.”

  5. Tom Wark - August 4, 2021

    JIm and Robert:

    Exactly which part of my post do you think needs to be backed up with more facts?

    I eagerly await your list.

    Tom…

  6. Tim F - August 4, 2021

    Way to be vigilant, Tom. Your vigilance is important given that:
    –This is not a systemic problem
    –You provide Zero evidence that it is a systemic problem
    –You reference an article that concludes that a regulated wholesale system is a good mechanism to prevent fraud despite then saying you think that that a wholesale system could possibly be to blame for this non-existent problem.
    –You have zero warrant as to why the three-tier system is to blame for this problem that is not a problem.
    –You don’t address the dozens of mechanisms (state tax auditing, retailers who have a clue, UPC codes, SCC Codes, etc.) that prevent this from being a problem.
    –You even suggest that large scale brand counterfeiting in the US is pretty much non-existent, but then suggest that, despite this, the nefarious wholesalers could try and pull one over on a mass scale.
    –You blame a three-tier system for being nefarious, when you are, at best, accusing them of being negligent of this non-problem.

    I am a supplier with 20-years experience and I am as incredulous as to the machinations of the three-tier system as anyone else. But this post is baseless clickbait.

  7. Tom Wark - August 5, 2021

    But Tim…

    Even the wholesale tier claims that counterfeit wines must be vigilantly protected against. Of course, they never say exactly what is likely to allow counterfeit wines into the system. However, I do. It’s perfectly obvious that the most likely source of large scale counterfeit wines entering the system would be the wholesale tier, not retail.

    As to the three tier system, in its strictest form it requires retailers to purchase their inventory from wholesalers. But if they want to be vigilant and avoid counterfeit wines, then they would need to be able to purchase directly from the source where possible. The three-tier system generally prevents that.

    So, Tim, I away your comments disparaging the wholesale tier’s baseless accusation that counterfeit wine is a problem due to the retail tier.

  8. Tim F - August 5, 2021

    While your obvious agenda is to protect DTC and consumer rights and their agenda is to protect theirs, my larger point stands firm. The wholesalers are warning about something that is not a systemic problem and you are trying to argue that if it ever became a problem they would probably be the source of that problem. Both of you (you more than them) are dramatizing a non-problem. I would argue (from experience) that there are pockets of the retail wine world than can operate free of three-tier mandates and when consorting with the gray market there is a substantial risk of fraud and that automatically promotes the awareness you espouse. But to make the claim that the “nefarious” three tier system will be the likely source of broad market fraud when you own analysis, the article you cite and a plurality of safeguards and market forces prove otherwise, is just alarmism for no other reason than to take shots at a system we can all agree is collectively idiotic for a lot of reasons. That said, this is not one of them. I agree with the ethos of what you stand for, but your alarmism needs to be based in reality and not what you think could happen because you don’t like the people who run the system.

  9. Tom Wark - August 5, 2021

    Tim:

    You wrote:

    “But to make the claim that the “nefarious” three tier system will be the likely source of broad market fraud when you own analysis, the article you cite and a plurality of safeguards and market forces prove otherwise…”

    I simply don’t see those safeguards inherent in the state-mandated use of a wholesaler and know for a fact that where the risk of encountering counterfeit wines on a large scale is concerned, it’s the wholesale tier and the wholesaler mandate that represents the greatest risk.

  10. Bill St. Croix - August 6, 2021

    Curious, where is the evidence and facts from the wholesalers that retailers would be a source (primary source?) of counterfeit wines?

  11. Jim Kuroski - August 10, 2021

    Tom, you have many valid points about the three tier system, this is NOT one of them. Do you really believe that any large wholesaler, is going to take in fake Cuervo from a black market source and sell it? Not because they are such honorable people, but because it would terminate their contract with their supplier as well as totally mess up their depletion reports with that supplier. let alone the implications with the Feds. Because you have some valid issues with the three tier system , which I agree with from time to time, you are grasping at straws with this one. Maybe your next writing will be that Southern Glazer had someone in the 6th floor of the building in Dallas in 1963? Wholesalers do plenty of actual things that do need the light of day shinned on, this is ‘out there”. Can you back this up, or do you just get to throw stuff against the wall since you have a platform?


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