How are liquor sales doing post-covid?
After two years of pandemic-related disruptions, which saw a temporary suspension of liquor sales as well as closure of bars and pubs, the liquor industry rebounded sharply in 2022-23, shored up by pent-up demand. Total sales of Indian-made foreign liquor (IMFL) in 2022-23 stood at 385 million cases (one case is 9 litres), up nearly 14% over the previous year. Compared with pre-covid levels, it is up 12%. This signals an end to pandemic-linked distress. The industry is also witnessing greater sales of premium liquor, which means Indians are drinking more of the good stuff.
Why is FY24 proving to be a challenge?
While the industry has seen handsome recovery from the pandemic lows, some issues, such as high raw material prices, still persist. This is specially true of raw materials such as glass and extra neutral alcohol, or ENA. Beer maker United Breweries recently warned analysts that it does not see glass prices softening till the end of the year. More recently, tighter supply of rice—among the key raw materials used for ethanol production—has rattled distilleries. The government is now mulling increasing the price of ethanol, a move that could cause a surge in costs for liquor companies.
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What exactly happened in Karnataka?
Recently, Karnataka hiked the additional excise duty on IMFL and beer. While the additional excise duty on IMFL has increased by 20% across 18 price slabs, that on beer has risen from 175-185% of the declared price. While the hikes would boost the state’s revenue, it could see a proliferation of “informal supply-chains”, the industry body ISAWAI warned.
What could this mean for buyers in K’taka?
Karnataka accounts for nearly 20% of India’s liquor market, according to the Confederation of Indian Alcoholic Beverage Companies, so these taxes could lead to multiple outcomes for consumers and companies. Alcohol could start flowing from neighbouring states into Karnataka. Consumers typically tend to move to cheaper brands in response to price hikes, and that could make things difficult for premium brands. Worse, drinkers at the bottom of the consumption basket could switch to illicit liquor.
How do these issues impact companies?
Liquor producers aren’t unfamiliar with high taxes. But these headwinds can pressure margins this fiscal. In its earnings call last month, United Spirits said maximum retail prices of its brands are likely to go up 14%-17% because of the tax hikes in Karnataka. United Breweries said prices in the state across its brands have increased by 3-5%. Meanwhile, higher ethanol prices could have a negative bearing on company earnings. These can potentially lead to a rise in costs of ENA, used as a base for spirits.