Alcoholic Drinks in El Salvador - July 2022 Market Update

EXECUTIVE SUMMARY

Sales of alcoholic drinks rebounded in 2021 after declining in 2020. The on-trade made a better-than-expected resurgence as people began socialising once more thanks to the rollout of the vaccination programme. Beer and spirits remain the largest categories, while wine sales remain low. RTDs are also growing in popularity, especially among young adults. Barriers to market growth, however, include the threat of crime and gang violence and official measures to tackle growing alcohol consumption.

Alcoholic drinks in 2021: The big picture

• In 2021, recovery of sales of alcoholic drinks surpassed expectations. Consumers seeking to make up for lost time and meet up again with friends and family after 2020 confinements and restrictions, together with advances in the vaccination programme increased confidence in socialising once more. This benefited sales of alcoholic drinks, especially in the on-trade. Despite the strong growth in the on-trade channel, retail sales also maintained strong growth as some consumers did not entirely make the switch back to the on-trade. More people continued consuming alcoholic drinks at home and stocked up their home bars. Moreover, freedom from home seclusion encouraged people to enjoy life with many opting to pamper themselves by trading up in terms of their brand choice within their relative budgets. This led to a positive performance of premium alcoholic drinks and recovery of the mid-priced segment.

Country background

• The country went into total lockdown on 11 March 2020, despite there not having been any confirmed cases of COVID-19 in the country at the time. This involved the borders being closed to commercial flights and incoming tourists on the same day. Lockdown included the closure of all consumer foodservice establishments and all retail outlets selling non-essential goods. Even for shops selling essential goods there were limited operating hours and other measures in place to limit the number of people in a store at any one time. Quarantine measures and a greater police and military presence on the streets were activated to enforce the lockdown. The government announced an economic relief programme that included measures such as allowing people to delay payment of public utilities bills like water and electricity, and, in some cases, rent, as well as the payment of a supplementary income of USD300 per person.

• During 2021 El Salvador carried out a successful vaccination campaign, closing the year with 72% of the population being fully vaccinated, while 80% had at least one dose. The country was also advancing booster vaccinations with over one million people having a third dose at the end of the year. With the number of COVID-19 cases being reported at the end of 2021 having decreased, with some days having no new cases reported, the country was able to recover. As such, having days with no new cases reported. This allowed the country to recover, with GDP growing by 9%. These developments benefited sales of alcoholic drinks.

• Around 6.5 million people live in El Salvador, 4.4 million of whom are of legal drinking age, presenting a substantial and attractive consumer base for alcoholic drinks in the country. Alcohol consumption is widely considered to be socially acceptable across all of the country’s major socioeconomic groups, with beer consumption in particular considered to be completely acceptable. In addition, drinking among women is seen as completely unremarkable among mid- and high-income consumer groups and there are no clear differences in the consumption of spirits between men and women. Local beer producers include women in most advertisements. Men and women aged 25-60 years old are the primary consumers of spirits, while older people tend to consume higher volumes of alcoholic drinks.

• According to a 2018 study by the World Health Organization, total annual pure alcohol consumption per capita among Salvadoran drinkers aged over 15 years old is 3.7 litres on average, the second lowest in the Americas after Guatemala, with men consuming considerably more alcohol than women. On average, the study recorded average consumption of 6.9 litres of pure alcohol for men and barely 1.1 litres for women. Even though it is generally acceptable for women to drink, especially among middle-class consumer groups, women are still expected to drink substantially less than men.

• Rising alcohol consumption is increasingly seen as a problem in El Salvador, with an estimated 60% of the Salvadoran population regularly drinking alcohol at the end of the review period. Alcohol is involved in more than half of all road traffic accidents involving motor vehicles and it is also believed to be linked to the majority of preventable illnesses in the country.

• To address these issues, Industrias La Constancia has been working in partnership with Glasswing International to encourage more responsible alcohol consumption in a number of cities. This partnership has for example targeted primary and middle school students with courses focused on discouraging underage drinking while targeting older members of the community with workshops focused on responsible consumption. Bartenders, waiters, and managers from restaurants, nightclubs and bars have also been offered training to encourage the responsible sale, service and consumption of alcoholic beverages.

• Responsibility for issuing and monitoring alcohol licenses falls to each of El Salvador’s municipal authorities. All businesses selling alcohol need to obtain a permit from the municipality, to sell alcoholic drinks with an ABV of 6% or over. Drinks with an ABV of less than 6% meanwhile do not need any permits, meaning that any independent small grocer may sell beer or other products that fall within this classification without the need for a license. Retail outlets and on-trade establishments applying for a license to serve alcohol must be located more than 100m from hospitals, health clinics and schools.

• There are no cultural barriers that limit or encourage consumption of alcohol in El Salvador, with an estimated 10% or less of the population prohibited from consuming alcohol due to their religion. There are also no cultural or religious barriers between rural and urban areas. However, while the legal age for drinking is 18 years old, enforcement of this law tends to be lax in outlets where alcohol is sold.

• Most consumption of alcohol takes place after work during the week or at weekends. Most employees tend to avoid consuming alcohol at lunchtimes during workdays. Beer brands and other industry players are currently focused on afterwork happy-hour promotions in the on-trade during the week, with these usually running from 17.00hrs to 20.00hrs and offering beer and other refreshing drinks such as vodka and rum cocktails. Most commercial activity is centred on the capital San Salvador, which is also located just 40km from the coast and numerous beaches, which means that residents of the country’s largest urban area are often came to take advantage of the country’s year-round favourable climate to visit the beach at weekends, with food and alcoholic drinks usually a central part of beach-based activities.

• The most popular products are beer and aguardiente, categorised under other spirits. Wine consumption is rare and remains confined to a small niche of affluent people with knowledge and experience of wine. However, category sales are growing strongly from a low base as it is increasingly perceived as an ideal accompaniment to a meal. It should also be noted that wine in general is more appealing to women than to men. RTDs is a smaller category, with demand confined mainly to younger consumers and these drinks appealing more to women than men. Moreover, high prices mean that demand for RTDs is confined mainly to affluent urban-dwellers.

• Consumption of traditional artisanal alcoholic drinks is waning as public opinion around these products becomes increasingly negative, not least as the production of most of these drinks is prohibited by law. However, illicit sales of unlicensed artisanal alcoholic drinks are an ongoing problem in El Salvador, although in volume terms contraband does not represent a significant share of overall alcohol consumption. Within illegal alcohol, domestically distilled vodka and aguardiente are the most prominent products, while unlicensed artisanal beer is almost non-existent. According to importers and local producers, more action from the country’s authorities is expected to be seen as part of ongoing efforts to counteract such illicit activity.

• The most significant forms of illicit alcohol include surrogate alcohol not intended for human consumption such as pharmaceutical alcohol or beverages mixed with methanol. Counterfeit brands of spirits also have a significant presence, as do unlicensed artisanal drinks such as guarapo, chaparro, and chicha. Surrogate alcohol is mainly consumed in rural areas of the country, where unemployment rates are highest. Surrogate alcohol is also readily available in the central markets of many major cities.

• The parallel trade in unlicensed artisanal alcohol and contraband products remains in decline thanks to the ongoing activities of the National Civil Police to reduce the impact of smuggling and other clandestine activity in these areas. Typically contraband, including counterfeit spirits brands, enters El Salvador via its borders with Guatemala and Honduras.

• Although there are no prominent anti-drinking organisations active in El Salvador, the Ministry of Health has developed a campaign which highlights the risks of excessive drinking. These campaigns tend to be most conspicuous during the Christmas and New Year festive season and other major holiday periods.

• Major changes were seen in the competitive environment in beer towards the end of the review period as Industrias La Constancia (ILC), which had recently come under the ownership of AB InBev, was forced to sell two of its four beer brands, Suprema and Regia, by the Superintendence of Competition. This step was mandated by the Salvadoran competition authorities to avoid ILC establishing a monopolistic position in the category. The brands were divested to Cervecería Salvadoreña (CS), a conglomerate recently formed by Guatemalan and Salvadoran investors, which met all criteria issued by the government. The agreement involves ILC continuing to produce and distribute the two brands in question until such time as CS is able to take control of these activities. Cervecería Salvadoreña began distributing Suprema and Regia during 2020. However, marketing and promotion activities for the brands are already under the control of CS. ILC was able to maintain complete control over its bestselling beer brands Pilsener and Golden and it has been undertaking aggressive advertising campaigns in most media channels for these brands since being forced to hive off Suprema and Regia.

Socioeconomic trends

• During 2021, El Salvador registered an improvement in formal employment, as well as recovery in remittances sent from abroad. This had a positive impact on consumption which was able to return to pre-pandemic levels. Recovery in consumption of alcoholic drinks led to an increase in the frequency of purchase and a reduction in pack sizes.

• While recent years have seen significant development in El Salvador’s formal economy, the country still has a substantial informal economy, which is thought to employ around 60% of the labour force. Moreover, many people living in urban areas either work part-time or receive remuneration at below the minimum wage. These factors have a negative impact on consumer spending power and the ability of consumers to purchase alcoholic drinks.

• Population growth remained at low levels over the review period and this can be partly attributed to the high levels of emigration that have been the defining characteristic of demographic trends in El Salvador for at least a generation. 2018 saw the country register net migration of 6/1,000 population, although these official figures are likely to be drastically understating the levels of emigration as many emigrants depart the country illegally, often motivated to seek safer places to live by high levels of crime and widespread gang violence. The country’s birth rate is also declining, with this linked to economic and safety concerns among many people of childbearing age. In addition, the presence of the zika virus in El Salvador earlier in the review period motivated the government to actively discourage women from becoming pregnant due to the risk of birth defects that the zika virus presented.

• Annual per capita consumption of alcoholic drinks remains at around 20 litres, only a third of the levels seen in Mexico, Paraguay and Argentina. There is thus significant potential for further sales growth, although this will require further improvements in the economy and a stronger approach to the issues posed by widespread crime and gang activity. Despite the negative impact of unfavourable demographic and socioeconomic trends, as well as the economic consequences of the pandemic disposable income levels are expected to continue rising, which will support sales growth of alcoholic drinks.

• Alcoholic drinks are regularly consumed by both men and women, although men account for a far higher proportion of alcohol consumption than women. Men tend to favour beer and aguardiente, with beer commonly consumed during sporting events or when watching football on TV. Women on the other hand tend to opt for premium beers and lighter alcoholic beverages, with RTDs becoming increasingly popular among female consumers.

• Among the leading industry players, Industrias La Constancia generally targets those within the 18-30 years old group with brands such as Pilsener and Golden. The company’s advertising campaigns are clearly aimed at young adults of legal drinking age. Since the company’s disinvestment of its premium brands Suprema and Regia, which targeted mid- to high-income groups, the company has shifted its focus and it has begun to target mid- to high-income consumers with Pilsener and Golden.

• Aguardiente, a distilled sugar cane spirit similar to brandy, is the alcoholic drink of choice among the low-income population due to its low price and wide availability. Aguardiente is generally preferred over beer among less affluent consumer due to its high alcohol content. Mid-income consumers tend to opt for domestic vodka, which has a lower ABV than imported vodka, or beer or rum. Whisky is usually considered premium drinks and it is consumed mainly by mid- to high-income groups. Imported beer brands such as Heineken and Stella Artois and craft beer are also popular mainly among mid- to high-income groups due to their higher prices in comparison with domestic alternatives. All of these alcoholic beverages are available from most supermarkets and independent small grocers in both urban and rural areas.

• Urban dwellers accounted for 74% of the overall population of El Salvador in 2021, with the residents of the country’s major urban areas forming the main consumer base for alcoholic drinks. Urban consumers tend to purchase their alcoholic drinks from supermarkets or from on-trade establishment such as bars, while rural dwellers tend to favour supermarkets and traditional grocery retailers.

• The alcoholic drinks industry is important to El Salvador’s wider economy. The industry leader AB InBev owes its strong position in the industry to its ownership of Industrias La Constancia (ILC), a company which has been present in the market for over a century and which employs around 50,000 people both directly and indirectly. The wider alcoholic drinks industry also contributes around 1% of GDP in taxes, which is equivalent to around USD60 million annually.

Logistics/infrastructure

• Moving goods around El Salvador is relatively easy as the country’s roads are generally in good repair and there are well-developed refrigerated distribution systems covering the country’s entire territory. However, the roads and related infrastructure remain poor in some rural areas, with government investment hindered by liquidity problems and a high budget deficit. The leading chains of supermarkets all have substantial outlet networks throughout the country, with these outlets conveniently located for most consumers.

• Although major roads are generally in good repair, companies distributing consumer goods in El Salvador face a different challenge: widespread organised crime and the constant threat of gang violence. In many cases, a protection fee must be paid to gang members in order for distributors to access certain areas. Most international players in the country’s alcoholic drinks industry rely on well-established local distributors to ensure a comprehensive distribution reach and these local distributors generally consider these payments to be a natural cost of doing business in the country.

• The prevalence of gang activity in some areas means that many traditional grocery retailers struggle to operate safely, with the result that many independent retailers were forced to close permanently during the review period. In many cases, supermarkets helped to fill this void as distributors find it safer and more cost-effective to distribute their products to fewer retail outlets of larger format. Moreover, most premium alcoholic drinks are generally only available in select stores, which tend to be located only in certain areas, specifically those populated by more affluent and sophisticated socioeconomic groups.

• Most of the population of El Salvador buy their alcoholic drinks from supermarkets, regardless of income level. One factor supporting the leading position of supermarkets in the retail distribution of alcoholic drinks is that these outlets are often located in shopping centres with secure parking, obviating the need for consumers to walk the streets, which is considered a potentially dangerous activity in many parts of the country due to high rates of crime and gang activity. Most consumers are perhaps unsurprisingly keen to shop in a secure environment without the threat of random violence. In addition, sales are also strong via the independent neighbourhood stores known as tiendas or expendios that specialise in alcoholic drinks. These are popular in low-income areas, both urban and rural. Lower-end restaurants and bars also offer vodka, aguardiente and beer. More affluent consumers tend to buy their alcoholic drinks via both the off- and on-trade, while those struggling on low incomes are more likely to avoid the on-trade due to high mark-ups.

• While supermarkets and discounters remain the most relevant distribution channels for alcoholic drinks, an easing of COVID-19 restrictions during 2021 enabled independent small grocers to recover. The small channel of e-commerce witnessed rapid growth as the number of internet users continued increasing, with consumers being more confident in making purchases via this channel.

• Industrias La Constancia (ILC), owned by Anheuser-Busch InBev NV, is the leading name in alcoholic drinks. In addition to being the longest standing player in the alcoholic drinks industry with more than 100 years of commercial activity under its belt, it is also the company behind Cristal, the country’s leading brand of bottled water, as well as being the official local bottler and distributor for all of the soft drinks brands of The Coca-Cola Co. This company is thus able to take advantage of its distribution and logistics muscle to make its beer brands available at more than 30,000 points of sale throughout the country, giving ILC a major advantage over much smaller competitors. The distribution network for the company’s beer brands encompasses small neighbourhood stores (tiendas), larger independent grocery stores, discounters, supermarkets, hypermarkets, forecourt retailers, bars, restaurants, hotels and nightclubs.

• Following the recent divestment by ILC of the beer brands Suprema and Regia to Cervecería Salvadoreña (CS), CS still relies on ILC to produce these two brands, until CS is able to take control of this activity. Cervecería Salvadoreña began distributing Suprema and Regia during 2020, and the company was already responsible for marketing and promotion activities for the brands.

• Spirits such as aguardiente, vodka, rum and whiskies are usually distributed under the control of their producers or importers via third party distributors that own their own networks of trucks and/or distribution centres. These distributors then sell the products direct to independent retailers as well as the buying groups that supply the country’s leading chains of supermarkets, discounters and hypermarkets. El Salvador is divided into 14 departments, with the three most important of these being Santa Ana in the West and San Miguel in the East, as well as San Salvador in the central zone, the location of the eponymous capital city. These departments are home to most of the country’s population and they are also the places where most of the country’s commercial activity occurs. Each distributor usually has response ability for one department or one specific area or zone within of one of the three more important departments.

• Cross-border trading and private imports are not common in El Salvador’s alcoholic drinks industry and the police and customs officials work hard to limit the influence of these types of illicit trade. These authorities have joined forces with legal producers and importers to reduce this problem, which was much more common 15 years ago than at the end of the review period.

• Thanks to the activities of the local police, the influence of contraband alcoholic drinks has been significantly reduced in recent years. However, there is still high demand for unlicensed artisanal aguardiente. One of the main driving factors behind the consumption of illicit alcohol is the much lower prices charged for these products, which in turn is a reflection of the fact that those offering unlicensed alcohol are able to avoid incurring excise and taxes on their activities.

• Duty free sales of alcoholic drinks are available to international travellers passing through El Salvador’s only international airport. As such, duty free sales remain minimal and have little impact on demand for alcoholic drinks.

Legislation

• There were no significant changes to the legislation covering alcoholic drinks in 2021 as COVID-19 related measures were lifted. However in February the holding of elections meant a dry law was in place.

• Both the legal drinking age and legal purchasing age are 18 years old in El Salvador. Sales of alcoholic drinks are regulated by the Ley Reguladora de la Produccion y Comercializacion del Alcohol y de las Bebidas Alcoholicas (“Law Regulating the Production and Sale of Alcohol and Alcoholic Drinks”) with this passed in 1996 and amended in 2004. However, enforcement of the law is lax and underage drinking is believed to be common, with Ministry of Health estimates suggesting that around half of those aged 15-19 years old have consumed alcoholic drinks.

• Drink driving is regulated through the Reglamento General de Transito y Seguridad Vial (“General Regulations of Transit and Road Safety) in El Salvador. The legal alcohol limit for drivers is 49mg/dl of breath. When a driver tests as having a breath alcohol level of 50-100mg/dl, the driver is classified as “pre-drunk” and faces lighter penalties. However, if the alcohol concentration is greater than 100mg/dl, the law classifies this as dangerous driving and penalties are much more severe. While there has been some discussion about raising fines and penalties, there were no changes in this regard during 2021.

• Advertisements for alcoholic drinks are required to include a warning that states, "El consumo excesivo de este producto es dañino para la salud y crea adicción. Se prohibe suventa a menores de l8 años" (“Excessive consumption of this product is damaging to one's health and causes addiction. Sales of this product are prohibited to those younger than 18-years-old"). There are no specific restrictions regarding alcoholic drinks advertising’s proximity to schools or restrictions on TV advertising.

• Since 2011, smoking in public has been banned in many places including restaurants, public offices, public transportation, hospitals and cinemas via The Tobacco Control Act.

• According to the Ley Reguladora de la Produccion y Comercializacion del Alcohol y de las Bebidas Alcoholicas, stores are not permitted to sell alcoholic drinks between 02:00hrs and 06:00hrs, with this a restriction applied throughout the country and seven days a week. However, this ordinance was declared unconstitutional and repealed by the Supreme Court prior to the review period. There are thus no legal controls on sales hours for on- or off-trade alcoholic drinks. As such, opening hours tend to vary between municipalities.

Taxation and duty levies

• There were no changes to the taxation levied on alcoholic drinks in El Salvador during 2021. Spirits are subject to five types of taxes depending on strength and around 60% of the product price is attributable to taxes. In addition to a general retail tax of 13% there is an additional ad valorem of 8% excluding VAT for alcoholic drinks. There is also an excise tax of USD0.09 per point of ABV on beer, some liqueurs, wines and fermented beverages. There are also import duties on alcoholic drinks with these levied at a rate of between 20% and 40%.

• All alcoholic drinks, beer, wine and spirits, pay excise taxes in El Salvador, depending on the alcoholic content, import taxes and production taxes, plus sales taxes. Ad-Valorem tax is 8% over the declared SRP, plus 1% depending on the type of alcohol detailed in the law of taxes for alcoholic products.