Safe as houses

As with the rest of the drinks industry, tough times are predicted for bonded warehousing. Nevertheless, the sector remains focused on providing top notch storage and vigilance against theft and fraud. By James Graham

If it is a truism that the only certainty in life is death and taxes, then the only certainty in the drinks industry is that somewhere between producer and consumer duty and excise will be levied. Before such charges are paid, untaxed products are kept in bonded warehousing, under the joint custody of the importer or its agent and HM Revenue and Customs (HMRC). Once the charges are paid, the stock is released to the trade.
Like all sectors in the drinks industry, bonded warehousing activity is facing a tough time in the near future, believe a number of drink industry executives.
“Based on feedback from our customers, it’s clear that we are facing a challenging period,” says Michael Lainas, director, Cert Octavian. “Many businesses feel that this year will be relatively flat in terms of trading, others are predicting that next year will be the true test. The impact of trading conditions on our customers is already being felt – it has been much harder to pass on government-led inflation to our customers, as they are operating in very tough markets such as retail and the hotel and restaurant sector, which is highly competitive.”

Strict rules
The fiscal and regulatory framework in which bonded warehousing works separates operators in this sector from unbonded warehousing, common through much of the storage and distribution industry. Key issues that appear on the radar of bonded warehousing managers include the guaranteeing of the provenance of drinks held under bond, theft from premises en route and consolidation in the sector.
Three UK-based companies reflect on similar market conditions that face the whole bonded warehousing sector.
“There is no doubt that conditions remain challenging. We have seen a number of warehousing companies go into administration, mainly as a result of pressure being applied to provide services at unrealistic rates,” says David Hogg of London City Bond (LCB). “While we acknowledge that service is paramount, this has to be delivered at rates that are sustainable and provide acceptable margins to both sides of any partnership.”

In a transfer worthy of the Football Association, Jeff Stanton, former CEO of the Cert Group, has recently joined LCB as non-executive chairman, drawing on over 20 years’ senior experience in supply chain and financial management.
LCB’s view is mirrored by Michael Phelps, director, EHD London, who has also seen changes that point to troubled waters over the medium term for bonded warehousing.
“While we have witnessed a number of bonds reducing capacities, closing or restructuring, there has been a steady growth in the case holding at EHD London over the last two years,” says Phelps. “That is why in June 2007 we moved to larger facilities at Weybridge, Surrey. Since the  Budget in March the ‘talk’ in the trade is that 2008 will be a difficult year. However, EHD continues to grow and is currently sourcing new facilities to extend its clients’ fine wines storage service.”
Acting as third parties between buyer and seller, bonded warehouses work hard to guarantee the provenance of the drink they store. Hogg says that sometimes it is not HMRC that is concerned but customers themselves.
“We do not believe that the provenance of goods is an issue with HMRC, although some customers do look for certain guarantees with regard to their stockholdings – mainly in the fine wine area. We believe our storage facilities are among the best but we would never guarantee provenance of stock held with us beyond providing full traceability, from the moment a case arrives in our warehouse to the day it leaves. As a company, London City Bond does not own any stock nor hold any stock in its name.”

Likewise, EHD’s Phelps also thinks the customer is more concerned than the authorities on the subject: “All stock is received to customers’ accounts in conjunction with accompanying paperwork. The stock is then labelled accordingly, identifying ownership in line with the system record and our obligations to HMRC. Therefore, there should never be an issue with the customer or HMRC with regards to ownership and never has been,” he says.
For Cert Octacvian, Lainas says: “All goods that arrive into our care are ready-packaged. What we focus on is ensuring that storage conditions are appropriate for the product, whether that is ambient, temperature-controlled or in our underground, fine wine storage facility, Corsham Cellars. The introduction of our premium fine wine cellarage service, Octavian Vaults, provides private customers with additional benefits including the world’s first secure certificate of storage provenance. For the first time, the certificate of pristine storage, which is protected with anti-fraud features equal to those of currency, allows us to securely document the storage provenance of each bottle of wine that we handle. Based on empirical evidence from auction houses and wine producers, a customer could expect an increased premium of up to 20% when auctioning their wine with proof of storage provenance in perfect conditions. We believe this is a major step forward in safeguarding storage provenance, and are continuing to work with the wine industry and media to ensure that this issue is taken more seriously.”

Keeping wrongdoers at bay
While operators are naturally reticent when it comes to discussing issues surrounding theft and security at their facilities, modern security methods and equipment are well-placed to secure the goods under bond.

“You can never say any warehouse, or system, is 100% secure. However, the risk of physical theft from warehouses can be minimised by good CCTV systems, robust CRB checks on all employees and advanced security systems, which we have in place at all our warehouses,” says Hogg.
“There is a growing trend by determined individuals and gangs to work scams whereby vehicles are diverted before arriving at warehouses, with the consequent loss of their loads. We continue to work with HMRC and other agents in the supply chain to minimise the risk of stock theft in transit.
“Our IT systems are robustly protected and our IT support team, based at our Tilbury headquarters, remains vigilant to protect our business and our customers’ stock at all times.”
For Cert Octavian, physical security at one of its locations has truly gone to ground.
“Cert Octavian has a very strong track record in terms of high levels of security. We rarely have a theft issue across any of our facilities and particularly at Corsham, which is based 100ft underground and is only accessible by 157 steps down the former mine shaft. We have invested heavily in CCTV, which is constantly monitored and we haven’t experienced a problem with our IT systems as security features are continually updated. We don’t experience diversion fraud – all in all, we believe that our security processes are as robust as they can possibly be,” says Lainas.
“However, we do recognise that paperwork and process theft is an issue for the industry and measures must be taken to stamp out fraudulent activity. To combat this, we communicate frequently with our customers, who are also vigilant, so that if a suspect order does come in, no products are picked unless the order has been validated by all parties involved.”
EHD is alert for suspicious activity by potential customers to boost its security, says Phelps. “To eliminate the chance of theft from EHD, we have a very comprehensive security system in operation. Our staff are all permanent and have been with us for a considerable time. The major concern this year has been the release of the 2005 Bordeaux vintages and their transport to the UK. The high value of this stock has left it susceptible to problems,” he says.

“In regards to ‘paperwork’ theft, our many years within the industry has taught us to be aware of the telltale signs that a trader may be fraudulent. As part of our commitment to HMRC’s Early Warning System (EWS), we constantly monitor the trade. Provisional goods-in bookings, mobile telephone numbers used as main contact numbers and disregard for tariffs are an indicator for fraudulent activities. With this in mind we have outsourced our IT support to experts who have implemented all the necessary systems to prevent hacking.”
LCB has a turnover in excess of £25 million and, on average, holds over three million cases of stock in its warehouse at any given time. This stock is likely, on average, to turn over three to four times a year. The company acquired Vinothèque in Burton-upon-Trent as a substantial remote warehouse with perfect conditions for cellaring fine wines – how has this worked out?
“Vinothèque has been very successful for LCB and has given us the ‘out of town’ warehouse we were looking for in respect of fine wine storage. We believe this is now regarded as one of the major facilities within the UK for the storage and maturation of fine wines. It has also proved popular with a number of our fine wine trade customers, who are now able to offer a complete fine wine service to their private clients including recommended storage facilities,” says Hogg.
LCB has also acquired a major, new, state-of-the-art warehouse in Barking that extends to over 270,000 square feet.

Cert Octavian handles 300,000 orders and delivers 45m cases of wine per year, to over 30,000 delivery points. The Corsham operation alone holds around 750,000 cases of wine.
“In terms of the length of storage, some customers turn over their stock six times per year, but we also have clients whose fine wine has been stored with us at Corsham for 20 years,” says Lainas. “It’s an interesting dichotomy that some customers have objectives to improve their stock-turn to raise profitability, whereas at the other end of the spectrum we have customers storing with us for years on end and the value of their stock increases the longer it is stored with us.”
EHD finds that stock can move the week it arrives although some has been at EHD for several years.
Phelps says: “The average turn over of stock is a little over four times per year. During the busy Christmas period we were distributing over 10,000 cases per week. As well as offering storage and distribution for the commercial sector we do have many private accounts for both UK and overseas clients. We undertake cellar clearances for private individuals, which recently included offering temporary storage for nearly 20,000 cases of Port for one of London’s oldest gentlemen’s clubs.”

© db May 2008