the illegal alcoholic beverages market in six latin american countries - 2014
TRANSCRIPT
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THE ILLEGAL ALCOHOLIC BEVERAGES MARKET IN SIX LATIN AMERICAN COUNTRIES2014
Report prepared by Euromonitor International
for SABMiller
October 2015
INTRODUCTION
REGIONAL ANALYSIS
COLOMBIA
ECUADOR
EL SALVADOR
HONDURAS
PANAMA
PERU
APPENDIX
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INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
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Euromonitor International network and coverage
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Project background
Over the past four years SABMiller has partnered with Euromonitor
International to complete an intensive investigation of the illegal alcoholic
beverages market in six Latin American countries to gauge the size of the
illegal market and its impact on legal trade. The country and regional level
insights in this research provide the foundation necessary to build a
strategic plan and to increase consumer and government awareness of the
issues.
Client objectives
Estimate the size of the total market for illegal alcohol in value and volume
terms and by type of alcohol.
Examine the current trends in the Latin American illegal alcohol landscape.
Gain an understanding of what motivates people to buy illegal alcohol,
based on interviews with industry players.
Identify any changes to the illegal alcohol value chain in 2014.
Identify distribution and production trends and highlight any changes since
last year's report.
In addition to the annual research objectives given above, this year’s
research includes an in-depth review of the current ethanol supply chain in
each country, with a strategic focus on uncovering potential chokeholds.
Project objectives
Category coverage
Counterfeit & illegal brands
Contraband
Illegal artisanal
Surrogate
Tax leakage
Country coverage
Colombia
Ecuador
El Salvador
Honduras
Peru
Measures
Volume (HL LAE)
Value (US$ mn)
Fiscal loss (US$ mn)
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Category/subcategory Definition
Recorded alcohol
Alcohol products that are subject to government regulation and are
appropriately recorded for taxation, consumption and other commercial
purposes. Recorded alcohol comprises Formal Alcohol production and trade.
Unrecorded alcohol
Alcohol products that are not subject to government regulation and/or
purposefully evade commercial and governmental regulation, including
payment of excise tax. Unrecorded alcohol includes Informal and Illicit
Alcohol production.
Informal alcohol
Informal alcohol is typically produced as part of long-standing traditional
and/or cultural practices. While some governments permit the production and
sale of informal alcohol, it typically is not subject to excise tax payments or
health and safety requirements due to the nature of production and
consumption.
Illicit alcohol
Illicit alcohol products can pose a health risk - including death - to
consumers. By its very nature, illicit alcohol illegally enters the economy
either through production, distribution and/or purchase channels outside of
the formal and recorded market, thereby eluding excise tax payments and/or
industry safety standards. In many instances, illicit alcohol is traded by
criminal organisations involved in other contraband and illegal commercial
enterprises. Illicit alcohol can take many forms, including: counterfeit,
smuggled, adulterated, surrogate and tax-avoidance.
Definitions
Source: Position Statement and Principles regarding Illicit and Informal Alcohol, SABMiller 2014
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Category/subcategory Definition
Counterfeit & illegal brands
Substitute/refillIllegal alcohol sold as legal brands or empty bottles of legitimate
products refilled with cheaper alcohol
Industrial manufacturing of
illegal brandsManufacturing of illegal branded or unbranded alcohol
Contraband
Ethanol as raw material Illegal imports of ethanol as a raw material
Finished products Illegal imports of alcoholic beverages
Illegal artisanal
Illegal artisanal alcoholic beverages made for commercial purposes
Surrogate
Alcohol not meant for human consumption (e.g. pharmaceutical alcohol)
diverted to the alcoholic beverages market
Tax leakage
Legal alcoholic beverages (locally produced) on which excise was not
paid
Definitions
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Alcohol categorization
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
INTRODUCTION
REGIONAL ANALYSIS
COLOMBIA
ECUADOR
EL SALVADOR
HONDURAS
PANAMA
PERU
APPENDIX
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 10
852,616 HL LAE
Illegal Volume
US$2,523 mn
Value at illegal price
US$650 mn
Fiscal loss
Illegal Market 2014 – Region
Volume
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Which are the main findings for the illegal market in 2014?
• The tax increase on alcohol in Peru (in mid 2013 ) and Panama (in early 2013) was felt in the legal market in 2014. In Peru, this translated into a fall at overall market level, while in Panama there was a shift in consumption from distilled alcoholic beverages towards legal beer.
• In Ecuador, it was not an issue of taxes on production but on imports, which encouraged production and consumption of local alcoholic beverages.
Taxes have an impact on the legal market in Peru, Panama, Ecuador
• The gap widened in Colombia, El Salvador and Panama, due to an increase in the price difference as a result of contraband.
• The gap narrowed in ethanol producing countries such as Peru and Ecuador, where the fall in international demand for ethanol reduced the price of the raw material.
Marginal reduction in the gap between legal and illegal prices
• At aggregate level, consumption per capita in the overall market fell by 3.7% in 2014 to 4.7 L LAE per capita. This is due to a fall in consumption both in the legal and illegal market.
• A different scenario was found in Ecuador and Panama, where an increase in consumption per capita was noted both in the legal and illegal market due to greater availability of national products, while in Panama the illegal market increased due to the taxes on high alcohol content beverages, leading to a 3.0% increase in beer consumption at HL LAE.
Consumption per capita in the aggregate market fell by 3.7%
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Which are the main findings for the illegal market in 2014?
• New regulations in place imposing stricter sanctions on illegality, and an increase in confiscations in several countries such as Ecuador, Peru and Colombia. However, illegal traders created new modalities to be able to carry on with their business.
• On the other hand, control of the illegal market for alcoholic beverages is not as yet a priority for the authorities in many countries in the region.
Retailers continued to avoid regulations and authorities
• With the exception of Peru and Panama, the rest of the countries do not have a register in place for ethanol purchases and sales, which facilitates access to raw materials for production of illegal alcoholic beverages. El Salvador does have a register in place, but this tool is insufficient to control the flow of ethanol towards the illegal market.
• In addition to ethanol (the main raw material), there are other supplies such as bottles, labels, pharmaceutical alcohol, etc. that are not subject to control.
Failure to carry out control and follow up on raw materials continued
• In spite of mandatory sanitary registers for ethanol imports and exports, failure to make controls in customs allows the entry of potable ethanol as though it were industrial ethanol, which is then used for unauthorized purposes.
• Illegal products trading generates sources of income and subsistence for communities living close to country boundaries, who are unable to get a formal job – which means informal economy continues to develop. They may take an active part in the business or be forced to do so by organized groups.
Failure to control and coordinate country boundaries continued
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Which are the main findings for the illegal market in 2014?
• 45% of fiscal loss at an aggregated level, comes from contraband, and 10% from tax leakage.
• The country most contributing to fiscal loss is Colombia (65% of the region) with the main category behind the fiscal loss being contraband.
Contraband was the main source of fiscal loss in the region
• Categories involving illegal artisanal, counterfeit and surrogate fell in 2014 due to a lower availability of residual ethanol in the market as a result of the increase in sugar exports.
Peru stood out within the region for its fall in the illegal market
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• At aggregate level, per capita consumption in the illegal market fell 5.8%.There was an increase in Ecuador, Honduras and Panama. The high availability of illegal alcohol in Ecuador and Peru was clear in the high consumption per capita.
• Honduras was the country with highest historical growth in illegal volume (2012-14), while Peru maintained the highest share in the illegal market.
• The percentage of the illegal market remained above the aggregate average in Peru, Ecuador and Colombia.
• At aggregate level, sanitary* and tax** risk involved a 60/40 share.
• Tax leakage was the category gaining most share in aggregate.
• Counterfeit beer increased its share marginally in 2014. Counterfeited beer in Peru has a significant influence on the aggregate analysis; other countries are characterized by contraband.
Which are the main findings for the illegal market in 2014?
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
*Counterfeit, illegal artisanal and surrogate. ** Contraband and tax leakage.
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• In 2014, El Salvador and Peru saw a fall in percentage points in the illegal market (2.1 and 2.8, respectively) while the other countries saw an increase.
• Since 2012, the volume (HL LAE) of illegal alcohol in Colombia, Honduras and Panama increased while decreasing in aggregate, due to the fall in Peru.
• The legal market in Peru, Ecuador and El Salvador has not yet recovered the levels of 2012.
• Ecuador and Panama the only two markets that saw an increase at illegal and legal level, i.e., total per capita consumption increased.
• Peru continued to have the largest volume on the illegal market. However, it saw the most significant fall in volume in 2013-14.
Which are the main findings for the illegal market in 2014?
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
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In 2014, El Salvador and Peru experienced a fall in their share of the illegal market
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
Given the historical variations in certain countries are deemed to be marginal under the margin concept of
minimis (+/- 2%), Euromonitor International considers that Honduras, El Salvador and Peru are the only
markets experiencing significant changes in 2014.
23.8%
28.6%
23.5%
13.1%
2.4%
30.8%
25.6%
24.3% 23.9%24.9%
13.5%
2.4%
30.6%
24.9%24.8% 24.5%
22.8%
17.1%
2.5%
27.8%
24.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Colombia Ecuador El Salvador Honduras Panama Peru Aggregate
% Ille
gal m
ark
et
Illegal market evolution 2012 - 2014 (HL LAE)
2012 2013 2014
The aggregate share
of illegal alcohol fell
0.5 percentage point
in 2014
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Illegal Market
HL LAE2012 2013 2014
2013-2014
change*
Colombia 346181 370,253 371,527 1,275
Ecuador 186,326 129,939 142,011 12,072
El Salvador 33,478 32,238 28,006 (4,232)
Honduras 14,287 13,930 16,981 3,051
Panama 3,719 3,719 4,048 329
Peru 342,381 338,752 290,043 (48,709)
Aggregate 926,371 888,831 852,616 (36,214)
Peru still the largest illegal market. However, it experienced the highest fall in volume over the 2013 – 2014 period
*Figures for 2013 in Panama were modeled.
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Illegal Market 2012-14
growth
Aggregate -8.0%
Colombia 7.3%
Peru -15.3%
Ecuador -23.8%
El Salvador -16.3%
Honduras 18.9%
Panama 8.8%
Since 2012, the illegal alcohol volume in Colombia, Honduras and Panama has increased, while decreasing in aggregate
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
2012 2013 2014
HL
LA
E
Illegal market 2012 - 2014
Colombia Ecuador El Salvador Honduras
Panama Peru Aggregate
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 19
Legal Market
2012-14
absolute
growth
Aggregate -1.9%
Colombia 1.4%
Peru -2.0%
Ecuador -6.0%
Panama 1.5%
El Salvador -13.1%
Honduras -13.2%
The legal market volume in Peru, Ecuador and El Salvador has not yet recovered the levels reached in 2012
Source: SABMiller, Euromonitor Passport
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-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
2012 2013 2014
HL
LA
E
Legal market 2012 - 2014
Colombia Ecuador El Salvador Honduras
Panama Peru Aggregate
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Colombia
Ecuador
El Salvador
Honduras
Panama
Peru
Aggregate
(80,000) (60,000) (40,000) (20,000) - 20,000 40,000 60,000
Variation in total market per country: 2013 vs 2014 (HL LAE)
2013 vs 2014
variation HL LAELegal Market Illegal Market Total Market
Colombia (29,463) 1,275 (28,189)
Ecuador 23,004 12,072 35,076
El Salvador (2,397) (4,232) (6,629)
Honduras (6,973) 3,051 (3,922)
Panama 2,267 329 2,596
Peru (17,039) (48,709) (65,749)
Aggregate (30,602) (36,214) (66,816)
Over the last year, Ecuador and Panama have shown an increase in absolute terms in illegal and legal consumption
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In aggregate, per capita consumption in the total market has fallen to 4.7 L LAE - the strongest fall was noted in Peru
In aggregate, total market per
capita consumption fell 3.7% in
2014 to 4.7 L LAE. This is due
to a fall in consumption in both
the legal and illegal markets.
Peru is the country with the
largest fall in per capita
consumption at illegal level
and in the overall market.
Honduras is the country with
the strongest fall in legal per
capita consumption (9.9%
versus 2013) to 1.6 L LAE and
the strongest increase in
illegal consumption. At total
alcohol level, consumption
fell -6.0%.
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
∆ -3.7%
∆ -8.9%
∆ -6.0%
∆ -6.3%
∆1.7%
∆ 4.9%
∆ -3.1%
∆ = variation in total per capita consumption 2013 vs 2014
1.1
1.4
0.7
0.3
0.2
1.4
1.2
3.5
4.4
2.3
1.6
6.2
3.8
3.6
4.6
5.9
3.0
2.0
6.4
5.2
4.7
- 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Colo
mbia
Ecua
dor
El
Sa
lva
do
rH
on
du
ras
Pa
na
ma
Pe
ruA
ggre
ga
te
Per capita consumption - % growth 2013-2014
Per capita total consumption Per capita legal consumption Per capita ilegal consumption
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 22
PanamaEl SalvadorColombia Honduras
1.1 0.7 0.3 0.2
Peru
1.4
Ecuador
1.4
Easy availability of illegal alcohol in Ecuador and Peru reflected in a high per capita consumption
Annual per capita consumption of illegal alcohol in liters LAECalculation based on a 15-65 years-old population
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
Illegal growth per
capita L LAE 2013-
14
-17.0% 7.7% -1.0% -14.2% 19.1% 8.8%
Honduras is the country with the strongest increase in illegal per capita consumption (19.1% compared to
2013) to 0.3 L LAE.
Peru is the country with the strongest fall in illegal per capita consumption (17.0% compared to 2013) to 1.4 L
LAE.
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 23
Colombia
Ecuador
El Salvador
Honduras
Panama
Peru
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0% 5% 10% 15% 20% 25% 30% 35% 40%
% G
row
th 2
012 -
2014
% of illegal alcohol in 2014
Illegal alcohol market – LAE volume
Honduras is the country with the largest growth between 2013 -2014, while Peru still has the largest share in the illegal market
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
• Since 2012, illegal LAE volume has grown faster than legal volume in Colombia, Honduras and
Panama.
• Although Peru was the market with the highest fall in the illegal market in 2014, Ecuador was the
country that most reduced volume and share over the 2012- 2014 period.
Ecuador is the market with the
greatest fall in volume and illegal
share over the 2012-14 total
Honduras is the market with the
highest growth in illegal volume and
share over the 2012-14 total
The size of the bubble
represents the size of the illegal
market in 2014 (HL LAE).
Transparent bubbles represent
the size of the market in 2013.
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4.5%
28.4%
6.1%
24.8%
21.4%
24.5%
22.8%
17.1%
4.6%
2.5%
27.8%
15.7% 16.0%
23.6%
0%
5%
10%
15%
20%
25%
30%
Argentina Brasil Chile Colombia Costa Rica Ecuador El Salvador Honduras Nicaragua Panama Peru DominicanRepublic
Venezuela Regional
Czech
Republic
7.1
%
Illegality levels in the countries under study are high as compared to other countries
*The figures in Brazil do not include tax leakage
Brazil, Dominican Republic, Venezuela = 2011. Nicaragua, Costa Rica = 2012. Argentina, Chile = 2013.
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South
Afr
ica
22.9
%
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24.8%
24.5%
22.8%
17.1%
2.5%
27.8%
24.4%
75.2%
75.5%
77.2%
82.9%
97.5%
72.2%
75.6%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Colombia
Ecuador
El Salvador
Honduras
Panama
Peru
Aggregate
2014: Illegal market shares (LAE)
Illegal LAE % Legal LAE %
Peru, Ecuador and Colombia remain above the aggregate illegal average
Aggregate
average
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In aggregate, the illegal market had a 60/40 share between sanitary and tax risk
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
Note: Sanitary risk includes counterfeit, illegal artisanal and surrogate. Tax risk includes contraband and tax leakage.
46%
14%
49%
8%
53%
42%
36%
12%
5%
90%
53%
20%
27%
5%
19%
4%
22%
25%
14%
10%
40%
0%
6%
3%
55%
2%
17%
11%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Colombia
Ecuador
El Salvador
Honduras
Panama
Peru
Aggregate
Illegal market categories (LAE)
Counterfeit Contraband Illegal Artisanal Surrogate Tax leakage
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In aggregate, counterfeit lost share, which translated into lower sanitary risk as compared to 2013
Counterfeit Contraband Illegal Artisanal Surrogate Tax Leakage
Colombia 0.4% 0.1% -0.2% -0.6% 0.2%
Ecuador -0.7% -3.1% -0.4% 0.0% 4.3%
El Salvador 2.8% -1.6% 0.3% 1.6% -3.2%
Honduras 9.7% -9.7% 0.0% 0.0% 0.0%
Panama -0.8% -2.9% -7.1% 0.0% 10.9%
Peru -6.4% 4.1% 1.9% -0.1% 0.4%
Aggregate -3.2% 1.4% 0.0% -0.2% 1.9%
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-3.2%
1.4%
0.0%
-0.2%
1.9%
-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%
Counterfeit
Contraband
Ilegal artisanal
Surrogate
Tax leakage
Illegal market variation by category at aggregate level: 2013 vs 2014
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Counterfeit beer share increased marginally in 2014
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99.1
% L
eg
al b
eer
0.9
%Ille
ga
l b
eer
1,964,308
HL LAE
16,978
HL LAE
The volume of illegal beer
increased by100 HL LAE in 2014 v.
2013, to a total of 16,978 HL LAE.
Counterfeit beer increased its share
in the total by 2 percentage points.
Increase comes mainly from the
substitute (refill) beer in Peru.
52%48%
Counterfeit Contraband
41%
13%3%
6%
35%
Legal beer LAE
Colombia Ecuador El Salvador Honduras Panama Peru
39%
8%4%
49%
Illegal beer LAE
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Most counterfeit beer comes from Peru, while in the rest of the countries illegal beer comes from contraband
Illegal beer does not exist in Panama and El Salvador
6,732 HL 1,311HL 644 HL 8,291 HL 16,978 HL
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1,436
7,476
8,913
5,296
1,310 644
816
8,065
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Colombia Ecuador Honduras Peru Aggregate
Illegal beer, volume LAE 2014
Counterfeit Contraband
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Greater awareness (of authorities and public), presence of authorities and a larger number of seizures provide a better control over the production and consumption of alcoholic beverages in some channels and countries. However, enforcement is still not as stringent as for other crimes.
The lack of control over ethanol commercialization continues, providing illegal alcohol manufacturers with easy access to this raw material, somewhat similar to what happens with recycled bottles, labels and seals, which are easy supplies to obtain.
In spite of the efforts to increase controls at country boundaries and customs, corruption and the lack of officials mean contraband from neighboring countries continues to exist.
The change in alcoholic beverage tax added to import fees has increased the price of legal products in several countries.
Which are the main factors affecting the illegal market in 2014?
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
Consumers still demand low price alcoholic beverages regardless of their source,
particularly among the lower socioeconomic levels.
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Valor
852,616 HL LAE
Illegal Volume
US$2,523mn
Value at illegal price
US$650 mn
Fiscal loss
Illegal Market 2014 – Region
Value
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 32
15%
20%
9%
4%
2%
15%
15%
85%
80%
91%
96%
98%
85%
85%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Colombia
Ecuador
El Salvador
Honduras
Panama
Peru
Aggregate
2014: Illegal market share (US$)
Illegal US$ % Legal US$ %
Ecuador was the country with the highest illegal market share in value; Peru and Colombia are also above average
Aggregate average
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
Note: Estimated amount based on illegal retail prices
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 33
The main category in terms of value and volume was counterfeit
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
47%
14%
51%
5%
73%
46%
40%
20%
16%
93%
72%
12%
30%
6%
10%
6%
15%
12%
8%
5%
0%
26%
3%
2%
55%
2%
9%
3%
12%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Colombia
Ecuador
El Salvador
Honduras
Panama
Peru
Aggregate
Illegal market categories (US$)
Counterfeit Contraband Illegal Artisanal Surrogate Tax Leakage
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 34
$11.8
$11.0
$6.8
$6.1
$13.5
$6.4
$9.4 $9.7 $9.8
$5.5
$4.8
$9.9
$4.5
$7.6
$-
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
Colombia Ecuador El Salvador Honduras Panama Peru Aggregate
US
$
Legal Average RSP US$ Illegal Average RSP US$
In aggregate, the gap between the price of legal and illegal products was reduced from 20.3% to 19.8%
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
∆ 17.6%
∆ Variation %
∆ 10.7%
RSP = retail selling prices. Exchange rates for local currencies vs USD may also affect the results of the 2013 vs 2014 review.
The gap narrows in ethanol
producer countries such as Peru
and Ecuador where the fall in
international demand of ethanol
reduced the price of raw
materials
The gap between legal and
illegal prices in 2014 vs 2013
increased in Colombia, El
Salvador and Panama due to
the increase in the price
difference caused by
contraband
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 35
39%
8%4%
49%
Illegal beer LAE
Illegal beer value and segmentation continued the same in 201499.2
% L
eg
al b
eer
0.8
% Illeg
al b
eer
The value of illegal beer increased
marginally by US$1mn.
Contraband versus counterfeit
breakdown remained unchanged.
Contraband is still most relevant for
illegal beer in terms of value, while
counterfeit beer is most important in
terms of volume.
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
US$10,473
mn
US$87 mn
61%
39%
Counterfeit Contraband
50%
12%
3%
27%
Legal beer US$
Colombia Ecuador El Salvador Honduras Panama Peru
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852,616 HL LAE
Illegal Volume
US$2,523 mn
Value at illegal price
US$650 mn
Fiscal loss
Illegal Market 2014 – Region
Fiscal Loss
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 37
44%
65%
17%
17%
34%
14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Volume LAE Fiscal Loss
Peru
Panama
Honduras
El Salvador
Ecuador
Colombia
Colombia accounts for 65% of the aggregate fiscal loss
In 2014, Ecuador increased its fiscal loss share from 14% to 17% due to the
increase in tax leakage
852,616 HL LAE US$650mn
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Peru, Honduras and El Salvador above average in the region in terms of US$ / LAE alcohol ratio
LatAm
average CO PE EC HON PA SV
VAT Rate 15% 16% 18% 12% 18% 10% 13%
Beer Excise + VAT US$/LAE 12.8 16.8 17.2 11.5 11.4 8.4 18.3
Distillate Excise + VAT
US$/LAE 9.3 18.9 6.5 11.5 4.3 6.5 8.6
Ratio: beer / spirits US$/LAE 1.8 0.9 2.7 1.0 2.6 1.3 2.1
Source: SABMiller
Average
Below average
Above average
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
1.76
0.9
2.7
1
2.6
1.3
2.1
0
0.5
1
1.5
2
2.5
3
Aggregate Colombia Peru Ecuador Honduras Panama El Salvador
Rati
o:
beer
/ sp
irit
s U
S$ /
L
AE
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Contraband is the most important category in terms of fiscal loss, but not in terms of volume or value
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
59%
24%
22%
78%
66%
5%
45%
31%
12%
41%
22%
79%
34%
3%
16%
4%
14%
13%
7%
5%
31%
4%
48%
12%
3%
10%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Colombia
Ecuador
El Salvador
Honduras
Panama
Peru
Aggregate
Fiscal Loss per category (US$)
Contraband Counterfeit Illegal artisanal Surrogate Tax Leakage
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 40
Colombia and Panama are the two countries where most excise US$ are lost per LAE
Illegal market
size (US$ mn)
Excise lost
(US$ mn)
Import rates
(US$ mn)
Excise lost per
LAE (US$)
Total Fiscal loss
(US$ mn)
Colombia 1,391 397 25 11 422
Ecuador 467 93 20 7 113
El Salvador 49 12 4 4 16
Honduras 18 5 1 3 5
Panama 15 4 1 9 5
Peru 584 86 2 3 88
Aggregate 2,523 597 53 7 650
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The most significant negative impact in the illegal market is for local governments, who are the main losers
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
Illegal alcoholic beverage manufacturers who do not pay taxes or any other costs related to a legitimate business, and therefore obtain higher profit margins.
Consumers who are able to pay a low cost for alcoholic beverages.
Raw material producers who have access to both the legal and the illegal markets.
Governments who fail to receive taxes, which affects public services such as education and health, which requires this income.
Authorities, who need to invest resources in the fight against the illegal alcoholic beverages business.
Consumer who drink potentially dangerous alcoholic beverages.
Legal brands who lose competitiveness against the prices of illegal alcoholic beverages.
Communities who are forced to take part in illegal activities.
Winners
Losers
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According to the 2014 research, Euromonitor identified the following factors that could affect the illegal market in 2015
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
• It is expected that in aggregate, the gap between the price of legal and illegal products will continue to fall, as has happened over the last tow years, affecting the competitiveness of illegal brands.
• In Peru, it is expected that regulation of Law 29.632 will come into full operation during 2015.
• Ecuador will have a new electronic billing system whereby all businesses will be required to issue solely electronic invoices, which will help track taxes.
• In Ecuador, a fiscal seal on bottles will be a new requirement for alcoholic beverages imported to Ecuador at the end of 2014, which could have a positive impact on the reduction of contraband in 2015.
• In Ecuador, as of 2015 specific tariffs will be changed for the calculation of ICE, which could have a negative impact on the legal market.
• In Panama, given the increase in taxes on high alcohol content beverages, in 2015 taxes on all alcoholic beverages will be levelled off, which could affect the legal market.
• In Honduras, the increase in panela production could cause a negative effect on the counterfeit market.
• In Colombia counterfeit beer was found on visits to stores conducted in 2015.
INTRODUCTION
REGIONAL ANALYSIS
COLOMBIA
ECUADOR
EL SALVADOR
HONDURAS
PANAMA
PERU
APPENDIX
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 44
371,527 HL LAE
Illegal volume
US$1,391 mn
Value at illegal prices
US$423 mn
Fiscal loss
Illegal Market 2014 – Colombia
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Which are the main findings for the illegal market in 2014?
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• Counterfeit alcoholic beverage manufacturers created new ways of infringing the law to be able to carry on with their business. For instance, hiding merchandise away in homes where the authorities can only enter with a search warrant, which is not easy to get.
Counterfeit alcohol increased due to new ways of infringing the law
• Controls focus on the country’s frontiers and roads, leaving cities such as Bogotá exposed to the increase in contraband. In this case, products enter via the city airport.
Contraband grew in cities like Bogotá
• There are no prosecutors solely devoted to processing this type of crimes and priority is given to other more serious crimes.
• Only the Atlántico and Antioquia departments have police intelligence groups to attack illegal alcoholic beverage market structures.
• There is insufficient coordination of efforts among the authorities for processing crimes associated to illegal alcoholic beverages.
Illegal market control is not as yet a priority for the authorities
• Consumption of these types of alcoholic beverages fell during 2014 due to a reduction in poverty levels. Illegal artisanal alcohol consumers who improved their income were able to access other higher cost alcoholic beverages.
There was a fall in illegal artisanal alcohol and surrogate alcohol
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 46
During 2014 there was a reduction in poverty levels leading to a fall in consumption of
illegal artisanal alcohol and surrogate alcohol equivalent to 2,614 HL LAE, i.e., a fall of
3.5% and 5.0%, respectively, between 2013 and 2014.
Lack of control over the selling of potable ethanol continues, which means illegal alcohol manufacturers can easily access this raw material. Something similar also happens with recycled bottles, labels and seals, which are easy to obtain.
Law enforcement is stricter for asset laundering than for contraband. However, contraband has become a key activity for asset laundering.
Certain communities on the country frontiers live off contraband and no strong measures
have been implemented by the authorities to attack this problem in these regions.
Which are the main factors affecting the illegal market in 2014?
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Increase in year on year illegal market share
75.2%
24.8%
2014
Legal
Illegal
HL LAE Volume 2011 2012 2013 2014
Illegal Market 288,072 346,181 370,253 371,527
Legal Market 1,078,647 1,109,741 1,154,884 1,125,420
Total Market 1,366,719 1,455,922 1,525,137 1,496,948
Note: Figures in the illegal market for 2011 do not include tax leakage
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45.9%31.0%
36.0% 59.5%
5.1%3.3%9.9%5.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Volume Fiscal Loss
371,527 HL LAE
Tax Leakage
Surrogate
Illegal Artisanal
Contraband
Counterfeit
US$423 mn
Contraband accounts for 36% of the illegal market in terms of volume, and for 60% of fiscal loss
Priority in terms of fiscal loss should be on frontier control.
Note: fiscal loss = excise + duties. Does not include any other types of taxes, such as sales tax.
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$10.5
$15.9
$2.6
$18.6
$8.0
$9.7
$24.7
$11.8
$0
$5
$10
$15
$20
$25
Counterfeit Contraband Illegal Artisanal Surrogate Tax Leakage Total Illegal
US
$
Illegal RSP Price Legal RSP Price
Note: RSP = Retail selling prices – end consumer selling price
The gap between the average market price for legal and illegal products was 18%, a higher margin compared to 2013
The price of the
counterfeit alcohol
is the same as that
of legal brands,
deceiving
consumers with
sophisticated
adulteration.
Average price
variation between
contraband
products and legal
products is 36%.
This price
difference is what
most appeals to
consumers.
Surrogate alcohol
is made with
pharmaceutical
alcohol, which is
purchased in the
legal market.
Products evading taxes are sold at the
same price as legal products. Producers
keep the margin by charging consumers the
same price.
There is no difference in prices
since no legal artisanal alcohol
exists. However, these products
are very cheap as compared to
other legal alcoholic beverages.
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In Colombia, 81% of illegal beer is contraband
In 2014, beer accounted for 72%
of the legal alcoholic beverages
market (an increase of 3%
compared to 2013), equivalent to
805,971 HL LAE.
Volume of illegal beer is 7,364 HL
LAE: 81% of the volume is
contraband and 19% is
counterfeit alcohol (“refill”).
There was no industrial
production of illegal beer in 2014.
99
.2%
Le
ga
l b
ee
r 0
.8%
Ill
eg
al
be
er
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
72%
Legal categoriesLAE
RTD Wine Destilled Beer
81%
19%
Illegal beer LAE
Contraband Counterfeit
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 51
46.9%
Illegal Value
31.0%
Fiscal Loss
The counterfeit alcohol category accounts for almost half of the illegal alcoholic beverages market
45.9%
LAE Volume
170,590 HL LAELegal volume 2014
US$653 mnValue at illegal prices 2014
US$131 mnFiscal loss 2014
Industrial production of national distilled beverages dominates this category
Counterfeit alcohol is the most important category within the aggregate illegal alcoholic beverage market, in terms of volume (46%) and value (47%).
Distilled products dominate this category, accounting for 99% of the volume.
The most relevant subcategory is industrial production, which accounts for 81% of the volume, while refills account for 19%.
For total counterfeit alcohol, the growth between 2013-2014 was 1.2%, driven by the growth in industrial production (1.3%), due to easy access to raw material and supplies.
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The main factors influencing this category are easy access to supplies and sophisticated counterfeit techniques
Beverage• Aguardiente, imported distilled beverages (whisky).
• Bottles are refilled with low quality alcoholic beverages, or with whiskey-flavored or even
honey-flavored extracts.
Where • Bogotá, Medellín, Cali y Barranquilla. City centers in los San Andresitos commercial
centers.
• Small stores (estancos = liquor stores), bars and discos.
Factors
• Easy access to all the supplies required.
• Sale, production and storage of counterfeit alcohol is done in different houses, to make
control searches more difficult.
• There are no controls at points of sales for alcoholic beverages such as San Andresitos.
• Adulteration is becoming more and more sophisticated which makes it increasingly
difficult for consumers to distinguish original products from counterfeit ones.
Effects• Health risk for consumers.
• Damage to the image of original brands.
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Counterfeit alcohol grew 1.2% due to the following factors:
Factors Effects
1
There is as yet no control over the sale of
ethanol. Likewise, printing shops are not
supervised so as to identify any that may produce
fake labels and seals.
Counterfeiters have easy access to all the
supplies required to make alcoholic beverages
without any kind of limitation.
2
There is no a law providing for prosecution of
persons selling counterfeit alcohol. In addition to
this, control searches in houses require a search
warrant, which is not easy to obtain from the
prosecutors.
Counterfeiters split up tasks among different
houses in the same neighborhood, such as
sale, production and storage of fake products.
Thus, if a seller is found to have fake bottles, but
there is no evidence of him also manufacturing
them, the seller cannot be prosecuted.
3
There is a network of offenders and criminals
which is a part of the crime structure.
Intelligence work is required to be able to get to
these criminals, which makes it hard to capture
them.
4.
Not all Revenue Offices in the country have the
tools required to perform alcohol tests on
alcoholic beverages which are suspected of being
illegal.
Bottles identified with some type of abnormality in the labels or seals are reported as contraband by the Revenue Offices that have no way of measuring alcohol levels.
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Contraband is the main source of fiscal loss
This category is dominated by the contraband of distilled finished products
Contraband is the second most important category among total illegal alcoholic beverages, in terms of volume (36%) and value (40%).
Distilled products dominate this category, accounting for 93% of the volume.
The most relevant subcategory corresponds to the finished product contraband, which accounts for 57% of the volume, while ethanol contraband accounts for 43%.
At aggregate level, the growth of contraband between 2013 and 2014 was 0.7%, driven by the growth in finished product contraband (5.8%).
133,929 HL LAEIllegal volume 2014
US$554 mnValue at illegal prices 2014
US$251 mnFiscal loss 2014
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
36.0%
LAE Volume
39.9%
Illegal Value
59.5%
Fiscal Loss
© Euromonitor International Ltd 2015. Applicable terms and conditions of use and the disclaimer at the beginning of this document apply. 55
Contraband is distributed from the frontiers to the main cities in the country
Beverage • Whiskey, rum, aguardiente (carrousel contraband), wines.
Where
• Contraband coming from Aruba, Curacao and Venezuela enters through via northern
frontier to Santander and Guajira.
• Contraband coming from Panamá enters via the port of Buenaventura (Valle del Cauca).
• National aguardiente is taken legally across the border into Ecuador, and then reentered
as contraband, without paying the excise tax.
• Contraband also enters by air through Bogotá.
Factors• Authorities concentrate their control operation on frontier highways, leaving cities like
Bogotá exposed to the increase in contraband.
• Contraband storage is done at different houses to make searches more difficult.
• Consumers see contraband as a way of purchasing a good product at a low price.
Effects• The mafia uses contraband as a means of money laundering, which in turn leads to
higher levels of violence and crime.
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Contraband grew 0.7% due to the following factors
Factors Effects
1
Contraband is also coming in through the El Dorado
airport in Bogotá. This explains the difference in
price between a contraband bottle in Bogotá
(COP56,000) and one in Barranquilla (COP70,000
and COP80,000).
Smugglers have a practically free entryway for merchandise since the authorities focus their actions on frontier highways, leaving cities such as Bogotá exposed to the increase in contraband.
2
Contraband alcoholic beverages are not stored
at the points of sale but kept in nearby houses,
in cars parked close to the points of sales, or are
sometimes even delivered door-to-door. It is thus
more difficult for the authorities to track goods
down.
Its is more complicated for the authorities to
conduct search operations on houses since
they require a search warrant to do so. This
process is slow, which gives smugglers time to do
their business.
3
POLFA statistics at national level are not
representative since in some departments control
actions are focused on highways near the
frontiers.
Contraband entering via airports is growing and particularly in the city of Bogotá, which is one of the main consumption centers.
4. Fewer ethanol legal imports. Less technical contraband of ethanol, which is the main source of this illegal practice.
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Although this category is less significant in volume, risks associated to consumption are high
Illegal artisanal alcohol fell by -3.5% in 2014
Illegal artisanal alcohol is the fourth most important category within the five categories for illegal alcoholic beverages in terms of volume (5%).
Distilled and fermented products account for 52% and 48% of the LAE volume, respectively. However, in terms of beverage, fermented beverages account for 92%.
The most relevant alcoholic beverages include viche, chirrinchi, guarapo and chicha, and these are produced in unsanitary environments, which means they may pose a significant health risk.
At overall category level, the decrease between 2013-2014 is -3.5% due to a reduction in poverty levels.
18,963 HL LAEIllegal volume 2014
US$84 mnValue at illegal prices 2014
US$14 mnFiscal loss 2014
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
5.1%
LAE Volume
6.0%
Illegal Value
3.3%
Fiscal Loss
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Illegal artisanal beverages are the support for families in marginal populations in several areas of the country
Beverage • Viche (Pacific region, panela-based beverage), chicha (corn-based beverage) and
guarapo (fruit-based beverage).
Where • Sold in stores, street markets and popular fairs.
• Sold during cultural festivities such as the Pacific day, as well as at the "Petronio
Álvarez” Pacific Music Festival.
Factors
• Production of artisanal beverages is a source of income for many families in the marginal
populations of the Andean Region.
• Easy access to raw materials.
• There is no strict control to avoid manufacturing and sale of artisanal beverages.
• Low prices for consumers, who belong to the lower economic levels.
• Consumption of these alcoholic beverages is part of local culture.
Effects• Health risk for consumers.
• Easily accessible for sale to minors.
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Consumption of illegal artisanal beverages registered a fall of 3.5% due to the following factors
Factors Effects
1 In 2014, poverty decreased by 7%.
Consumers of artisanal alcohol who improved their income were able to have access to other types of higher-priced alcoholic beverages, such as adulterated aguardiente.
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5.0%
Fiscal Loss
Alcoholics are the main purchasers of surrogate alcohol
Surrogate alcohol fell by -5.0% in 2014
Surrogate alcohol is the third most important category with the five categories in terms of volume (10%) within overall illegal alcoholic beverages.
Products in this category are distilled, such as pharmaceutical alcohol, with the addition of some type of sweetener or coloring such as powdered beverages.
Pharmaceutical alcohol is a substitutes for aguardiente among consumers of these products.
The category fell by -5.0% in 2013-2014 due to a reduction in poverty levels.
9.9%
Volume LAE
5.1%
Illegal Value
36,598 HL LAEIllegal volume 2014
US$71 mnValue at illegal prices 2014
US$21 mnFiscal loss 2014
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Surrogate alcohol in general consists of beverages prepared with pharmaceutical alcohol
Beverage • Pharmaceutical alcohol (with the addition of some type of sweetener or coloring such as
powdered beverage).
Where • Consumers purchase antiseptic alcohol at any store or drugstore, even at some liquor
stores.
• Consumers prepare the beverages themselves.
Factors• The cost of this beverage is quite low and this contributes to it being consumed by a
number of low income people.
• Raw materials can be easily accessed without any type of restrictions.
Effects • High consumer health risk.
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Surrogate alcohol fell by 5.0%
Factors Effects
1
Raw materials used to manufacture surrogate
alcohol are easily available. Additionally,
pharmaceutical alcohol is not denaturalized.
There is a group of consumers who are more prone to consume substitute beverages based on pharmaceutics alcohol, such as minors, prisoners, alcoholics etc., who may easily purchase this product.
2 In 2014, poverty levels fell by 7%.
Certain consumers of surrogate alcohol live in
extreme poverty. When their economic situation
improves they have access to other types of
alcohol, or they may even leave their addiction.
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Tax leakage accounts for the smallest volume in the market and only involves distilled products
Tax leakage increased by 7.9% in 2014
Tax leakage is the smallest of the five categories in terms of volume (3%).
Distilled products account for 100% of the LAE volume.
The most relevant alcoholic beverages include aguardiente, rum and aperitifs.
In the case of aperitifs, leakage comes from reporting a lower alcohol content on the label than the actual content.
In the case of aguardiente and rum, leakage is due to undeclared volumes by formal producers.
Growth for 2013-2014 was 7.9%, due to an increase in aguardiente and rum tax leakage as a result of a fall in legal sales.
11,447 HL LAEIllegal volume 2014
US$29 mnValue at illegal prices 2014
US$5 mnfiscal loss 2014
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU | APPENDIX
1.2%
Fiscal Loss
3.1%
LAE Volume
2.1%
Illegal Value
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Higher profit margins of are the main drivers for production tax leakage
Beverage • National aguardiente and rum through unrecorded production.
• Aperitifs reporting a lower alcohol content on labels than the actual content.
Factors• Although there is an executive order ruling that alcoholic beverage manufacturers are
required to certify in Good Manufacturing Practices, this is still not in force, which means
it easy for new companies to obtain licenses.
Effects• Fiscal losses.
• Disloyal competition.
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Tax leakage grew by 7.9% due to the following factors
Factors Effects
1
The difference between the volume of nationally
produced aguardiente and rum compared to
recorded sales increased.
Higher volume of tax leakage versus 2013, due to
the higher consumption reported.
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INTRODUCTION
REGIONAL ANALYSIS
COLOMBIA
ECUADOR
EL SALVADOR
HONDURAS
PANAMA
PERU
APPENDIX
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142,011 HL LAE
Illegal volume
US$467 mn
Value at illegal prices
US$113 mn
Fiscal loss
Illegal Market 2014 – Ecuador
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What are the main findings for the illegal market in 2014?
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• On the one hand there is more control over illegal products in the traditional channels; there are more policemen and the penalties are severer.
• However, the development of alternative distribution channel continues, and these are difficult to trace. For instance, online and informal store sales.
Illegal alcohol distribution done via non-traditional channels that continue to grow
• Most tax leakage comes from distilled alcoholic beverages for undeclared volumes sold by formal producers and from clandestine plants.
• During 2014, local production increased along with production tax evasion. Tracking systems are as yet insufficient. However, the implementation of the Simar system is expected to increase control over local producers.
Increase in evasion of taxes on production
• During 2014 domestic alcohol production increased. Further control over residual ethanol volumes is as yet wanting, which means there is easy access to the raw materials required for counterfeit alcoholic beverages.
• While in 2014 the purchase of artisanal alcohol for biofuel production continued, results were not visible in terms of a lower quantity of residual ethanol from informal presses. Failure to invest in the Ecopaís program has made it difficult to see significant results.
Increase in counterfeit alcohol and illegal artisanal alcohol
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The recently implemented label and seals regulation for imported distilled alcoholic beverages has led to a reduction in contraband consumption.
Increased police presence in on-trade channels (mainly in bars) has allowed for increased control over consumption of counterfeit alcoholic beverages in this channel.
High customs duties and tariff safeguards have increased raw materials costs for legal
manufacturers and the price of imported finished product, which means illegal alcoholic
beverages are able to offer more attractive prices.
Greater ethanol availability as a result of the increase in local production is translated into
more widespread illegal alcohol production in the form of counterfeit beverages and illegal
artisanal alcoholic beverages.
What are the main findings affecting the illegal market in 2014?
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Following a fall in legal and illegal alcohol consumption in 2013, both markets recovered in 2014
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU
HL LAE Volume 2011 2012 2013 2014
Illegal Market 87.639 186.326 129.939 142.011
Legal Market 488.559 464.470 413.690 436.695
Total Market 576.198 650.796 543.629 578.706
71.4%
28.6%
2012
76.1%
23.9%
2013
75.5%
24.5%
2014
Legal
Illegal84.8%
15.2%
2011
Note: Illegal market figures for 2011 do not include tax leakage
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13.6% 11.8%
12.1%23.6%
18.9%16.4%0.4%0.3%
55.1%48%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
LAE Volume Fiscal loss
476,868 HL LAE
Tax leakage
Surrogate
Illegal artesanal
Contraband
Counterfeit
US$113 mn
Tax leakage is the main category in terms of volume and fiscal loss
Tax leakage accounts for 55% of LAE volume and 48% of fiscal loss. The most
significant fiscal loss is due to evasion at national industry level.
Note: Fiscal loss = excise + duties. Excludes other types of taxes, such as sales tax.
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$14.2
$15.5
$8.4 $8.1 $8.3
$9.8
$17.6
$20.9
$9.1 $8.9
$11.0
$0
$5
$10
$15
$20
$25
Counterfeit Contraband Illegal artesanal Surrogate Tax leakage Total illegal
US
$
Illegal price RSP Legal price RSP
Note: RSP = Retail selling prices – price sold to consumer
Average illegal market prices are 11.9% lower than legal market prices, similar to 2013
On average, the
price of counterfeit
alcohol is 24% lower
than the price of
legal brands.
Aguardiente can be
found at US$8 per
liter.
Average price
variation between
contraband
products and legal
products is 35%.
This price
difference is what
most appeals to
consumers.
Surrogate alcohol makes use
of alcohol purchased in the
legal market.
Products evading taxes are sold at
the same price as legal products.
Producers keep the margin by
charging consumers the same
price.
Illegal artisanal alcohol
prices are 9% lower than
legal versions of the same
products.
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In terms of volume, 0.5% of the beer market is illegal and comes almost entirely from contraband
99.9%
0.1%
Illegal beer LAE
Contraband Counterfeit
In 2014, beer accounted for 61%
of the legal market of alcoholic
beverages (a 1% increase
compared to 2013), equivalent to
265,102 HL LAE.
Illegal beer volume amounted to
1,311 HL LAE, 99.9% of which is
contraband, since counterfeit
beer is not common practice.
Beer contraband comes mainly
from Peru due to lower product
price there.
There is no industrial production
of illegal beer.
99
.5%
Le
ga
l b
ee
r 0
.5%
Ill
eg
al
be
er
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39%
61%
Legal CategoriesLAE
RTD Wine Distilled Beer
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14.3%
Illegal Value
11.8%
Fiscal Loss
Counterfeit alcohol accounts for 14% of the illegal alcoholic beverages market in volume and value
13.6%
LAE Volume
19,296 HL LAEIllegal volume 2014
US$67 mnValue at illegal prices 2014
US$13 mnFiscal loss 2014
Counterfeit comes fourth in terms of volume among illegal alcoholic beverages
In Ecuador, counterfeit accounts for 14% of the total illegal alcoholic beverages, both in terms of volume and value.
Within the category, distilled products include practically the entire volume.
Between 2013 and 2014, this category increased by 4% mainly due to the higher internal ethanol production level, leading to greater raw material availability as a result of the lack of control over residual ethanol.
Fiscal loss from counterfeit alcohol is estimated at US$13 mn for 2014, which accounts for 12% of total fiscal loss.
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The main factor influencing this category is the lack of control over local ethanol production and any residual volume
Beverage
• Distilled beverages, mainly Johnny Walker whisky. Counterfeit Chivas Regal whisky,
Bacardi rum and Jose Cuervo tequila are also supplied.
• Bottles are refilled with lower quality alcoholic beverages, extracts and other
components.
Where • Most commonly in on-trade channels, bars and discos and even at event venues offering
services which include alcoholic beverages.
Factors
• Lack of control over residual ethanol volume, which provides easy access to raw
materials.
• Easy availability of good quality, low-priced artisanal ethanol.
• Lack of control at locations selling counterfeit beverages.
Effects• Fiscal loss.
• Risk to consumers’ health.
• Damage to original brand images and to legal product sales.
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Counterfeit alcohol increased by 4.1% due to the following factors
Factors Effects
1
During 2014 internal ethanol production levels
increased and authorities have no effective control
over the residual ethanol volume.
Increased availability of residual ethanol, the main
raw material for counterfeit alcohol.
2Despite tougher sanctions and more police control
over illegal alcohol sales, stricter control is required.
Counterfeit alcohol can be found in both large and
small cities, at bars and discos.
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Contraband is the category registering the most significant fall in the illegal alcoholic beverages market
Contraband of finished distilled products dominated the category
Contraband accounts for 12% of the illegal alcoholic beverages market in terms of volume and 20% in terms of value.
Within this category, 43% corresponds to contraband of ethanol as a raw material and 57% to contraband of finished products, in terms of volume.
Between 2013 and 2014, total contraband decreased by 13% mainly due to increased control of this problem by the relevant authorities. In particular, contraband of finished products decreased by 21%.
In 2014, fiscal loss caused by contraband was estimated at US$27 mn accounting for 24% of total fiscal loss in the illegal alcoholic beverages market.
17,112 HL LAEIllegal Volume 2014
US$95 mnValue at illegal prices 2014
US$27 mnFiscal loss 2014
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12.1%
LAE Volume
20.4%
Illegal Value
23.6%
Fiscal Loss
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High customs duties and tariff safeguards are the main cause of contraband
Beverage
• Contraband of finished products involves a wide range of distilled beverages, among
which popular brand whiskies and rums are the most important. Likewise, tequilas and
vodkas, though to a lesser extent.
• Contraband of ethanol is used for counterfeit alcoholic beverages.
Where • Most contraband comes from the frontier with Peru and Colombia.
• Finished products are also smuggled in by sea from Panama.
• Contraband products are distributed through medium sized grocery stores.
Factors• High customs duties and tariff safeguards.
• Although control systems have improved, there are still areas along the frontier that are
not sufficiently covered and goods are smuggled in.
Effects• Fiscal loss.
• Unfair competition for legal product importers.
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Contraband fell by 13% in 2014 due to the following factors
Factors Effects
1
Regulation of imported distilled beverages by
applying seal control is an effective form of
government control.
Increase in confiscation of finished products being smuggled in.
2More stringent sanctions on illegal alcohol trading
and increase in formality by the government.
Reduction in finished product and ethanol contraband.
32014 saw sufficient internal production of good
quality low-priced ethanol.Contraband has become less attractive.
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18.9%
LAE Volume
9.6%
Illegal Value
16.4%
Fiscal Loss
Biofuel programs have had no impact on the production of illegal artisanal alcoholic beverages
Illegal artisanal alcohol increases in 2014
Illegal artisanal alcoholic beverages account for 19% of the total illegal alcoholic beverages market in volume and for 10% in terms of value.
Over 80% of the volume within this category are sugar cane based distilled products. The difference corresponds to the consumption of fermented products, in particular a type of manioc beer known as chicha de yuca.
In overall terms the category displayed an increase of 7% between 2013 and 2014 based mainly on the increase in internal ethanol production.
Fiscal loss from this category is estimated at US$19 millions for 2014, which accounts for 16% of total fiscal loss for illegal alcoholic beverages.
26,783 HL LAEIllegal Volume 2014
US$45 mnValue at illegal prices 2014
US$19 mnfiscal loss 2014
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Illegal artisanal beverages are regularly consumed due to easy availability across the country, including rural and remote areas
Beverage• Puntas is a distilled sugar cane based beverage with the addition of fruit extracts.
• Also, aguardiente, a distilled beverage, and chicha, a fermented beverage.
Where • Most common in rural areas, in small presses and agricultural plots.
• Manabí and El Oro on the coast, and Cotopaxi and Chimborazo in the mountains, are
among the most popular places for production.
Factors
• Access to raw materials for production and availability for consumption.
• No thorough controls are conducted to avoid manufacturing of artisanal beverages.
• Low prices for consumers, from lower socioeconomic levels.
• Consumption of these alcoholic beverages is a strongly rooted habit in rural and
suburban areas in the subtropical, deeper littoral and altiplano regions.
Effects• Health risk for consumers.
• Profit loss.
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2014 saw a 7% increase in consumption of illegal artisanal beverages due to the following factors
Factors Effects
1 During 2014 local ethanol production increased. Artisanal producers sell their products in the illegal market, where they can get better prices.
2The Ecopaís biofuel program was not promoted
sufficiently to absorb this internal production.No visible results of the program.
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Though not very significant, risks associated to consumption in this category are high
Surrogate alcohol is the smallest category in the market
In terms of volume, value and fiscal loss, surrogate alcohol accounts for less than 1% of the illegal alcoholic beverages market in Ecuador.
Fiscal loss stemming from this category is estimated at US$369,000; accounting for 0.3% of total fiscal loss in the illegal alcoholic beverages market.
Between 2013 and 2014, this category decreased by 1% in volume due to stricter controls, greater care among consumers and increased availability of low-priced locally produced alternatives.
533 HL LAEIllegal Volume 2014
US$1 mnValue at illegal prices 2014
US$0.4 mnFiscal loss 2014
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU
0.3%
Fiscal Loss
0.4%
LAE Volume
0.2%
Illegal Value
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There is greater control over methanol handling and consumption of surrogate alcohol is marginal
Beverage • A mix of pharmaceutical alcohol and water, flavoring and coloring agents.
Where • Normally consumed in low-income areas.
• Consumers themselves prepare the alcoholic beverages directly.
Factors• This product is sought by alcoholics and who seek high alcohol content beverages at the
lowest possible price.
Effects • Significant health risk for consumers, which may even lead to death.
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Surrogate alcohol fell 1%, with a consequent fall in cases of intoxication
Factors Effects
1During 2014 there was an increase in local
production of good quality low-priced ethanol.Alternative for surrogate alcohol consumers.
2The Ministry of Public Health (MSP) reinforced its
surrogate alcohol awareness programs.
Consumers are more aware of the health risks associated to surrogate alcohol.
3Government agencies such as the MSP keep a
close watch on cases of methanol intoxication.
There was a reduction in the number of methanol
intoxication cases as a result of consuming
surrogate alcohol.
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Tax leakage continued to be the main problem for the alcoholic beverages industry in the country
This is the most important category in the illegal alcoholic beverages market
Tax leakage accounts for 55% of the illegal market in terms of volume and value.
Most tax leakage comes from undeclared volumes of distilled alcoholic beverages manufactured by formal producers.
Between 2013 and 2014, the category increased by 18% due to non-existence of a specific control system.
This category generates the highest fiscal loss, amounting to US$54 mn, while accounting for 48% of total fiscal loss in the illegal market of alcoholic beverages.
78,287 HL LAEIllegal Volume 2014
US$259 mnValue at illegal prices 2014
US$54 mnFiscal loss 2014
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU
47.9%
Fiscal Loss
55.1%
LAE Volume
55.4%
Illegal Value
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Tax leakage comes from producers of distilled alcoholic beverages
Beverage • Most tax leakage is connected to aguardiente, due mainly to the country’s high
production capacity.
• Aguardientes evade taxes via unrecorded production.
Factors• High margins that make tax evasion appealing.
• Lack of control by the authorities on aguardiente and other distilled beverage producers.
Effects• Fiscal losses.
• Unfair competition for companies paying taxes as required.
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Tax leakage increased by 18% due to the following factors
Factors Effects
1During 2014 internal ethanol production levels
increased with little control from the authorities.Tax leakage occurs in the formal industry.
2
Tracking systems have increased, but are as yet
insufficient. There is no specific system to control
tax evasion.
Producers still have undeclared brands. In addition
to this is the existence of clandestine distilling
plants.
INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU
INTRODUCTION
REGIONAL ANALYSIS
COLOMBIA
ECUADOR
EL SALVADOR
HONDURAS
PANAMA
PERU
APPENDIX
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28.006 HL LAE
Illegal Volume
US$49 mn
Value at illegal prices
US$16 mn
Fiscal loss
Illegal Market 2014 – El Salvador
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What are the main findings for the illegal market in 2014?
• Practically 90% of the illegal alcoholic beverage market fell into one of these two categories.
• Both categories decreased in 2014, due mainly to greater police and municipal control over expendios (canteens) and pharmacies, which are the main distribution channels.
Counterfeit and surrogate: main categories
• Though contraband still exists it is not the most outstanding problem for local industry, since the National Civil Police are taking effective measures to cut down on smuggling.
• Contraband comes in via some blind points in areas bordering on Guatemala and Honduras.
Contraband was significantly reduced
• In 2014 the authorized quota of ethanol for alcoholic beverages was not entirely covered, which means a surplus remained which was neither recorded nor controlled.
• Ethanol quotas continued to be approved without any follow-up providing the means to control the end use given to the raw material. This provides the opportunity to divert raw material towards types of production other than the one originally declared.
Surplus ethanol
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During 2014 there was more control by the authorities of the on-trade channel, particularly
at expendios (canteens), which are the main distribution channel for counterfeit alcoholic
beverages. This has enabled a reduction in the consumption of counterfeit alcoholic
beverages.
While canteens were the focus of increased control by the municipal authorities, pharmacies continued to sell surrogate products, not subjected to the denaturation process.
There continued to be some lack of control as to the annual quotas authorized each year by the Health and Economy Ministries in an effort to verify actual use of ethanol. The difference between the tax charged on ethanol used for producing alcoholic beverages compared to medicinal uses is an incentive to diverting ethanol to be used as a raw material.
Which are the main findings affecting the illegal market in 2014?
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75.1%
24.9%
2013
76.5%
23.5%
2012
Consumption of legal and illegal alcoholic beverages fell over the last two periods
79.8%
20.2%
2011
77.2%
22.8%
2014
Legal
Illegal
HL LAE Volume 2011 2012 2013 2014
Illegal Market 25.867 33.478 32.238 28.006
Legal Market 102.187 108.982 97.353 94.956
Total Market 128.054 142.460 129.591 122.962
Note: Figures for the illegal market in 2011 do not include tax leakage
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48.9%41.1%
4.6% 22.4%4.5%
4.1%
40.4%31.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
LAE Volume Fiscal Loss
28,006 HL LAE
Tax leakage
Surrogate
Illegal artisanal
Contraband
Counterfeit
US$49 mn
Counterfeit and surrogate continued to be the most relevant categories
The main cause of fiscal loss are counterfeit alcoholic beverages
Note: Fiscal loss = excise + duties. Excluding other types of taxes, such as sales tax.
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$4.7
$23.9
$9.1
$4.0 $5.3
$5.3
$51.2
$6.6
$0
$10
$20
$30
$40
$50
Counterfeit Contraband Illegal artisanal Surrogate Tax leakage Total illegal
US
$
Illegal price RSP Legal price RSP
Nota: RSP = Retail selling prices – Consumer sales price
The gap between average prices on the legal and illegal market is 24%, which is larger than the 15% gap for 2013
The price of
counterfeit products
is very similar to
that of legal brands,
so therefore they
deceive consumers.
There is a
significant price
variation between
contraband and
legal products, in
particular for
premium products.
This difference is
what most attracts
consumers. Surrogate
alcohol is
made using
pharmaceutical
alcohol, which
is purchased
in the legal
market.
Products evading taxes are sold at
the same price as legal products.
Producers keep the margin by
charging consumers the same
price.
There is no
difference in price
since there is no
legal artisanal
alcohol production.
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There is no illegal beer in El Salvador
In 2014, beer accounted for
45% of the legal alcoholic
beverages market (a 1%
increase compared to 2013),
equivalent to 42,220 HL LAE.
All the beer brands available in
El Salvador are legal.
10
0%
Le
ga
l b
ee
r
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45%
Legal CategoriesLAE
RTD Wine Distilled Beer
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Counterfeit accounts for almost half the illegal alcoholic beverage market
13,688 HL LAEIllegal volume 2014
US$25 mnValue at illegal prices 2014
US$7 mnFiscal loss 2014
Counterfeit was the main illegal source in 2014
Despite the reduction recorded between 2013 and 2014, counterfeit is the most important category among total illegal alcoholic beverages, in terms of both volume (49%) and value (51%).
There is no evidence of industrial production. The entire category corresponds to refill products.
The products making up this category are only distilled beverages, specifically aguardiente and vodka popular. The main raw material is ethanol which is easily available due to insufficient control over the quotas authorized for each year.
Fiscal loss as a result of counterfeit alcohol is estimated at US$7 mn for 2014, which accounts for 41% of the total fiscal loss from the illegal alcoholic beverage market.
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50.6%
Illegal Value
41.1%
Fiscal Loss
48.9%
LAE Volume
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The main factors behind counterfeit alcoholic beverages are lack of control, use of ethanol quotas, and distribution to end consumer
Beverage • Aguardiente and vodka popular.
• Refilled with ethanol and water.
Where • Specially in the on-trade channel, at bars and canteens.
• May also be found in the off-trade channel, but this is not common practice.
Factors• No control over raw material, i.e., as regards the end use given to ethanol after quota
approval by the Economy and Health ministries.
• No control at locations where counterfeit alcoholic beverages are sold.
Effects• Fiscal loss.
• Risk to consumers’ health.
• Damage to the image of original brands and to legal product sales.
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Counterfeit alcoholic beverages fell 8% between 2013 and 2014 due to the following factors
Factors Effects
1
Legal producers cooperate with the authorities on
an ongoing basis sharing information that leads to
confiscation operations.
More effective controls by the National Civil Police
translates into lower counterfeit alcohol
consumption.
2
Local authorities have increased land controls,
particularly in canteens, where counterfeit alcohol is
mostly found.
Since most counterfeit alcohol consumption takes place at expendios (canteens), increased control over this channel reduces the sale of counterfeit alcoholic beverages.
3
Despite efforts to avoid it, there are organized
counterfeiter gangs who visit expendios (canteens)
and bars on a daily basis to purchase original empty
alcoholic beverage bottles for refilling.
Additionally, there is still no control over the quotas
authorized each year by the Ministries of Health and
Economy as regards the final use given to the raw
material.
This continues to be the most important category in terms of volume within the illegal alcoholic beverages market in the country.
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Contraband comprises only distilled products
The entire contraband category involves finished products
Contraband accounts for 5% of the illegal alcoholic beverages market in terms of volume, and for 16% in terms of value. Price per liter of contraband products is the highest within the illegal alcoholic beverage market.
Products comprising this category are only distilled beverages.
In El Salvador there is a surplus supply of ethanol, which means there is little reason for contraband of this raw material.
In 2014, fiscal loss from contraband is estimated at US$4 mn accounting for 23% of total fiscal loss in the illegal alcoholic beverages market.
1,286 HL LAEIllegal volume 2014
US$8 mnValue at illegal prices 2014
US$4 mnFiscal loss 2014
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4.6%
LAE Volume
15.9%
Illegal Value
22.4%
Fiscal Loss
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The high price of imported alcoholic beverages encourages consumers to seek cheaper options
Beverage • Mainly whiskey.
• Also, premium vodka and some rum.
Where • Most contraband comes into the country through the areas bordering on Guatemala and
Honduras, particularly at blind spots where there are no customs controls.
Factors• The main factor is the high price of imported alcoholic beverages. Consumers see
contraband as a way of purchasing a good product at a low price and do not care about
product origin.
Effects• Fiscal loss.
• Disloyal competition for legal product importers and distributors.
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Although there are still some blind entry points for contraband, increased control led to a 35% reduction
Factors Effects
1
Efforts by the National Civil Police to attack
contraband, particularly at entry points from
Guatemala and Honduras.
Contraband has been reduced.
2
During 2014 there was an increase in the
availability of domestic alcohol. Legal product
imports increased as did the quota granted for the
production of alcoholic beverages.
Larger number of alcoholic beverage options for
consumers in the formal market.
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Illegal artisanal alcohol is one of the least relevant categories within the illegal alcoholic beverages market
Illegal artisanal alcohol fell in 2014
Artisanal alcoholic beverages accounted for 5% of the total illegal alcoholic beverage market in terms of volume and 6% in terms of value.
The main product in this category is chaparro, a distilled beverage based on sugar cane and corn, which is deeply rooted in the popular culture.
Fiscal loss is estimated by taking as a reference the price and taxes of popular vodka, an alcoholic beverage similar to chaparro. Fiscal loss from this category is estimated at US$1 mn for 2014, accounting for 4% of total fiscal loss in the illegal alcoholic beverage market.
1,258 HL LAEIllegal volume 2014
US$3 mnValue at illegal prices 2014
US$1 mnFiscal loss 2014
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4.5%
LAE Volume
5.9%
Illegal Value
4.1%
Fiscal Loss
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Chaparro continued to be the main illegal artisanal beverage in El Salvador
Beverage• The most popular beverage is chaparro, a corn and sugar cane based distilled beverage.
• It is sold in recycled plastic (PET) bottles.
Where • Chaparro is consumed mainly via the on-trade channel, at expendios (canteens).
• Consumption is basically focused among the lower income segments in large cities and
in distant towns or rural areas.
Factors
• Among the lower income segments, artisanal alcoholic beverages are sought for their
high alcohol content and low price, as compared to similar alcoholic beverages in the
legal market.
• In rural zones, these alcoholic beverages are part of the local tradition and culture.
Effects• Health risk for consumers.
• Fiscal loss.
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Consumption of illegal artisanal beverages registered a 7% fall due to the following factors
Factors Effects
1 Decrease in rural population.Artisanal alcohol consumers migrating to urban areas are able to access other types of alcoholic beverages.
2
During 2014, local authorities increased land
controls, particularly at expendios, where illegal
artisanal beverages are sold.
Part of illegal artisanal beverages consumption takes place at expendios. The more stringent controls on this channel has led to a fall in the sale of alcoholic beverages.
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Surrogate alcohol is the second largest category in the market
Surrogate alcohol consumption fell in 2014
In terms of volume, surrogate accounts for 40% of the illegal alcoholic beverages market, and for 26% in terms of value.
Products in this category are distilled beverages, such as pharmaceutical alcohol, with the addition of some type of sweetener or colorant, such as powdered juices. Pharmaceutical alcohol is a substitute for aguardiente among those who consume these products.
Fiscal loss coming from surrogate alcohol is estimated at US$5 mn and accounts for 31% of total fiscal loss from the illegal alcoholic beverages market.
11,325 HL LAEIllegal volume 2014
US$13 mnValue at illegal prices 2014
US$5 mnFiscal loss 2014
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31.0%
Fiscal Loss
40.4%
LAE Volume
25.7%
Illegal Value
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In general, surrogate alcohol is sold through pharmacies
Beverage • Prepared with pharmaceutical alcohol mixed with water, soda or powdered juice.
Where • To the extent authorities apply more stringent controls on expendios, the product is
marketed to a larger extent via independent pharmacies.
Factors
• Low income consumers and alcoholics demand high alcohol content beverages at the
lowest possible price.
• Failure to control raw material, i.e., the end use given to ethanol after the quota has been
approved by the Economy and Health ministries .
• Pharmaceutical alcohol is subject to the denaturation process.
• Absence of more stringent control by the authorities means pharmacies can market
alcohol this way.
Effects • High risk to consumer health, and can even cause death.
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Surrogate alcoholic beverages consumption fell by 10%
Factors Effects
1Inspections on pharmacies requesting alcohol for
sale.Fall in surrogate alcohol consumption.
2
Despite the fall in this category, it is worth noting
that it is relatively easy to have access to the raw
material required to make surrogate alcoholic
beverages.
Likewise, no controls have been implemented as
yet over the quotas authorized every year by the
Health and Economy Ministries as regards the end
use given to the raw material.
Finally, pharmaceutical alcohol is not denaturalized.
There is a group of consumers who are more prone
to consuming substitute alcoholic beverages based
on pharmaceutical alcohol, such as minors,
prisoners, alcoholics, etc., who continue to find it
easy to buy this product.
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Tax leakage accounts for the smallest volume in the market and relates solely to distilled products
All tax leakage comes from distilled alcoholic beverages
The tax leakage category is the smallest of the five categories in terms of both volume (2%) and value (2%).
Most leakage comes from distilled alcoholic beverages, for unrecorded volumes by formal producers.
Fiscal loss from tax leakage is estimated at US$0.2 mn and accounts for 1% of total fiscal loss in the illegal alcoholic beverages market.
450 HL LAEIllegal volume 2014
US$1 mnValue at illegal prices 2014
US$0.2 mnFiscal loss 2014
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1.4%
Fiscal Loss
1.6%
LAE Volume
1.9%
Illegal Value
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Higher profit margins are the main driver to production tax leakage
Beverage • Tax leakage volume comes from distilled alcoholic beverages.
• It is most common in aguardientes.
Factors• High margins which make it attractive not to pay taxes.
• Absence of controls by the authorities on distilled beverage producers.
Effects• Fiscal loss.
• Disloyal competition for companies who pay taxes.
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Tax leakage was the category with the greatest percentage reduction, though not in absolute terms
Factors Effects
1It is estimated that during 2014 production of out-of-
quota distilled alcoholic beverages fell. Lower production tax leakage.
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REGIONAL ANALYSIS
COLOMBIA
ECUADOR
EL SALVADOR
HONDURAS
PANAMA
PERU
APPENDIX
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16,981 HL LAE
Illegal volume
US$18.2 mn
Value at illegal price
US$4.5 mn
Fiscal loss*
Illegal Market 2014 – Honduras
*Fiscal loss does not include sales tax
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Which are the main findings for the illegal market in 2014?
• Ethanol contraband continues to pose the greatest problem with regards to illegal beverages in Honduras. Growing demand for ethanol among the various industries making use of this product, in addition to the limited import quotas and low production levels, encourage smuggling.
• Finished product volumes have fallen. In the specific case of beer, the proliferation of low-priced imported brands is legal, and represents an appealing alternative for consumers who previously opted for smuggled beer.
Ethanol contraband was still the main category accounting for 80% of the illegal market for alcoholic beverages
• Within the illegal market, the category with the most significant increase is industrial aguardiente production as a result of the greater availability of panela used as a raw material. During 2014, important formal panela producers started selling part of their production for the illegal alcoholic beverage industry.
Increased illegal production of aguardiente due to greater availability of panela
• Illegal Guifiti production is increasing on the north coast, supported by the “Distintivo Atlántida” Project.
Increase in illegal artisanal beverage volume on the north coast
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In 2014, the government implemented strong measures to fight tax leakage across the board, which also affects the alcoholic beverages industry.
The increase in Sales Tax and falling purchasing power of Honduran people led to an increase in demand for illegal products.
Despite efforts to increase frontier and customs controls, corruption and the insufficient number of officials continue to allow the passage of smuggled goods from neighboring countries.
The “Distintivo Atlántida” project intended to promote typical north coast products, supports legal and illegal guifiti producers, thus promoting artisanal production.
Which are the main findings affecting the illegal market in 2014?
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The fixed quota for ethanol imports and the high demand from the various consumer
industries in the country contribute to ethanol contraband.
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2014 saw a significant increase in illegal market volumes along with a fall in the legal market
HL LAE Volume 2011 2012 2013 2014
Illegal Market 16,407 14,287 13,930 16,981
Legal Market 101,424 95,089 89,557 82,584
Total Market 117,831 109,376 103,487 99,565
82.9%
17.1%
2014
Legal
Illegal
Note: 2011 figures for the illegal market do not include tax leakage
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10.3% 7.6%
89.7% 92.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Volume LAE Fiscal loss
16,981 HL LAE
Tax Leakage
Surrogate
Illegal Artisanal
Contraband
Counterfeit
US$4.5 mn
Contraband accounts for over 90% of fiscal loss
Fiscal loss= excise + duties
Focus should be on frontier control, where most fiscal loss occurs.
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$2.9
$7.4
$5.0
$5.6
$3.8
$9.5
$6.2
$7.6
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Counterfeit Contraband Illegal Artisanal Total Illegal
US
$
Illegal RSP Price Legal RSP Price
Average price difference between the legal and illegal markets amounted to 20.9%
Average price for
counterfeit alcohol
is 23.7% lower
than for legal
products.
There is a 22,5%
difference between
average prices for
contraband and
legal products.
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Average price for
illegal guifiti is
20.0% lower than
for legal products.
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Beer contraband exists, although this has fallen as a result of the increase in legal imports of cheap brands
98.8
% L
eg
al b
eer
1.2
% Illeg
al b
eer
In 2014, beer accounted for 65%
of the legal market for alcoholic
beverages (a 3.7% fall compared
to 2013), equivalent to 54,081 HL
LAE.
The volume of illegal beer
amounted to 644 HL LAE, 100% of
which was contraband.
There was no industrial production
of illegal beer in 2014.
34%
65%
Legal Categories LAE
RTD Wine Destilled Beer
100%
Illegal Beer LAE
Contraband
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7.1%
Fiscal Loss
6.6%
Illegal Value
Counterfeit alcohol is the second most important category in the illegal market in terms of volume, value and fiscal loss
9.9%
LAE Volume
Industrial production of distilled beverages accounts for 100% of this category
Counterfeit alcohol is the second most important category for total illegal beverages, both in terms of volume (10%) and value (7%).
However, the most important category, ethanol contraband, is the main source for refill / substitute production, but these volumes are included in this category.
Distilled products dominate this category, accounting for the entire volume.
The counterfeit alcohol category grew around 1,650 HL LAE in 2014 due to greater availability of panela used as a raw material. During 2014, clandestine factories purchased panela from formal producers, while in other years supply was limited to artisanal panela.
1,680 HL LAEIllegal volume 2014
US$1.2 mnValue in illegal prices 2014
US$0.3 mnFiscal loss 2014
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The main factor influencing the category is the easy availability of supplies, including panela, empty bottles, etc.
Beverage
• Some brands of aguardiente such as Golazo and Bambú are refilled using original
bottles.
• This refill product is produced with aguardiente from contraband ethanol.
• Production of illegal beverages, specifically panela-based aguardiente, is increasing as a
result of the growth in panela production.
Where • Refilling is done in the northern area of the country.
• Illegal production of panela-based aguardiente is found in rural areas of the country
where panela is produced, such as Taulabe, certain parts of Olancho, and some areas in
the south of the country.
Factors
• Since aguardiente is the most commonly consumed distilled beverage in the country, it is
a sure target for refill and illegal production.
• Due to the high consumption of different brands of aguardiente in the country, it is very
easy to find empty bottles for refill.
• Most aguardiente consumers tend to look for the cheapest product, and are easily willing
to buy refills or illegal production.
Effects• Fiscal loss.
• Possible intoxications due to lack of knowledge as to product origin.
• In the case of refills, financial and image damage to the original brand.
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Counterfeit alcohol grew ~1.650 HL LAE due to the following factors
Factors Effects
1
In previous years, production of artisanal
panela was the main source for the preparation
of counterfeit beverages. However, in 2014
formal panela producers started selling part
of their production to clandestine aguardiente
producers.
Increase in counterfeit aguardiente volume.
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Contraband ethanol is used in making counterfeit beverages, hence its relevance in this category
Ethanol contraband dominates the category
Contraband is the most important category for total illegal alcoholic beverages both in terms of volume (90%) and value (93%).
Ethanol contraband is the most relevant subcategory, accounting for 86% of the volume, while finished product contraband accounts for 14%. Contraband ethanol is used in refills/substitutes.
Distilled products dominate this category, accounting for 100% of finished products.
Contraband grew 10.1% between 2013 and 2014, driven by the increase in ethanol contraband (16.0%).
15,299 HL LAEIllegal volume 2014
US$17.0 mnValue in illegal prices 2014
US$4.2 mnFiscal loss 2014
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90.1%
Volume LAE
93.4%
Illegal Value
92.9%
Fiscal Loss
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Limited ethanol offer in the local market is one of the main factors behind contraband
Beverage• Whisky, followed by vodka, and lastly tequila.
• Beer.
• Ethanol contraband is used for aguardiente refill.
Where • Ethanol contraband comes mainly overland from Guatemala.
• Finished product contraband comes in mostly through Puerto Cortés, and some blind
spots along the different frontiers.
Factors
• The growing demand for ethanol among the various industries making use of this
product, in addition to limited import quotas and insufficient production contribute to
ethanol contraband.
• The increase in sales tax, currency devaluation, and falling purchasing power of the
Hondurans are factors that trigger the purchase of contraband finished products in the
country, although volumes have fallen.
Effects• Fiscal loss.
• Damage is caused to brands and their formal importers, in particular those holding
exclusivity contracts.
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Contraband grew by 10.1% as a result of the following factors
Factors Effects
1Devaluation of the lempira compared to the
US dollar.
Slump in the market for legal and
contraband imported products due to price
increases.
2
Fall in purchasing power and end consumer
migration towards lower-priced legal
alcoholic beverages.
Proliferation of lower-priced imported
alcoholic beverages on the market, in
particular for beers.
3
Reduction in legal ethanol import, in addition
to an increase in local production of
aguardiente requiring ethanol as a raw material.
Increase in ethanol contraband.
4Surplus beer supply (higher apparent
consumption versus recorded sales).
Decrease in beer contraband due to the wide
presence of legally imported low-priced beer.
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0.0%
Illegal Value
0.0%
LAE Volume
0.0%
Fiscal Loss
Illegal artisanal alcohol category is practically non-existent, with low volumes of guifiti
Illegal artisanal alcohol grew by 30.0% in 2014
The illegal artisanal alcohol category is almost non-existent, and accounts for less than 1% in terms of volume, value and fiscal loss.
Distilled products account for all volumes, with guifiti as the main product.
Artisanal guifiti produced by the Garifunas does not pay taxes in Tela and Ceiba, and is taken as illegal.
This category grew by 30.0% in 2014 due to the “Distintivo Atlántida” project, which promotes products typical of the north coast, whether legal or illegal.
2.2 HL LAEIllegal volume 2014
US$0 mnAmount at illegal prices 2014
US$0 mnFiscal loss 2014
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Artisanal production is promoted, for both legal and illegal products, such as guifiti
Beverage
• The main artisanal alcoholic beverages in Honduras is guifiti, made by macerating a
variety of herbs in aguardiente.
• According to the Garifuna peoples, this product is not illegal, even though sold, since
artisanal products should not be required to pay taxes.
• However, production is always illegal since producers/sellers do not have the sanitary
licenses or operating permits required.
Where
• Guifiti is mostly produced on the north coast of the country, specifically in La Ceiba and
Tela.
• These products can be found in restaurants, bars and stores selling alcoholic beverages
in these cities.
• They are also found to a lesser extent in some areas of San Pedro Sula and Copan.
Factors• The “Distintivo Atlántida” project promotes and supports legal and illegal guifiti
production, based on the support of small and medium companies by granting hotels
and restaurants in Tela and Ceiba a quality seal to attract domestic and international
tourism.
Effects• Potential health hazard caused by handling a potentially toxic product.
• Fiscal loss.
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Consumption of illegal artisanal beverages grew by 30.0% as a result of the following factors
Factors Effects
1
Increased support from local Tourism
Chambers for artisanal producers with
quality seals based on the “Distintivo
Atlántida” project.
Increase in illegal artisanal production of guifiti.
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REGIONAL ANALYSIS
COLOMBIA
ECUADOR
EL SALVADOR
HONDURAS
PANAMA
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APPENDIX
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4,048 HL LAE
Illegal Volume
US$15 mn
Value at illegal prices
US$5 mn
Fiscal loss
Illegal Market 2014 – Panama
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What are the main findings for the illegal market in 2014?
• As a result of tax increases, distilled beverage consumption was diverted to fermented beverages in the legal alcoholic beverages market.
• However, distilled beverage consumption shifted towards the illegal market, leading to a higher level of both contraband and tax evasion.
Illegal alcohol consumption increased over that of legal alcohol
• Panama is a small, easily accessible country (by air, sea, or overland), which means it is necessary to keep strict control at the frontiers and free trade zones.
• The increase in selective tax on high alcohol content beverage consumption encourages contraband.
Contraband continues to be the main illegal source in the market
• All the ethanol not used for alcoholic beverages must be denaturalized in Panama, thus limiting consumption of this type of beverages to a marginal part of the population (highly addicted and low-income groups), who consume pharmaceutical alcohol direct and soak it in bread to neutralize de taste of the denaturalizing agent.
Consumption of surrogate is only minimal
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The increase in taxes on high alcohol content beverages means locally produced distilled
beverages are more expensive and also favors consumption of illegal beer which, in
relative terms, is cheaper.
The increase in the selective tax on high alcohol content beverage consumption makes locally manufactured products, such as seco and rum, more expensive. So as not to reduce margins, prices are increased, encouraging distilled beverage contraband and tax evasion.
Absence of controls at customs and in the free trade zone contributed to the illegal market by direct contraband from neighboring countries, in addition to reentry of products declared for export.
Which are the main findings affecting the illegal market in 2014?
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97.5%
2.5%
2013
97.6%
2.4%
2012
Share in aggregate illegal market has been increasing since 2012
97.1%
2.9%
2011
97.5%
2.5%
2014
Legal
Illegal
HL LAE Volume 2011 2012 2013 2014
Illegal Market 3,787 3,719 3,883 4,048
Legal Market 126,085 153,079 154,212 155,346
Total Market 129,872 156,797 158,096 159,394
Note: Figures for the illegal market for 2011 do not include tax leakage
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7.7% 8.6%
53.2%65.5%
22.0%
13.6%
17.1% 12%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
LAE Volume Fiscal Loss
4,048 HL LAE
Tax leakage
Surrogate
Illegal artisanal
Contraband
Counterfeit
US$15 mn
Contraband accounts for 53% of the illegal market in volume, and 66% of fiscal loss
Priority in terms of fiscal loss should be given to exercising control over
contraband.
Note: Fiscal loss = excise + duties. Excluding other types of taxes, such as sales tax.
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$5.0
$19.1
$4.0 $3.9
$6.5
$9.1$8.3
$26.7
$9.9
$12.3
$0
$5
$10
$15
$20
$25
$30
Counterfeit Contraband Illegal artisanal Surrogate Tax leakage Total illegal
US
$
Illegal price RSP Legal price RSP
Note: RSP =Retail selling prices – Selling prices to consumer
The gap between average legal and illegal market prices amounts to 36% due to the large volume of contraband
The price of
counterfeit is lower
than for average
legal brands, so
demand remains the
same in spite of the
tax increase
Average price variation
between contraband and
legal products is 40%. This
price difference is the main
attraction for consumers
Surrogate is made with
pharmaceutical alcohol,
purchased in the legal
market
Products evading taxes are
sold at lower prices than
those of legal products.
Thus, they attract
consumers who able to
detect the origin of the
product, e.g., from the free
trade zone
There is no difference
in price since there is
as yet no legal
artisanal alcohol
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In Panama, illegal beer comes from contraband
In 2014, beer accounted for 76%
of the legal alcoholic beverages
market (a 3% increase compared
to 2012), equivalent to 6,864 HL
LAE.
Illegal beer volume is of 31 HL
LAE and accounts for 0.8% of
total beer consumption in the
country. All the volume is
contraband.
There was no industrial
production of illegal beer in 2014.
99
.2%
Le
ga
l b
ee
r 0
.8%
Ill
eg
al
be
er
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76%
Legal categoriesLAE
RTD Wine Distilled Beer
Illegal Beer LAE
Contraband
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Counterfeit alcohol is the least significant category within the illegal alcoholic beverages market
312 HL LAEIllegal volume 2014
US$0.7 mnValue at illegal prices 2014
US$0.4 mnFiscal loss 2014
The entire category is made up of distilled beverages
Counterfeit alcoholic beverages accounts for 8% of total illegal alcoholic beverages in terms of volume, and 5% in terms of value.
Distilled products dominate this category and account for 100% of the volume.
Counterfeit is mainly found in on-trade channels, in canteens and restaurants.
The reduction in total counterfeit products between 2012 and 2014 was -2%, mainly caused by lower consumption of distilled beverages subject to adulteration.
Fiscal loss from this category is estimated at US$0.4 mn for 2014, which accounts for 9% of total fiscal loss for illegal alcoholic beverages.
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4.9%
Illegal Value
8.6%
Fiscal Loss
7.7%
LAE Volume
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Beverage • Alcoholic beverages such as Herrerano seco and Champions whisky are refilled with
cheaper similar spirits and water.
Where • Counterfeit beverages are mainly found in Colón and Ciudad de Panama.
• At restaurants, canteens and bars.
Factors• The on-trade channel tries to keep up sales margins by adulterating legal products. This
requires permanent control by the authorities, since in general the end consumer does
not notice the difference
Effects• Health risk for consumers.
• Damage to original brand image.
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Counterfeit alcoholic beverages are found mainly in the on-trade distribution channel
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Counterfeit fell by 2% due to the following factors
Factors Effects
1
Legal products used as raw material for counterfeit
are affected by a tax increase transferred to
consumers by way of price increases.
The raw material used for counterfeit products is
the original legal product. Between 2012 and 2014
both consumption and distilled production fell.
2 Permanent control throughout the chain.Adulteration of alcoholic beverages is kept under
control at minimum levels.
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Contraband is the main source of illegal products in the market in terms of value, volume and fiscal loss
Most contraband involves distilled beverages
Contraband accounts for 53% of the total illegal alcoholic beverages in Panama in terms of volume, 72% in terms of value and 66% in the total fiscal loss.
97% of contraband involves distilled beverages, 1% fermented and 2% ethanol contraband.
Total contraband has grown over the last two years by 3%, driven by growth in ethanol contraband (10%), as a result of increasing levels of raw material imports coming into the country.
Contraband of distilled products also increased (3%).
Meanwhile, contraband of fermented products fell significantly by 14% between 2012 and 2014.
2,152 HL LAEIllegal volume 2014
US$11 mnValue at illegal prices 2014
US$3 mnFiscal loss 2014
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53.2%
LAE Volume
71.7%
Illegal Value
65.5%
Fiscal Loss
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Contraband alcoholic beverages enter through free trade zones, ports and the airport
Beverage • Distilled beverages produced in neighboring countries.
• Other high value imported distilled beverages such as Old Parr and Buchanans, in 750
ml bottles.
Where
• Aguardiente and rum come in from Colombia.
• Distilled alcoholic beverages come illegally into the country across the frontier between
Panama and Costa Rica or via some ports in the City of Panama.
• Contraband also comes in through the International Airport of Tocumen.
Factors
• The price increase in alcoholic beverages due to the increase in the selective tax on
consumption created a great difference in the price of legal beverages compared to that
charged for free trade zone or frontier purchases.
• The excise tax (ISC) increased from US$0.035 to US$0.105 for all beverages having an
alcohol content over 5% and costing more US$18, and to US$0.062 for all beverages
having an alcohol content over 5% and costing less than US$18.
Effects• Fiscal loss.
• Disloyal competition for legal product importers.
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Contraband grew by 3% between 2012 and 2014 due to the following factors
Factors Effects
1
In 2013 there was an increase in the selective tax
on consumption of high alcohol content beverages,
which translated into higher prices for legal distilled
alcoholic beverages.
Consumption of distilled beverages in the legal market fell and contraband was seen as an opportunity for consumers to pay a lower price for the same products.
2Lack of necessary controls on the entrance of
products through ports and free trade zones.Increase in contraband from free trade zones.
3 Greater amount of legal ethanol imports.Increase in technical ethanol contraband, which is the main source of illegal beverages.
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Illegal artisanal alcohol is the second most important category in the market
Illegal artisanal alcohol fell as regards distilled and fermented products
Illegal artisanal alcohol accounts for 22% in terms of volume and 15% in terms of value for total illegal alcoholic beverages.
Distilled products account for 83% of the LAE volume in the category and fermented products account for 17%.
In aggregate, the category fell by -18% between 2012 and 2014, mainly because part of rural artisanal production started to be marketed legally and legally produced alcoholic beverages are reaching rural consumers.
Fiscal loss in this category is estimated at US$0.7 mn for 2014, accounting for 14% of total fiscal loss due to illegal alcoholic beverages.
892 HL LAEIllegal volume 2014
US$2 mnValue at illegal prices 2014
US$0.7 mnFiscal loss 2014
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22.0%
LAE Volume
14.9%
Illegal Value
13.6%
Fiscal Loss
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Consumption of these artisanal alcoholic beverages is widespread as they are part of the local culture and are not viewed as illegal
Beverage • The main artisanal alcoholic beverages being illegally marketed are chirrisco (distilled)
and chicha fuerte (fermented).
• Sold in half-gallon or 1 liter plastic bottles.
Where
• Chirrisco is marketed in Santiago de Veraguas and in the province of Los Santos.
• Chicha fuerte is marketed in Los Santos, Herrera and Gnobe Buglé, where it is viewed
as a traditional beverage.
• They are sold in the streets or along the roadways.
Factors
• Consumption of illegal artisanal alcoholic beverages is viewed as part of the country’s
culture.
• In many of the country’s rural areas they are consumed at parties and not considered
illegal by consumers.
• Easy access to raw materials used in making alcoholic beverages (mainly sugar cane
and fruit).
Effects• In some cases rather precarious manufacturing methods are used, which involves a
health risk for consumers.
• Fiscal loss.
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Consumption of illegal artisanal beverages registered an 18% fall due to the following factors
Factors Effects
1
Rural and aboriginal population manufacturing
these products has started to market their products
formally.
A fall in the proportion of illegal products within the
aggregate artisanal alcohol production in the
country.
2
Consumers of artisanal alcohol have access to
locally produced alcoholic beverages, which are in
the main attractive due to the lower prices charged
compared to the total market.
Among regular consumers of these products there is an increase in alcoholic beverage consumption in the legal market, in particular for beer, which is not affected by the tax increase.
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Tax leakage is the category with the highest growth in the market
Tax leakage increased two times between 2012 and 2014
Within the total illegal alcoholic beverages, tax leakage accounts for 17% of the total in terms of volume and 9% in terms of value.
Distilled products account for 100% of the LAE volume. This mainly involves rum, through undeclared volumes by formal producers.
The growth in the category in 2014 increased two times in comparison with 2012, mainly due to the increase in the tax on distilled beverage consumption.
Fiscal loss from this category is estimated at US$0.6 mn for 2014, which accounts for 12% of the total fiscal loss due to illegal alcoholic beverages.
690 HL LAELegal volume 2014
US$1 mnValue at illegal prices 2014
US$0.6 mnFiscal loss 2014
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8.5%
Illegal Value
12.2%
Fiscal Loss
17.1%
LAE Volume
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The increase in taxes on distilled products encouraged local producers to declare a lower production to that actually produced
Beverage • Mainly national rum, the largest local production beverage.
• They evade taxes through unrecorded production.
Factors• The increase in taxes affecting higher alcohol content beverages encouraged producers
to evade taxes to be able to maintain their margins without increasing prices.
Effects• Fiscal loss.
• Disloyal competition for companies paying their taxes.
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Tax leakage grew almost over 200% due to the following factors
Factors Effects
1
The gap between the national production volume of
aguardiente and rum increased compared to
recorded sales.
Recorded production of high alcohol content
beverages decreased.
2The increase in high alcohol content beverages
acted as an incentive for evasion.
Local producers record their products as exports,
which are later reentered into the country through
free trade zones without paying the corresponding
taxes.
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INTRODUCTION
REGIONAL ANALYSIS
COLOMBIA
ECUADOR
EL SALVADOR
HONDURAS
PANAMA
PERU
APPENDIX
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290,043 HL LAE
Illegal volume
US$584 mn
Value at illegal prices
US$88 mn
Fiscal loss
Illegal Market 2014 – Peru
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Which are the main findings for the illegal market in 2014?
• Illegal artisanal, counterfeit and surrogate alcohol categories fell during 2014 as a result of lower residual ethanol availability in the market, while tax leakage and ethanol smuggling increased.
Lower availability of residual ethanol led to a fall in the illegal alcohol market
• Law 29.632 and its corresponding regulation in connection with ethanol selling and use require more time for the controls and rulings to become fully operational. For instance, there are still no efficient controls in place for customs and the transportation of ethanol.
Restricted application of the regulation for Law 29.632 continued to favor illegal ethanol trading
• The increase in the contraband of potable ethanol from Bolivia caused a rise in the production of counterfeit alcoholic beverages, particular in the Puno, Arequipa and Cusco areas.
• As a result of this, lower priced distilled alcoholic beverages have experienced a reduction in market share, particularly in the frontier areas mentioned above.
Increase in contraband ethanol, the raw material for manufacturing counterfeit alcohol in frontier areas
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The increase in sugar exports reduced the availability of residual ethanol for the production of illegal alcoholic beverages such as counterfeit and illegal artisanal alcoholic beverages.
The change in the Selective Tax on Consumption increased the price of beverages with more than a 6° alcohol content (such as rums, piscos and whiskies), increasing the competition with counterfeit alcoholic beverages which are lower in price.
Lack of coordination among the different controlling agencies such as PRODUCE and the Fiscal Police, in addition to insufficient road control and product monitoring, and an inefficient judicial system, contributed to illegal trading.
The Peruvian consumer continued to demand low price alcoholic beverages regardless of their origin, in particular among the lower socioeconomic levels.
Which are the main findings affecting the illegal market in 2014?
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2014 registered the most significant fall in illegal market share since 2011
HL LAE Volume 2011 2012 2013 2014
Illegal Market 331,931 342,381 338,752 290,043
Legal Market 739,481 767,678 769,309 752,270
Total Market 1,071,412 1,110,059 1,108,061 1,042,312
72.2%
27.8%
2014
Legal
Illegal
69.4%
30.6%
2013
69.2%
30.8%
2012
Note: Illegal market figures for 2011 do not include tax leakage
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52.9%
78.6%
20.0%
5.1%24.6%12.6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Volume LAE Fiscal Loss
Tax Leakage
Surrogate
Illegal Artisanal
Contraband
Counterfeit
US$88mn
Counterfeit alcohol accounts for over three quarters of fiscal loss
Fiscal loss = excise + fees
Priority in terms of fiscal loss should involve the control of distilled refills. It is
important to monitor ethanol purchases and sales since this is the raw material
used in producing these beverages.
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290,043 HL LAE
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$5.1
$16.2
$2.1
$0.7
$7.6
$4.5
$7.4
$23.4
$2.6
$7.4
$10.7
$6.4
$0
$5
$10
$15
$20
$25
Counterfeit Contraband Illegal Artisanal Surrogate Tax Leakage Total Illegal
US
$
Legal RSP Price Illegal RSP Price
The average price difference between the legal and illegal markets amounted to 29.8%, a 1% reduction compared to 2013
The average price
for counterfeit
alcohol is 31.1%
lower than for legal
products.
There is a 30.9%
difference between
average prices for
contraband and
legal products.
The price of
alcoholic beverages
evading the
corresponding
taxes is 29%lower
than legal products.
Surrogate alcohol is low
quality alcohol mixed with
other liquids at an average
price of US$0.7 per litre.
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In Peru, 90% of illegal beer is found in the refill category
98.8
% L
eg
al b
eer
1.2
% illeg
al b
eer
In 2014, beer accounted for 90%
of the legal market for alcoholic
beverages (a 2% increase
compared to 2013), equivalent to
678,808 HL LAE.
Illegal beer volume amounted to
8,292 HL LAE or 1.2% of the total
beer market. 90% of the illegal
volume was counterfeit alcohol
(refill) and 10% was contraband.
There was no industrial production
of illegal beer in 2014.
10%
90%
Illegal Beer LAE
Contraband Counterfeit
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6%
90%
Legal categoriesLAE
RTD Wine Destilled Beer
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72.7%
Illegal Value
78.6%
Fiscal Loss
Counterfeit alcohol is the main problem in the illegal market in terms of volume, value and fiscal loss
52.9%
LAE Volume
Distilled refills/substitutes dominated this category
Counterfeit alcohol is the most important category for total illegal alcoholic beverages, both in terms of volume (53%) and value (73%).
Distilled products dominate this category, accounting for 95% of the volume.
The most relevant subcategory is refills/substitutes, accounting for 68% of the volume, while industrial production accounted for 32%.
The counterfeit alcohol category fell 23.6 % in 2014 due to a lower presence of residual ethanol in the market, as a result of higher ethanol exports.
153,379 HL LAEIllegal volume 2014
US$424 mnValue at illegal prices 2014
US$69 mnFiscal loss 2014
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The main factors influencing the category are the differences in profit margins
Beverage • Ethanol is the main raw material for producing pisco, rum, aniseed and wine refills.
• Counterfeit pisco is produced on an industrial scale.
• Beer refills are produced using water.
Where • Formal and informal channels, such as small stores and markets.
• Grape-growing areas producing wine and pisco such as Ica and Chincha.
• Close to the border with Bolivia, for example in Puno, where ethanol is smuggled in.
• In peripheral areas such as Lima, Puno (Juliaca), Arequipa and Trujillo.
Factors
• Insufficient road controls contribute to making ethanol transport easier.
• Intimidation of controlling authorities and police by mafia groups.
• Corruption of monitoring and control authorities, using bribery, payoffs, etc.
• The illegal industry pays better prices for used bottles than legal company programs
established for this purpose due to higher profit margins.
• Access to contraband ethanol coming in from Bolivia.
• Attractive profit margin in sales prices (30% as compared to the prices charged for legal
products).
Effects
• Increase in violence and crime level.
• Health risk for consumers.
• Damage to original brand image.
• Significant fiscal loss.
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Counterfeit alcohol fell 23.6% due to the following factors
Factors Effects
1
Less potable ethanol available in the domestic
market due to new purchase and sale register for
potable ethanol.
In spite of this reduction, there was an increase
in contraband of potable ethanol from Bolivia to
be used as raw material for counterfeit beverages.
This increase is lower than the reduction in potable
ethanol in the domestic market, therefore leading a
lower amount of counterfeit alcohol overall.
2Increase in exports of ethanol (for uses other
than fuel) due to the depreciation of the Sol.
Less availability of domestic raw materials for
the illegal alcoholic beverage industry.
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Most significant in this category is the contraband of ethanol used as an ingredient in counterfeit beverages
Ethanol contraband dominated the category
Contraband is the third most important category for total illegal alcoholic beverages both in terms of volume (20%) and value (12%).
Ethanol contraband is the most relevant subcategory, accounting for 86% of the volume, while contraband of finished products accounts for 14%. Contraband ethanol is used in manufacturing counterfeit alcohol.
Distilled products dominate this category, accounting for 83% of finished products.
Contraband grew 7.6% between 2013 and 2014, driven by the increase in ethanol contraband.
57,876 HL LAEIllegal volume 2014
US$68 mnValue at illegal prices 2014
US$5 mnFiscal loss 2014
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20.0%
LAE Volume
11.7%
Illegal Value
5.1%
Fiscal Loss
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Lack of frontier control and a preference for low-priced products are the main factors driving contraband
Beverage • Whisky, rum, vodka and wine are the most strongly affected alcoholic beverages.
• There is contraband of potable ethanol coming in from Bolivia.
Where
• Contraband of ethanol and finished products through Puno coming from Bolivia, using
both the so called “Culebra” (wagons) in the north, and “Culebra” in the south.
• Duty free area of Zofratacna.
• At customs, in the form of undervaluation or corruption.
• The most common forms of contraband are “hormiga” [i.e. “ant”, meaning in constant
small quantities”, “caleta” (hidden inside legal goods), “culebra” (mass smuggling from
Bolivia in wagons), “pampeo” (use of roads parallel to controlled highways), “carrousel”
(use of a single customs document to enter several goods) or “buying off” authorities.
Factors
• Higher earnings incentives due to higher prices for legal alcohol as a result of the
increase in ISC during 2013.
• Lack of customs control at the frontiers.
• Smugglers involve the townships in the areas they traverse while conducting their
operations. They thus become an means of income for people in these areas where
there is little government presence.
Effects• Fiscal loss.
• Disloyal competition for legally established companies.
• Money laundering for other illegal activities.
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Contraband grew by 7.6% as a result of the following factors
Factors Effects
1
The measures issued by SUNAT were stronger
for finished products than for raw materials,
especially in duty free areas such as Tacna.
Fall in volumes of smuggled finished products.
2
Increased profit incentives as a result of higher
prices of legal alcohol due to the increase in ISC in
2013 (average price per liter of spirits US$17 in
2013 vs US$19 in 2014).
The better profit margins compared to the legal
market encourage contraband along the southern
frontier areas, where ethanol contraband is used in
the production of counterfeit beverages.
3
Little ethanol contraband control at frontiers.
According to interviews, corruption and lack of
control are still problems that need addressing
which have undergone few changes since 2013.
Increase in ethanol contraband from Bolivia, impacted by the ethanol sale and purchase controls in the formal market.
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The second most significant category in volume, though less important in value and fiscal loss due to low prices
Illegal artisanal alcohol fell by -7,0% in 2014
Illegal artisanal alcohol is the second most important category of the five categories of illegal alcoholic beverages in terms of volume (25%).
Distilled and fermented products account for 93% and 7% of the LAE volume, respectively.
Some of the most relevant alcoholic beverages are cañazo, chicha, wine and pisco, and they are produced in unsanitary environments, which may pose a health risk.
The category fell by 7.0% in 2014 due to a reduction in residual ethanol in the market.
71,312 HL LAEIllegal volume 2014
US$71 mnValue at illegal prices 2014
US$11 mnFiscal loss 2014
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24.6%
LAE Volume
12.2%
Illegal Value
12.6%
Fiscal Loss
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The main factors influencing the category are cultural traditions and the low prices of these alcoholic beverages
Beverage • Distilled beverages include aguardiente, pisco, yonque and cañazo.
• Fermented beverages include chicha, wine and “jungle” beverages such as masato.
Where
• Small and medium sized grape farms in Ica, Chincha, Arequipa and Moquegua
producing wine, pisco and grape aguardiente.
• Cane producers in Huánuco, Cajamarca, in the Amazon area for distilled beverages
such as cañazo.
• Chicha is common in urban areas in the city of Cuzco, Arequipa, Lima and in several
Andean regions except in the jungle, and in restaurants and informal food stores.
• Alcoholic beverages are often included as part of the work package, i.e., wages plus a
certain quantity of cañazo.
Factors
• Cultural traditions such as regional festivities, and regional gastronomy.
• Availability of local supplies and local demand.
• Low prices as compared to other legal alcoholic beverages.
• Consumers tend to consider chicha or other similar beverages are legally sold alcoholic
beverages.
• Lack of government presence in remote areas where artisanal production takes place.
Effects
• Damage to national pisco image (due to failure to comply with the technical standard
requiring a statement of origin).
• Fiscal loss.
• Potential effects on health, since alcoholic beverages are manufactured in uncontrolled
environments.
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Consumption of illegal artisanal beverages fell by 7.0% as a result of the following factors
Factors Effects
1
Less potable ethanol available in the domestic
market due to the new rulings requiring the
recording of sales and purchases of potable
ethanol.
In spite of this reduction, there was an increase
in potable ethanol contraband from Bolivia with
ethanol being the raw material entered for
producing counterfeit beverages. This increase is
lower than the reduction of potable ethanol in the
domestic market, and there is, therefore, less
counterfeit alcohol in general.
2Increase in ethanol exports (not for fuel) due to
the depreciation of the Sol.
Less availability of domestic raw materials for
the illegal alcoholic beverage industry.
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0.5%
Fiscal Loss
The smallest category shrank even further due to increased awareness of the dangers these alcoholic beverages entail
Surrogate alcohol fell -26.9% in 2014
Surrogate alcohol is the smallest category of the five in terms of volume (<1%) among total illegal alcoholic beverages.
Products within this category are distilled, in the form of low quality ethanol mixed with liquids, and are known as Racumin and Salta pa' tras.
Surrogate alcohol substitutes rum consumption among consumers of those products.
In 2013-2014 , the category underwent a fall of 26.9% due to increasing awareness of the risks involved in consuming these alcoholic beverages.
0.4%
LAE Volume
0.1%
Illegal Value
1,277 HL LAEIllegal volume 2014
US$0.3 mnValue at illegal prices 2014
US$0.4 mnFiscal loss 2014
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The main factors affecting the category include abuse and low prices
Beverage• Alcoholic beverages based on bad quality ethanol mixed with soft drinks or powdered
juices.
• Common names are racumin or salta pa´atrás .
Where
• These alcoholic beverages are marketed in marginal areas, generally in the areas
surrounding wholesaler markets.
• However, there has been a growth in a type of parties known as “ruletas” [roulettes] and
“semáforos” [traffic lights] comprising very young people, including minors, of low
economic resources.
Factors • Excessively low price – a bottle may cost 0.50 to 0.70 soles (US$ 0.17 – 0.20).
• Dependency and addiction.
Effects• Severe health problems.
• Violence and crime.
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Surrogate alcohol fell by 26.9%
Factors Effects
1
News of the severe health consequences
involved has led to greater awareness among
consumers.
Reduction in the number of consumers for this
type of products.
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Tax leakage increased among distilled beverages in 2014
Tax evasion increased by 7.0% in 2014
Tax leakage is the fourth of the five categories in terms of volume (2%).
Distilled products account for 72% of the LAE volume.
The most significant alcoholic beverages include rum, pisco and wine, and involves a volume which is not declared by formal producers.
Growth between 2013-2014 was 7.0%, due to an increase in pisco tax leakage.
6,198 HL LAEIllegal volume 2014
US$20 mnValue at illegal prices 2014
US$3 mnFiscal loss 2014
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2.1%
LAE Volume
3.4%
Illegal Value
3.2%
Fiscal Loss
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Lack of control over small producers is the main driver for production tax leakage
Beverage • Pisco, wine and other beverages distilled by small legal producers.
• Some companies provide a percentage of alcohol or molasses as a form of payment or
benefit, which means this is not included in production statistics.
Where • Generally sales are made at the farm or in the producer’s warehouse.
• Grape producer area: Ica, Arequipa, Moquegua.
• Legal producers of cane aguardiente: Huánuco and Cajamarca.
Factors• Lack of government presence in distant or rural areas where access is not easy.
• Alcoholic beverages are introduced into the market by way of sales without receipts.
Supplies, too, are purchased without a bill or invoice along the length of the production
chain.
Effects• Fiscal loss.
• Illegal competition against legal brands.
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Tax evasion grew by 7.0% as a result of the following factors
Factors Effects
1Higher prices for legal alcohol due to the ISC
increase during 2013.Consumers look for cheaper products in the market.
2Wages are paid in the form of products such as
molasses or finished products.
Follow up on quantities and control are difficult
since the figures do not appear in the statistics.
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Tel: + 56 2 2915 7200 x 7227
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Tel: + 56 2 2915 7200 x 7236
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