Parallel importing and its shades of grey

If you’ve been into a whisky for a while, you’ve no doubt got a good feel for the “going rate” of most bottlings. You’ll know the RRP of the staples – all the 10yo/12yo/15yo expressions of the main players, and you’ve probably also got a good feel for the going rate of the typically-found independent releases as well. And that means you’re well placed to spot when a bargain comes through and when a retailer is offering something at a significantly cheaper price than the norm.

If you’re used to seeing 700ml bottles of Glen Bagpipe retail for $130 and suddenly some outlet is selling 1 litre bottles of the same release for $100, it’s going to grab your attention. But should it also raise your suspicions?   In many such circumstances, there’s a good chance that parallel importing (aka grey importing or grey imports) is behind it. Some grey importers dress up their practice by referring to it as “direct importing”, although this can be misleading as they’re rarely dealing “directly” with the distillery/supplier but, instead, have sourced the whisky through a different market.

So what is parallel importing, and should it concern you? A lot of what follows was inspired by my long-term colleague and collaborator, Matthew Fergusson-Stewart (aka Son of Whisky) of Whisky Molecules fame, who wrote on the subject recently. Striking a chord with my own thoughts and observations on the topic, I’ve re-purposed and paraphrased his recent text (with permission!), expanded it somewhat, and added a bit of colour around the edges…..

At the end of the day, consumers like a bargain and no one likes overpaying for whisky if the same bottle is available elsewhere at a lower price. This drives price competition between wholesalers, retailers, and bars, and it also leads to parallel imports.

Parallel importing is when one business has the contract, agreement, and rights from a brand or distillery to be its official importer and distributor, but someone else then brings in the same product – and at a cheaper price. This is not illegal in most countries, but whether you like or dislike the practice depends on where you sit and how it impacts you. Different parties have vested interests in it all, and the narrative varies depending on your view point.   Before we dive into all that, let’s first explore how parallel importing comes about:

1. Whisky brands and distilleries sell into different markets (i.e. countries) at different prices. Large, established markets have higher volumes and therefore have lower transaction costs per bottle than smaller / new markets. In addition to simple economies of scale, distributors moving larger volumes may also be able to negotiate cheaper purchasing rates.   In other words, Generic Scotland Distillers Ltd sells its Glen Bagpipe 12yo to its Singapore distributor for 20 pounds per bottle, but sells the same product to its USA distributor for 17.80 pounds per bottle on the basis of the respective size of the orders.

2. Other factors come into play within the pricing structure. There are shipping/freight savings (e.g. it costs less to ship whisky from Scotland to Switzerland than it does to ship it to, say, South America). And then there’s the different excise/tax costs in different countries, before we even start to account for favourable or non-favourable currency exchange rates.

3. There are specialist distributors who focus on brand building and education for one or more of their products (e.g. they’ll employ a brand ambassador and/or other marketing staff) and then there are other disinterested businesses who seek nothing more than to simply push volume. Clearly, the former has significantly higher operating costs and cost margins than the latter.

Industry research has shown that a price difference of as little as just 7% between two countries (after taxation differences are factored in) is enough to create parallel trade. In other words, assuming reasonably similar taxes and duties, if a whisky is sold in Country A for $100 and Country B for $107, then stock from Country A will end up being sold in Country B for less than $107.

So those are the basic mechanics of it. But what do all the interested parties think about it, and what might it ultimately mean for you?

 

What do governments think about it?

Some countries only allow one company to be the registered importer and distributor for a given whisky brand. In these countries, parallel trade is illegal. The laws are enforced with varying degrees of consistency and success, and despite good intentions, it’s a system that’s ripe for corruption. What would otherwise be the grey market actually becomes the black market!

For countries where parallel trade is legal, governments don’t care who brings the products in, providing all taxes and duties are paid and the importers/distributors comply with all the relevant licencing and trade laws surrounding alcohol. 

 

What do the distilleries and whisky companies / brands think about it?

The distilleries and brands will, ultimately, have mixed feelings and divided loyalties, depending on their personal ideals and their financial position/interests. A family-owned distillery might have a different viewpoint to a multi-national that has shareholders to answer to!

On one hand they have an obligation to look after their selected agents in each country and to minimise the presence of competing parallel imports. On the other hand, they have an obligation to move volume, and 10 pallets sold directly to Country B represents the same volume as 10 pallets sold to Country A that subsequently ends up on the shelves in Country B! Some companies work hard to suppress parallel trade; some don’t. 

 

What do the parallel traders think?

In most countries, parallel traders are usually doing nothing illegal and if they can make a buck in arbitrage by being more cost efficient than the local agent, then why shouldn’t they? They’re (occasionally) creating jobs, contributing to commerce and the economy, and they’re providing a product at a better price that customers want to buy. They’ll rightly point out that some official agents treat their agency as a quasi-monopoly that charges higher margins than they should, so parallel trade helps keep prices in check.

On the other hand, if a product sells poorly, they’re happy to drop it and move on to another. They have no interest in brand building and little interest in quality control. Parallel traders simply want to move volume and they’ll tell you their product is identical to the product from the official agent and that there are no risks involved.

 

What do the official agents and official importers think about it?

Here’s where the narrative gets a bit more emotive. In addition to selling/distributing the product, an official agent is also responsible for building the brand. In whisky, this means undertaking activities like creating an online presence, driving social media, educating consumers, employing a brand ambassador, maintaining price position in an increasingly competitive market, conducting tasting and training sessions, supplying (and educating!) the on-premise market, and responding to local questions and complaints about the product. It might also mean having to attend the numerous whisky shows around the country (e.g. Whisky Live) – paying not just to take out the stand, but to freely pour out (i.e. sacrifice) all the stock in the name of marketing. And either sacrifice their time to travel to the event and man the stand, or paying someone to do it on their behalf.  These are all things a parallel importer does not have to do. Suddenly, you can see why the official agent might need to charge $120 per bottle and the parallel importer can flog it for $100!

The irony is that the more successful an agent is at building a brand, the greater the opportunity they create for a parallel importer to steal their market share. Parallel importers are less likely to import something a market has never heard of, and more likely to import a product that a market knows and loves. If a parallel trader is simply going to step in and take a piece of the pie that the official agent has created, they actually have a disincentive to grow the brand past a certain point – particularly if they have a higher purchase cost from the supplier.

Official agents want to protect their sales and will tell you that parallel imports lack accountability, reduce diversity of product in the market, and can also be a channel that moves sub-standard and/or counterfeit alcohol. This is not necessarily scaremongering – there’s some truth behind it and some big risks involved. We’ll discuss these below. 

 

What do consumers think? What should consumers think?

So with those contrary and competing claims and interests, what should we as consumers think? The truth lies somewhere in the middle. Parallel imports are low risk, but they are not risk free. Sticking to “high profile” brands is no guarantee that you won’t get a tainted, damaged, or inferior bottle. There are some common and well publicised examples of this, which we’ll explore in a moment.

As a consumer, if your personal mindset and philosophy is only to buy your whisky for as cheap a price as possible, some of what follows won’t be important to you. But I’d gently suggest it should be…

Whisky manufacturers increasingly want to build their brand and they work to suppress parallel trade to protect their local agents. One way they do this is to reduce the difference in sell-in price to different markets. But they have other methods at their disposal: Look closely at a bottle of whisky and you’ll likely find a lot code. This code can be used to trace the original destination of the bottle. Local agents will find parallel imports in their market, record the lot code and report it to the manufacturer. The manufacturer can then find out where that bottle was originally exported to and act to force the original buyer to shut down their leaks to parallel trade. Depending on how those leaks were occurring, they may fire employees, reduce the agent’s allocations to suppress or reduce future leakage, or drop the agent entirely.

Having trouble finding the lot code? Parallel importers often make it harder to trace and suppress supply by removing the code – scratching off the label or grinding the code off the glass. As manufacturers develop methods to make subversion harder, the parallel importers develop new ways around them. Removing the codes might protect their supply, but they inevitably create accountability and traceability issues.

But the lot codes serve another purpose. In any production process, it’s possible to get a bad batch. (A parcel of casks might have sulphur taint; a bottling run might use a supply of corks contaminated with TCA; a consignment of bottled cases might get cooked during transport). Lot codes can subsequently be used to trace batches, fix problems, and issue product recalls. Parallel importers who tamper with lot codes jeopardise this consumer protection.

A more common reality – and this has been experienced and reported on in Australia – is that supply chains can be sub-standard, particularly if parallel importers are using multiple freight handlers and convoluted shipping routes to obtain their product at the cheaper rates they need. Heat, light, and poor storage can and does damage whisky. A pallet left out in the hot sun for several days awaiting collection or a consignment cooking in a shipping container transferring through the middle east can result in sub-standard whisky eventually sitting on a retail shelf on the other side of the planet. The lot codes can help trace where the whisky has been to help fix/avoid such problems, but grey importers who remove the codes also remove such tracks and accountability.

Common in some countries and rare in others, counterfeiters can also reside in the shadows, removing codes and thus being able to hide amongst parallel trade and lower prices. Official agents might get accused of overstating the risk of getting a bad or counterfeit bottle through parallel trade, but such risks are real and counterfeit products can – quite literally – be deadly. (Three deaths were reported in Zimbabwe in late 2019 from counterfeited Jamesons Irish Whiskey; eight Russians died in 2015 from counterfeited Jack Daniels that contained toxic levels of methanol. The appeal of buying cheap whisky at a price well below the established RRP should have raised eyebrows).

If a consumer gets a bad bottle (yes, it does happen – read through any whisky thread on Twitter or in a Facebook whisky group) they’ll usually take it back to where they purchased it, or they’ll contact the importer. Either way, it often ends up back with the importer, who then reports it to the manufacturer – usually getting a credit or replacement bottle so they can replace yours. The manufacturer, naturally, will want the lot code so they can trace the problem.

Parallel importers, with no real incentive to build brands and having no relationship with the manufacturer, typically do not care about your bad bottle. If they have a retail brand to protect (i.e. they’re a store or retail outlet) they may give you a replacement or a credit, but that’s not guaranteed, nor are they likely to go above and beyond. Official agents or manufacturers, in contrast, will typically replace your bottle and may even provide a little bonus on top as an apology and a thank you.

So why should you be concerned? The main concern for the official agents and distributors is that in buying parallel imported product, you are making it harder for them to build the brand and make money. In the long term, if parallel imports make it harder for the official agent to run their business, they’ll simply stop bringing new products to your market. No, a single $80 bottle of garden variety single malt from a parallel trader won’t kill their business model but, as parallel trade grows, so too does the loss to the official agent. Someone, somewhere, eventually loses out. 

 

So what should you do?

As a consumer, there are both short term and long terms risks with parallel imports which are small, but not insignificant. If your driving impetus is to save a couple of bucks, you need to manage those risk and acknowledge some realities:

• Be prepared to lose out on a bad bottle occasionally. Parallel importers do not always control their supply chain; the product travels further via other markets; and – as discussed above – product can occasionally spoil in transit.   This is a common problem for Australian consumers, at least certainly with a specific brand that is parallel imported by one particular retailer. If there’s a whisky with a strong reputation that is praised by others suddenly being sold in one litre bottles at a price that’s significantly cheaper than the 700ml variant, and you found the one litre bottle you bought to be hot, fiery, or too spirity, then you should join the dots instead of whinging on social media about it and slagging the brand.

• Stick to reputable sources. A big website that does parallel trade is a lot safer than the bloke you met at the pub who’s selling stock out the back of his van. A heat-damaged bottle, whilst an offence to your tastebuds, is no risk to your health; counterfeit whisky is.

• Be prepared to see fewer exciting whisky tastings and other events in your market. These are paid for by brand builders, not parallel traders.

• Be prepared to have less opportunity to buy great whisky in your market in the long term. Official agents don’t invest in brands they can’t make money from, and parallel traders don’t operate in markets where brands aren’t built.

Some, of course, might choose to take a principled approach and avoid/boycott grey imports – if you can identify them. That’s the position of the two authors behind this article, and it’s not a holier-than-thou stance – simply an acknowledgement from two guys in the industry that we’re happy to live with a 5-10% price difference, knowing that it’s best for the market in the long term.

If the price difference is significantly greater and the dollars are important to you, it’s worth talking to the official agent and seeing if they can do better. In asking, you’re helping them as much as you’re helping yourself.

Cheers,
AD

(With thanks and acknowledgement to Matthew Fergusson-Stewart).