Grape expectations

Online wine sales may bring massive changes, but not to prices

By Kim Tong-hyung

An affection for wine will double as a curse in Korea where a bottle of watery Bordeaux or a Chilean ``cheapie'' could cost more than a pair of Nikes. It bears further watching whether the government’s plans to allow wines to be moved via electronic commerce will curb complaints from local drinkers about paying a premium for mediocrity.

Despite all the bureaucratic speechifying about ``rationalizing'' wine prices, most industry people seem to be excluding the possibility of a ruthless price competition or Web-induced bargain binge. However, the Internet could dramatically reshape how wine consumers find, pick and buy their bottles, and the changes could come at the expense of small wine shops and bars, which may face an existential crisis.

It wasn't long ago that the country looked to be quickly earning its stripes as a wine-drinking nation. But then the Lehman Brothers collapsed and credit-crunched consumers were suddenly uneasy about spending too much on fermented grape juice.

The country's free trade agreements (FTAs) with major wine-making regions like the Europe Union, the United States and Chile made little difference to prices on the shelves with the lowered tariffs negated by heavy taxes and a complex web of importers and retailers.

It seems clear that the Lee Myung-bak government has no intention of letting the wine boom turn to gloom. The Fair Trade Commission (FTC), which in the past couple of years emerged as Cheong Wa Dae's unorthodox weapon for combating inflation, suggests that the best idea for shaving the prices of wines is lifting the ban selling it over the Internet.

And despite passionate resistance by internal revenue officials and health authorities, the anti-trust watchdog seems to have the ears of those atop the policy-making totem pole.

According to numerous sources at the presidential office and FTC, the government has all but concluded to allow wines to be promoted and sold online, with the official announcement expected within the next few weeks. There has also been an agreement to limit the companies operating online wine stores to importers in order to properly monitor the new market.

Working-level officials are now discussing ways to prevent wine importers from exploiting Internet transactions for tax evasion, which was the concern of the National Tax Service (NTS), and online verification systems to block underage users from placing orders. There is also a possibility the government will impose a cap on the volume of wine traded on the Internet to protect the market for other beverages.

While the country has long banned the online sale of alcoholic drinks, traditional products like makgeolli, a popular form of peasant wine, have been granted an exemption since 2010 to provide new income sources to struggling farming communities.

``The decision has been made in allowing the online sales of wine on the condition that we install supplementary measures to reduce the possibility of side effects. We are doing this for consumers, using the Internet to simplify the retail structure of wine and shed unnecessary costs, so talks have progressed in the direction to find ways to make this work rather than not,’’ said a senior government official, who didn’t want to be named.

``The worries that online transactions of wine will lead to an increase in non-documented transactions and tax evasion are not entirely off target. But these problems could be easily fixed by limiting the type of companies allowed to sell wine on the Internet and requiring purchases to be made with credit cards. This will make the transactions more easily traceable than offline cash sales.’’

Industry people say that the move to authorize Internet sales will reshape the wine market dramatically and not just in the way prescribed by policymakers. Small merchants and bar owners will be hit hardest by the changes in consumption patterns.

Importers, many of them relying on one or two popular brands to keep their business afloat, could benefit from using the online stores to reduce their unsold inventories. But there are worries that larger wine importers like Shinsegae and Lotte, which benefit from their massive retail networks, will dominate the Internet market like a fat kid does a cookie jar.

``When importers buy from wineries, the contract usually requires them to buy a certain volume of lesser-known wines along with their best sellers. It’s hard to sell these wines due to their anonymity and randomness in supply, so the Internet could provide a great way for importers to move these bottles,’’ said an official from one mid-sized importer.

Consumers, however, are cautioned against getting their hopes to high about price declines. To begin with, Korea’s high level of wine prices has more to do with heavy taxes than its retail structure.

Unlike Japan, which taxes alcoholic beverages according to the volume consumed, Korea taxes drinks by price. Wine conventionally is significantly more expensive than beer and soju, so the 30 percent alcohol tax really widens the price differential. Then there is the 10 percent education tax and 10 percent added value tax, all coming before middlemen and retailers add their margins.

Another reason to be skeptical about the price effect of Internet sales is that importers will likely continue to rely on large discount chains and department stores for their main business.

Internet purchases only account for around 10 percent of wine sales in the United States and Korean officials believe the online proportion to be somewhere around 5 to 10 percent here, being a market where wine has yet to reach national acceptance.

It’s hard to imagine importers biting the hand that feeds them and sell wine cheaper online than the prices they provide to major retailers. They are likely to use their online stores to move less popular wines or for special promotions, while continuing to provide their best sellers to E-Marts and Hyundai or Lotte department stores.

NTS opposes online sales

The NTS is clearly frustrated by how the talks are progressing, claiming that the country is following a dangerous path that could eventually lead to the rattling of its tax system and allowing its increasing alcohol problem to spin further out of control.

Once wine is sold online, it will be difficult to convince the makers of beer and soju why they are being left out. The Japanese government is already pressing authorities here to allow online sales of sake, the country’s globally popular rice wine, NTS officials say.

The Ministry of Health and Welfare and Ministry of Gender Equality and Family are also unhappy campers as they insist Cheong Wa Dae should take a closer look at how Internet sales could affect drinking habits. They are finding support from doctors’ groups like the Korean Academy of Addiction Psychiatry (KAAP), which blasts the government for putting business before health.

``While the discussions about allowing online wine sales should first and foremost consider the effects on public health, all the talks now are about consumption and taxes. There has been a disregard on the worries that Internet sales could aggravate what is already a destructive drinking culture and allow teenagers an easier path toward getting hold of alcoholic beverages,’’ said Ki Seon-wan, a senior KAPP member.

Park Yeong-nam, who runs a bar near Sungkyunkwan University in Seoul and has become a seasoned veteran in detecting and repelling under-aged drinkers at his premises, agrees on the prediction that wine sales on the Web will make youth drinking problems harder to control.

``The only reason that online sales of traditional beverages didn’t influence the under-aged drinking problem that much is because teenagers don’t care about unbranded peasant wine made by old farmers. For them, it’s just as much as about drinking to be seen as getting drunk,’’ he said.

``But wine, which doubles as a status symbol, could be a different story. I have heard that in the United States, where wine is allowed to be sold online, the receiver is required to make a verifiable identification of himself and his age at the point of delivery. Of course, this never happens at Korean doors and it’s hard to imagine those hustling delivery men would ever be able to do that.’’

Korea’s wine boom peaked in 2008 when $166.5 million worth of wine was imported. Of course, that was the same year the financial crisis blew up and decimated markets across the planet. Korea’s wine imports were slashed by 32.5 percent the following year to $112.45 million. Wine imports last year rebounded moderately to $132 million.