'Ethical Auctions': Tackling Fakes, Flipping & Unfair Markets

By @LondonLiquor

As secondary market prices have soared in the past few years, all manner of whisky auction sites have sprung up to cater for demand. Major UK players with an international reach include Whisky.Auction, Scotch Whisky Auctions, Whisky Auctioneer, Whisky Hammer, Just Whisky, and Whisky-Online. Royal Mile Whisky's plans to enter the fray in the next month or so show the industry isn't going away anytime soon. Indeed, the UK has emerged as something of a global hub for online whisky auctioneering, no doubt aided by the strict restrictions on alcohol sales in the US.

The proliferation of whisky auction sites is not surprising: their commission-based business model can be lucrative. A Bitter Truth 24 Year Old Single Barrel Rye Whisky sold for £4600 in March netting the site a cool £1157 in commission and auction fees. Not an insignificant sum for facilitating the sale of a single bottle. With thousands of bottles going under the hammer each month, there's real money to be made.

And the benefits flow both ways. Auctions offer consumers the opportunity to buy and sell 'dusties' that haven't been seen on retail store shelves for years. British Bourbon Society members rave about 1980s and 1990s Wild Turkey obtained at auction.

So far, so good. But there are a few areas of concerns.  

First, are auctions doing enough to weed out fakes?

Second, do auctions offer a fair marketplace? Rumours abound of questionable business practices on certain sites, including credible claims that sale prices are artificially inflated to generate additional commission.

Third, are auctions doing anything to combat the 'flipping' of brand new whisky releases at many multiples of RRP? While not as obviously toxic as fakes and artificial price inflation, flipping is bad news for consumers who want to drink new releases as @The_Bourbonator explored on the BBS Blog back in January.

In sum, can consumers trust UK auction sites? Let's find out.

Fakes:

High profile cases of Scotch whisky and Wine forgeries have emerged all too frequently over the past few years and the past few months have shown that American whisky is not immune. In June 2017, an individual was revealed to have been purchasing empty bottles on eBay before refilling and reselling them on US-based Facebook groups. This hit the close-knit bourbon community hard as he had been a well-known figure and prolific seller, shipping over 1200 packages in 24 months with 77% of those packages containing more than one bottle. The total number of fakes is not known. Next time you see empties of Pappy Van Winkle and other hyped whiskies selling on eBay for over 100 dollars, you know why.  

So, it's risky to buy whisky from platforms that don't have robust anti-forgery measures in place. Auctions sites fortunately appear to be taking their responsibility to weed out fakes seriously. Whisky.Auction is one of several auction sites with a clear anti-forgery policy. Their discovery of a sophisticated whisky forgery operation in February 2017 suggests its being applied properly. Whisky Auctioneer's website also features a detailed policy on fraudulent whiskies that adopts a commendably cautious approach: "[w]hisky auctions are on the front line in combating whisky fakers and here at Whisky Auctioneer we frequently reject whiskies that are either not authentic, or that we simply deem questionable or problematic".

Taking a step back, whisky auctions can't win the battle against forgers alone. Upstream action is also urgently required: distilleries need to start doing more to combat fakes. Anti-forgery technology originally developed for the wine industry has fallen in price and it's hard to see why it couldn't be used on high-end whisky releases. Even Ralfy incorporated anti-forgery measures into the bottles of his excellent Port Charlotte Meteorite Single Cask release! BBS Members, bars and restaurants can also all play a part by destroying or defacing high-end empties.

Unfair markets:

All auctions expressly ban shill-bidding. To take Scotch Whisky Auctions' Bidding Policy as an example: "Sellers are expressly forbidden from bidding on their own bottles. Any bottles found to have been subjected to this will be withdrawn. Anyone found to be "bidding up" the prices of bottles will be removed from the site and banned from Scotch Whisky Auctions".

That's all well and good in theory but the devil is in the detail. Few auction sites provide any information on their business practices or the ethical guidelines by which the auctions are run. For example, most auctions don’t disclose whether employees are permitted to bid. But employee bidding raises clear conflicts of interest given the potential asymmetry of information between employees and other bidders.

Let's imagine a scenario where a bidder puts down £1000 on a bottle of Pappy Van Winkle 23 Year Old and sets a 'maximum auto-bid' price of £1800. Maximum auto-bid prices are accessible to employees who place a bid of £1790, ostensibly because they want to purchase the item, but with the real aim of automatically increasing the maximum bid to £1800. The bidder ends up paying an inflated price while the auction pockets greater commission. Far-fetched? Not really. I've received credible information that at least one site turns a blind eye, to put it charitably, to this type of behaviour.

To get greater clarity on this, we contacted multiple auctions to ask whether appropriate safeguards were in place to ensure a fair marketplace. The responses were not reassuring. While conduct of the type mentioned in the above scenario would run contrary to internal Staff Codes of Conduct and, in particular, the prohibition on shill-bidding, employees were generally permitted, and in some instances actively encouraged, to bid on auctions despite having access to information on other bidders. BBS Members: be extremely wary of setting auto-bids.  

Royal Mile Whisky Auctions has chosen to do things differently. Its recently announced 'strict ethics policy' adopts a commendable position: "Staff of Royal Mile Whisky Auctions or any partner/subsidiary companies are not permitted to sell or bid on our auction website […] Bidders know they are bidding in a fair marketplace, and not competing against the company providing the auction service itself, or the staff that work for them. All bidders have the same information when choosing to bid". A refreshing approach.

Flipping:

Back in January, @The_Bourbonator noted that "auction sites voluntarily implementing a policy of not selling new releases for at least 12 months is perhaps wishful thinking but at least such a step would force flippers to take a longer term financial risk than they do today".

Well, take a bow Royal Mile Whisky Auctions: "Royal Mile Whisky Auctions will not accept for auction any limited edition whiskies within one year of their release […] Whisky fans know that prices are not artificially being driven up, especially those new releases being ‘flipped’ immediately after release". This is an excellent initiative that, once again, marks Royal Mile Whisky Auctions out. None of the other auctions have implemented comparable policies.

Ultimately, however, flipping is another issue that can't be tackled by auctions alone. It requires a co-ordinated response by distributors, retailers and consumers. There have already been a few steps in the right direction. Notably, Milroy's of Soho and Hedonism have both collaborated with Hi-Spirits to put on events where Pappy Van Winkle is sold at RRP provided the buyer immediately 'defoils' the bottle to prevent resell. You can read more about these initiatives, which took the form of a tasting raffle and a tasting competition (won by BBS' very own @MCRBourbon) on the BBS Blog.


So, we asked at the start whether consumers could trust UK auction sites. The jury is still out in my opinion, particularly in respect of those auction sites that fail to disclose their business practices and/or the ethical guidelines, if any, by which they operate. This enigmatic approach could ultimately backfire on the whole industry: why should consumers blindly stump up substantial commission and fees when it's not clear whether the market is fair?

Auctions need to become more transparent or they risk losing consumer confidence. While it's still very early days for Royal Miles Whisky Auctions, their decision to enter the auction market arena with a 'strict ethics policy' is a commendable development. Indeed, Whisky Auctioneer has recently made its Code of Ethics publicly available for the first time. Although arguably not as far-reaching as RMWA's, it's certainly a step in the right direction.

Here's hoping there's now a shift towards 'ethical auctions' across the industry, with a greater focus on transparency and self-regulation, before a couple of bad apples ruin it for everyone.