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

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THE ILLEGAL ALCOHOLIC BEVERAGES MARKET IN
SIX LATIN AMERICAN COUNTRIES
2014
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/refill
Illegal alcohol sold as legal brands or empty bottles of legitimate
products refilled with cheaper alcohol
Industrial manufacturing of
illegal brands
Manufacturing 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

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
%Illegalmarket
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 LAE
2012 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
HLLAE
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
HLLAE
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 LAE
Legal 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
ColombiaEcuador
El
SalvadorHondurasPanamaPeruAggregate
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 LAE
Calculation 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%
%Growth2012-2014
% 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 Dominican
Republic
Venezuela Regional
Czech
Republic7.1%
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.
SouthAfrica
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%Legalbeer0.9%Illegalbeer
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%Legalbeer0.8%Illegalbeer
 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$/LAE 1.8 0.9 2.7 1.0 2.6 1.3 2.1
Source: SABMiller
Average
Below average
Above average
1.76
0.9
2.7
1
2.6
1.3
2.1
0
0.5
1
1.5
2
2.5
3
Aggregate Colombia Peru Ecuador Honduras Panama El Salvador
Ratio:beer/spiritsUS$/
LAE

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.

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.
72%
Legal categories
LAE
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 LAE
Legal volume 2014
US$653 mn
Value at illegal prices 2014
US$131 mn
Fiscal 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%).
 Distilled products dominate this category, accounting for 93% of the volume.
 The most relevant subcategory corresponds to the finished product contraband, which accounts for 57%
of the volume, while ethanol contraband accounts for 43%.
 At aggregate level, the growth of contraband between 2013 and 2014 was 0.7%, driven by the growth in
finished product contraband (5.8%).
133,929 HL LAE
Illegal volume 2014
US$554 mn
US$251 mn
Fiscal loss 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.
18,963 HL LAE
Illegal volume 2014
US$84 mn
US$14 mn
Fiscal loss 2014
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.
Effects
• 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
36,598 HL LAE
Illegal volume 2014
US$71 mn
US$21 mn
Fiscal loss 2014

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.
11,447 HL LAE
Illegal volume 2014
US$29 mn
US$5 mn
fiscal 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.

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
Contraband Counterfeit
 In 2014, beer accounted for 61%
of the legal market of alcoholic
beverages (a 1% increase
compared to 2013), equivalent to
265,102 HL LAE.
 Illegal beer volume amounted to
1,311 HL LAE, 99.9% of which is
contraband, since counterfeit
beer is not common practice.
 Beer contraband comes mainly
from Peru due to lower product
price there.
 There is no industrial production
of illegal beer.
39%
61%
Legal Categories
LAE
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
19,296 HL LAE
Illegal volume 2014
US$67 mn
US$13 mn
Fiscal loss 2014
Counterfeit comes fourth in terms of volume among illegal alcoholic beverages
 In Ecuador, counterfeit accounts for 14% of the total illegal alcoholic beverages, both in terms of volume
and value.
 Within the category, distilled products include practically the entire volume.
 Between 2013 and 2014, this category increased by 4% mainly due to the higher internal ethanol
production level, leading to greater raw material availability as a result of the lack of control over residual
ethanol.
 Fiscal loss from counterfeit alcohol is estimated at US$13 mn for 2014, which accounts for 12% of total
fiscal loss.

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.
2
Despite 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 LAE
Illegal Volume 2014
US$95 mn
US$27 mn
Fiscal loss 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.
Effects
• Fiscal loss.
• 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.
2
More stringent sanctions on illegal alcohol trading
and increase in formality by the government.
Reduction in finished product and ethanol
contraband.
3
2014 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.
26,783 HL LAE
Illegal Volume 2014
US$45 mn
US$19 mn
fiscal 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.
Effects
• 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.
2
The 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 LAE
Illegal Volume 2014
US$1 mn
US$0.4 mn
Fiscal 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
1
During 2014 there was an increase in local
production of good quality low-priced ethanol.
Alternative for surrogate alcohol consumers.
2
The Ministry of Public Health (MSP) reinforced its
surrogate alcohol awareness programs.
Consumers are more aware of the health risks
associated to surrogate alcohol.
3
Government 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.
78,287 HL LAE
Illegal Volume 2014
US$259 mn
US$54 mn
Fiscal loss 2014
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
1
During 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.

28.006 HL LAE
Illegal Volume
US$49 mn
US$16 mn
Fiscal loss
Illegal Market 2014 – El Salvador

What are the main findings for the illegal market in 2014?
• Practically 90% of the illegal alcoholic beverage market fell into one of these two
categories.
• Both categories decreased in 2014, due mainly to greater police and municipal control
over expendios (canteens) and pharmacies, which are the main distribution channels.
Counterfeit and surrogate: main categories
• Though contraband still exists it is not the most outstanding problem for local industry,
since the National Civil Police are taking effective measures to cut down on smuggling.
• Contraband comes in via some blind points in areas bordering on Guatemala and
Honduras.
Contraband was significantly reduced
• In 2014 the authorized quota of ethanol for alcoholic beverages was not entirely covered,
which means a surplus remained which was neither recorded nor controlled.
• Ethanol quotas continued to be approved without any follow-up providing the means to
control the end use given to the raw material. This provides the opportunity to divert raw
material towards types of production other than the one originally declared.
Surplus ethanol

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
$50
Counterfeit Contraband Illegal artisanal Surrogate Tax leakage Total illegal
US$
Illegal price RSP Legal price RSP
Nota: RSP = Retail selling prices – Consumer sales price
The gap between average prices on the legal and illegal market is
24%, which is larger than the 15% gap for 2013
The price of
counterfeit products
is very similar to
that of legal brands,
so therefore they
deceive consumers.
There is a
significant price
variation between
contraband and
legal products, in
particular for
premium products.
This difference is
what most attracts
consumers.
Surrogate
alcohol is
made using
pharmaceutical
alcohol, which
is purchased
in the legal
market.
Products evading taxes are sold at
the same price as legal products.
Producers keep the margin by
charging consumers the same
price.
There is no
difference in price
since there is no
legal artisanal
alcohol production.

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.
100%Legalbeer
45%
Legal Categories
LAE
RTD Wine Distilled Beer

Counterfeit accounts for almost half the illegal alcoholic beverage
market
13,688 HL LAE
Illegal volume 2014
US$25 mn
US$7 mn
Fiscal loss 2014
Counterfeit was the main illegal source in 2014
 Despite the reduction recorded between 2013 and 2014, counterfeit is the most important category
among total illegal alcoholic beverages, in terms of both volume (49%) and value (51%).
 There is no evidence of industrial production. The entire category corresponds to refill products.
 The products making up this category are only distilled beverages, specifically aguardiente and vodka
popular. The main raw material is ethanol which is easily available due to insufficient control over the
quotas authorized for each year.
 Fiscal loss as a result of counterfeit alcohol is estimated at US$7 mn for 2014, which accounts for 41%
of the total fiscal loss from the illegal alcoholic beverage market.
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.
Effects
• Fiscal loss.
• 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.
1,286 HL LAE
Illegal volume 2014
US$8 mn
US$4 mn
Fiscal loss 2014
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.
Effects
• Fiscal loss.
• 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.
1,258 HL LAE
Illegal volume 2014
US$3 mn
US$1 mn
Fiscal loss 2014
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.
Effects
• 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.
11,325 HL LAE
Illegal volume 2014
US$13 mn
US$5 mn
Fiscal loss 2014
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
1
Inspections 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 LAE
Illegal volume 2014
US$1 mn
US$0.2 mn
Fiscal loss 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.
Effects
• Fiscal loss.
• Disloyal competition for companies who pay taxes.

Tax leakage was the category with the greatest percentage
reduction, though not in absolute terms
Factors Effects
1
It is estimated that during 2014 production of out-of-
quota distilled alcoholic beverages fell.
Lower production tax leakage.

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

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