Toolkit for Assessing the Unrecorded Alcohol Market

What is the economic impact of the illicit market?

What is the Profit Loss for Legitimate Producers?

Calculating the total revenue losses created by the illicit sector begins with analyzing the private sector. The economic costs of illicit alcohol for legitimate producers and distributors stem largely from the creation of an uneven playing field in the competitive environment. Damage to brand reputation from counterfeit products is also a concern, although this is difficult to quantify.

Every unit of alcohol sold in the unrecorded market implies loss of revenue for the legitimate producer. Steps for calculating the loss incurred by the beverage alcohol industry are described below.


Step 1: Estimating the size of the licit and illicit market segments

The size of the licit and illicit market segments can be estimated from consumption data (see What is the Size and / or Composition of the Unrecorded Market?) for the reference year. When there is a time lag between available consumption data and the year for which lost revenue is being estimated, a compounded annual growth rate may be applied to the consumption data. In this case, the size of industry arrived at must be independently corroborated by reliable industry sources.

Step 2: Calculating the loss of sales to legitimate industry

Loss of sales to legitimate industry can then be calculated by applying the "grey” or unrecorded market percentage to the size of legitimate industry, as determined in Step 1.

Step 3: Calculating the average profitability of the alcohol sector

The next step is to calculate the average profitability of the alcohol sector to estimate loss of profits for the industry. Depending on data availability, profitability of genuine producers can be calculated within a country or geographical region. This should factor in all costs that a producer incurs to operate a legitimate business. Costs of production, sales, and distribution should be subtracted from aggregate industry-level sales or revenues. The difference between revenues and costs will determine average profits of the industry.

Step 4: Calculating the net profit loss for industry

In the final step, net profits lost for legitimate industry, before taxes, are calculated by multiplying the profitability percentage arrived at in Step 3 by the loss of sales arrived at in Step 2.

Source: TARI     


It should be noted that the approach outlined above only quantifies loss at the production (vs. distribution) stage. Although this is a limitation, production loss typically constitutes the larger proportion of total loss. Furthermore, loss at the distribution level (wholesale, retail) typically relates to mark-up, which is often difficult to ascertain. Loss related to retail sales is factored in to some extent in the form of loss of value-added tax (VAT) when calculating loss to government (see next - What is the Revenue Loss for Governments).