Counterfeit Spirits and Wine - Better have a Stiff Drink!

The health risk of counterfeit alcohol is something many people will be aware of, indeed we have reported on it in the past - see article entitled "Fraud and Counterfeiting in the Food Industry Makes the Sector Sick".  However, most people do not consider the economic cost and damage that may be caused by the infringement of intellectual property rights (IPR) facilitated by the sale of such counterfeit goods.

The European Observatory has published its annual report on the economic costs of IPR infringement in the spirits and wine sector, concluding that 3.3% of sales are lost by the sector due to counterfeiting, equating to €1.3 billion of lost annual revenue by the sector and €1.7 billion of lost sales in related sectors. Statistics which may be more understandable for smaller businesses include the fact that 4,800 jobs have been lost along with €1.2 billion of government revenue including taxes.  These are as a direct result of counterfeiting in the spirits and wine industry alone.

Costs to Industry

Direct Costs

As may be expected, the costs to industry are mainly composed of lost sales due to counterfeiting. Estimation of lost sales constitutes a major economic consequence in itself and because it drives other consequences, for example the loss of public fiscal revenue.

Indirect Costs

There are impacts on other sectors of the EU economy. These indirect effects are a result of the fact that the different sectors of the economy buy goods and services from each other for use in their production processes. If one sector's sales are reduced because of counterfeiting, then this sector will also buy fewer goods and services from its suppliers, causing sales declines and corresponding employment effects in other sectors.  In effect, counterfeiting and the losses derived from it, create a ripple effect of damage which spreads out and affects many companies and industries.

Major Impact on the UK

The report highlights that the UK is the largest producer of spirits, with production valued at more than €5billion, followed by France with more than €4 billion. UK exports represent more than 40% of total EU exports of spirits.

The industry engaged in distilling, rectifying and blending of spirits in the EU is comprised of 5,500 enterprises, most of which are SME's, with an average of less than 10 workers per firm.  The average size of firms in this sector varies and the report identifies that in the UK there are 150 enterprises employing, on average, 66 workers. In 2013, across the EU total employment in the sector was approximately 54,000 people.

Other Sectors

The negative impacts of the success of sophisticated and illegal counterfeiting organisations, including product safety, security in transactions and data protection, span across whole industries. Counterfeit products cause losses across many industries, notably the shoes and clothing industries, yet a survey carried out by YouGov in 2015 suggested that 21% of men and 14% women knowingly bought fake goods.

The European Observatory has so far published eight (including the one discussed into wines and spirits) sectorial studies into the impact of IPR infringements in the following sectors, all of which are available on the EUIPO Website:

cosmetics and perfumes,
clothing and footwear,
sports goods,
toys and games,
jewellery and watches,
handbags and luggage,
recorded music, and
spirits and wine.

Each report estimates of the size of the problem of counterfeiting for legitimate businesses and society in terms of lost sales, leading to lost jobs and loss of public revenue.

Further details can be found in the 32 page report entitled "The Economic Cost of IPR Infringement in Spirits and Wine".

If you have any questions on the content of this article in respect of your business, please do not hesitate to contact the team at McDaniel & Co. on 0191 281 4000 or legal@mcdanielslaw.com