The Illegal Alcoholic Beverages Market in Six Latin American Countries - 2014

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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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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)




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




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




Alcohol categorization



INTRODUCTION

REGIONAL ANALYSIS

COLOMBIA

ECUADOR

EL SALVADOR

HONDURAS

PANAMA

PERU

APPENDIX


852,616 HL LAE

Illegal Volume

US$2,523 mn

Value at illegal price

US$650 mn

Fiscal loss

Illegal Market 2014 – Region

Volume



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%





• 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





• 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




• 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.



*Counterfeit, illegal artisanal and surrogate. ** Contraband and tax leakage.



• 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.





In 2014, El Salvador and Peru experienced a fall in their share of the illegal market


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



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.




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


-

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



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


-

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



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




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%.


∆ -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



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


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.



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


• 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.



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.


South

Afr

ica

22.9

%



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




In aggregate, the illegal market had a 60/40 share between sanitary and tax risk


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



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%


-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



Counterfeit beer share increased marginally in 2014


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



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


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




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?


Consumers still demand low price alcoholic beverages regardless of their source,

particularly among the lower socioeconomic levels.



Valor

852,616 HL LAE

Illegal Volume

US$2,523mn


US$650 mn

Fiscal loss


Value



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


Note: Estimated amount based on illegal retail prices



The main category in terms of value and volume was counterfeit


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



$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%


∆ 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



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.


US$10,473

mn

US$87 mn

61%

39%


50%

12%

3%

27%

Legal beer US$

Colombia Ecuador El Salvador Honduras Panama Peru



852,616 HL LAE

Illegal Volume

US$2,523 mn


US$650 mn

Fiscal loss


Fiscal Loss



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




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


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



Contraband is the most important category in terms of fiscal loss, but not in terms of volume or value


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



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




The most significant negative impact in the illegal market is for local governments, who are the main losers


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



According to the 2014 research, Euromonitor identified the following factors that could affect the illegal market in 2015


• 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


371,527 HL LAE

Illegal volume

US$1,391 mn

Value at illegal prices

US$423 mn

Fiscal loss

Illegal Market 2014 – Colombia





• 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



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?




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




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.




$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.




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


72%

Legal categoriesLAE

RTD Wine Destilled Beer

81%

19%

Illegal beer LAE

Contraband Counterfeit



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.




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.




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.




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%).


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




36.0%

LAE Volume

39.9%

Illegal Value

59.5%

Fiscal Loss



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.




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.




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.





5.1%

LAE Volume

6.0%

Illegal Value

3.3%

Fiscal Loss



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.


• Easily accessible for sale to minors.




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.




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







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.




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.




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.



US$5 mnfiscal loss 2014


1.2%

Fiscal Loss

3.1%

LAE Volume

2.1%

Illegal Value



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.




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.



INTRODUCTION

REGIONAL ANALYSIS

COLOMBIA

ECUADOR

EL SALVADOR

HONDURAS

PANAMA

PERU

APPENDIX


142,011 HL LAE

Illegal volume

US$467 mn


US$113 mn

Fiscal loss

Illegal Market 2014 – Ecuador



What are the main findings for the illegal market in 2014?


• 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



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?

INTRODUCTION | REGIONAL ANALYSIS | COLOMBIA | ECUADOR | EL SALVADOR | HONDURAS | PANAMA | PERU



Following a fall in legal and illegal alcohol consumption in 2013, both markets recovered in 2014


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



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.




$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.




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



of the legal market of alcoholic

beverages (a 1% increase


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


39%

61%

Legal CategoriesLAE

RTD Wine Distilled Beer



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




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.




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.




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.




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




12.1%

LAE Volume

20.4%

Illegal Value

23.6%

Fiscal Loss



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.


• Unfair competition for legal product importers.




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.




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.



US$19 mnfiscal loss 2014




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.


• Profit loss.




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.




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$0.4 mnFiscal loss 2014


0.3%

Fiscal Loss

0.4%

LAE Volume

0.2%

Illegal Value



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.




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.




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.





47.9%

Fiscal Loss

55.1%

LAE Volume

55.4%

Illegal Value



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.




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

APPENDIX


28.006 HL LAE

Illegal Volume

US$49 mn


US$16 mn

Fiscal loss

Illegal Market 2014 – El Salvador




• 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




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?




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




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.




$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

$


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.




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


45%

Legal CategoriesLAE




Counterfeit accounts for almost half the illegal alcoholic beverage market




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.


50.6%

Illegal Value

41.1%

Fiscal Loss

48.9%

LAE Volume



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.


• Risk to consumers’ health.

• Damage to the image of original brands and to legal product sales.




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.




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.





4.6%

LAE Volume

15.9%

Illegal Value

22.4%

Fiscal Loss



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.


• Disloyal competition for legal product importers and distributors.




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.




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.





4.5%

LAE Volume

5.9%

Illegal Value

4.1%

Fiscal Loss



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.


• Fiscal loss.




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.




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.





31.0%

Fiscal Loss

40.4%

LAE Volume

25.7%

Illegal Value



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.




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.




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




1.4%

Fiscal Loss

1.6%

LAE Volume

1.9%

Illegal Value



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.


• Disloyal competition for companies who pay taxes.




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.



INTRODUCTION

REGIONAL ANALYSIS

COLOMBIA

ECUADOR

EL SALVADOR

HONDURAS

PANAMA

PERU

APPENDIX


16,981 HL LAE

Illegal volume

US$18.2 mn


US$4.5 mn

Fiscal loss*

Illegal Market 2014 – Honduras

*Fiscal loss does not include sales tax




• 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




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.



The fixed quota for ethanol imports and the high demand from the various consumer

industries in the country contribute to ethanol contraband.



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




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.




$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.


Average price for

illegal guifiti is

20.0% lower than

for legal products.



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


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


100%

Illegal Beer LAE

Contraband




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.


US$1.2 mnValue in illegal prices 2014





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.


• Possible intoxications due to lack of knowledge as to product origin.

• In the case of refills, financial and image damage to the original brand.




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.




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%).


US$17.0 mnValue in illegal prices 2014



90.1%

Volume LAE

93.4%

Illegal Value

92.9%

Fiscal Loss



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.


• Damage is caused to brands and their formal importers, in particular those holding

exclusivity contracts.




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.




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





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.




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.



INTRODUCTION

REGIONAL ANALYSIS

COLOMBIA

ECUADOR

EL SALVADOR

HONDURAS

PANAMA

PERU

APPENDIX


4,048 HL LAE

Illegal Volume

US$15 mn


US$5 mn

Fiscal loss

Illegal Market 2014 – Panama




• 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




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.





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




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.




$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

$


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




In Panama, illegal beer comes from contraband


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


76%

Legal categoriesLAE


Illegal Beer LAE

Contraband



Counterfeit alcohol is the least significant category within the illegal alcoholic beverages market


US$0.7 mnValue at illegal prices 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.


4.9%

Illegal Value

8.6%

Fiscal Loss

7.7%

LAE Volume



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


• Damage to original brand image.


Counterfeit alcoholic beverages are found mainly in the on-trade distribution channel



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.




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.





53.2%

LAE Volume

71.7%

Illegal Value

65.5%

Fiscal Loss



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.


• Disloyal competition for legal product importers.




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.




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.





22.0%

LAE Volume

14.9%

Illegal Value

13.6%

Fiscal Loss



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.




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.




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




8.5%

Illegal Value

12.2%

Fiscal Loss

17.1%

LAE Volume



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.


• Disloyal competition for companies paying their taxes.




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.



INTRODUCTION

REGIONAL ANALYSIS

COLOMBIA

ECUADOR

EL SALVADOR

HONDURAS

PANAMA

PERU

APPENDIX


290,043 HL LAE

Illegal volume

US$584 mn


US$88 mn

Fiscal loss

Illegal Market 2014 – Peru




• 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




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.





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




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.


290,043 HL LAE



$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.




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


of the legal market for alcoholic

beverages (a 2% increase


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



6%

90%

Legal categoriesLAE




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%).


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.







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.




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.




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.





20.0%

LAE Volume

11.7%

Illegal Value

5.1%

Fiscal Loss



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.


• Disloyal competition for legally established companies.

• Money laundering for other illegal activities.




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.




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.





24.6%

LAE Volume

12.2%

Illegal Value

12.6%

Fiscal Loss



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.




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.




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


US$0.3 mnValue at illegal prices 2014





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.




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.




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.





2.1%

LAE Volume

3.4%

Illegal Value

3.2%

Fiscal Loss



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.


• Illegal competition against legal brands.




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.



CONTACT DETAILS

Carolina Guzmán

Associate Consultant

Tel: + 56 2 2915 7200 x 7227

[email protected]

Jesus Utrilla

Business Development Manager, Consulting

Tel: +1 312-922-1115 x 8322

[email protected]

Helen Smith

Senior Consultant

Tel: + 56 2 2915 7200 x 7236

[email protected]

Lourdes Chavarria

Consulting Manager

Tel: +1 312-922-1115 x 8358

[email protected]

Philip Buchanan

Head of Consulting - Latam

Tel: +1 312-922-1115 x 8279

[email protected]

mailto:[email protected]



