SALBA is concerned over rising prevalence of illicit trade and calls for better law enforcement

Media Release

A report by Euromonitor International, commissioned by the South African Liquor Brandowners Association (SALBA), Beer Association of South Africa (BASA) and Vinpro last year to better understand the illicit market during the pandemic, found that the illicit market in South Africa grew by 10% (CAGR) in volume terms from 2017 to 2020.

Kurt Moore, SALBA CEO, said, “The total share of illicit alcohol in 2020, was estimated to be worth R20.5 billion and comprises 22% of total alcohol volumes1 – meaning one in five bottles are potentially illicit products. This is unacceptable.”

The report confirmed the growth in demand for illicit alcohol in 2020 as a direct consequence of the prohibition of alcohol sales. Moore went on to say that the report identified several other reasons for the growth of the illicit market, significantly including weak regulatory enforcement, inadequate punitive measures and enforcement which have incentivised crime syndicates to ramp up their smuggling and counterfeit operations and compounded the rise of illegal traders.

Overall, the expansion of the illicit trade has had a devastating social impact on citizens’ health and well-being and fuelled the engines of organised crime, which have increasingly become more firmly entrenched and sophisticated. The growth in illicit trade – a direct consequence of the prohibition of alcohol sales during the COVID-19 measures – took advantage of the depressed legal market. South Africa’s rampant illicit market is also compounded by stringent regulations on the legal sale of alcohol, including high real increases in alcohol excise taxes. This, combined with a weakening macro environment where unemployment increased to 34.5% in 2022, along with increasingly high inflation rates have subsequently fuelled the demand for cheaper illicit products.

At the time of the report, the illicit alcohol trade sales by volume had overtaken the entire combined wine and cider sectors (665 431 HL vs 627 758 HL).

“If we consider that our cider market is second only to the UK, and we are the eighth-largest wine producer in the world, having illicit volumes that exceed the cider and wine market is a significant shift,” he said.

“We are deeply concerned about the safety risks associated with the consumption of illegal concoctions and the commercial growth of an illicit alcohol network.  Unregulated alcohol is not subject to stringent quality control measures are not adequately policed. Many of these illegal alcoholic concoctions contain dubious ingredients which are unfit for human consumption and may be lethal if ingested. We urge both liquor outlets and consumers to purchase their preferred products from trusted sources.

The rise in illicit trade is also stalling the country’s economic recovery while fuelling the engines of organised crime. Euromonitor estimated that in 2020, the South African Revenue Service lost R11.3 billion due to the illicit alcohol trade. This is enough to pay for more than two million child support grants for a year or to place an additional 34,000 police on the streets.

The alcohol industry is remains committed to working with the government as it has been for years, including SAPS and SARS, to find solutions to the problem of illicit trade that not only poses a public health risk to our communities, but also a mutual revenue risk for the government and the industry. We can best accomplish this by operating within a well-regulated space with adequate support from law enforcement.

The industry urges consumers and traders to call the Consumer Goods Council hotline on 0800 014 856 to report any suspicion of illicit activity.

 

The Illicit trade is defined in the following categories:

Counterfeit and illicit brands. These include substitution/refilling (where illicit alcohol is sold as licit brands or empty bottles of legitimate products are refilled with cheaper alcohol) and industrial manufacturing of illicit brands (which includes the manufacturing of illicit branded or unbranded alcohol) Counterfeiting activities flourished during 2020amid rampant demand for spirits. Both refilling and industrial manufacturing increased by CAGR of 8.6% in volumes since 2017. Cheap raw materials and ease of access to ingredients such as ethanol contributed to the rise in counterfeiting operations.

Smuggling and Round tripping. Smuggling includes illicit imports of ethanol as a raw material or the illicit imports of alcoholic beverages.  Round tripping is the export of legally produced alcohol through duty-free channels on which the required taxes have not been paid in the country of production, these products are then sold back into the domestic market without incurring excise tax

Smuggling saw the fastest growth among all categories, with a compound annual growth (CAGR) of 13.4% in volumes since 2017. Criminal syndicates have ramped up smuggling and counterfeit operations to meet demand created by the alcohol bans – smuggled finished products are found in formal and informal markets and tend to mainly include spirits. Smuggling alcohol products is highly profitable compared to other categories due to ease of access and limited inputs required compared to producing counterfeit alcohol.

Illicit homebrew. This refers to home-made alcoholic beverages that are produced for commercial purposes without paying excise taxes.  The production of homebrew is not illegal or illicit. Only once the product is sold without paying the correct excise taxes is it deemed illicit. Illicit homebrew was estimated to have increased by CAGR of 12.5% in volume terms over the 2017-2020 period. Of concern is that homebrews are often not produced in sanitary conditions and in some cases may contain lethal additives to strengthen the alcohol content.

Surrogate. This is alcohol not meant for human consumption as a beverage, such as pharmaceutical alcohol which is diverted to the alcoholic beverages market

Tax leakage. This is legally produced alcohol on which the required taxes have not been paid in the country of production. Regulatory loopholes within the declaration of sugar-fermented ales remain a key concern. Producers of sugar-fermented ales mostly comply with regulations around labelling their products but are non-compliant in terms of composition (often containing a higher level of sugar-fermented water +20% than that allowed). In turn, falsely declaring their products as a fruit-based beverage, or undeclaring production volumes to avoid paying excise duties, are the key activities within tax leakage. Overall, tax leakage posted a CAGR of 5.2% in volumes during 2017-2020. These products are also sold for significantly lower prices, driving consumer demand from lower income groups.

 

 

  1. By litres absolute alcohol (LAA).  All references to volumes in this statement is measured in LAA, unless otherwise indicated.

NOTES TO EDITORS:

Issued by FTI Consulting on behalf of the South African Liquor Brandowners Association (SALBA).

salba@fticonsulting.com