India’s booze business was a rather dry affair in 2016.
After reporting sluggish sales growth of just 0.2% in 2015, the slowest rate in a decade, the market for alcoholic beverages struggled with even more hurdles in 2016. Though most companies are yet to announce their earnings for the current year, the industry’s battle with regulatory and political challenges suggests good news may not be on the horizon.
The big blow to liquor companies came in April with Bihar’s decision to impose a state-wide ban on alcohol. And by November, the ruling government’s move to stop the circulation of high-value currency notes further dented the market.
Here’s a round-up of the struggles liquor makers faced in India throughout 2016:
Early in the year, Bihar chief minister Nitish Kumar called for a state-wide ban on liquor as part of an electoral promise to please women voters. After Kumar won, he followed through with this, despite the fact that it would lead to a loss of around Rs6,000 crore in tax revenue.
The country’s largest liquor maker, United Spirits (USL), reported a 3% net impact on sales on account of prohibition in the first quarter of the year. “USL has had to stop bottling at its Bihar plant; hundreds of employees have lost their jobs,” Abanti Sankaranarayanan, business head for luxury and corporate relations at United Spirits, said in October.
The ban also resulted in companies reporting a loss of existing inventory and raw material.
“We were hoping to start the new financial year with a bang and look at what has happened,” Deepak Roy, vice-chairman at Allied Blenders and Distillers, which makes Officer’s Choice whiskey, told the Business Standard newspaper. “We have crores worth of material at godowns, for which excise has already been paid. All this will become redundant with the ban.”
The move forced liquor companies such as beer maker Carlsberg and USL to reconsider their investments in the market. After Bihar’s move, more states, such as Tamil Nadu and even Goa, made public their intention to go alcohol-free to various degrees, causing concern among companies, though none of these states have implemented a ban yet.
More recently, in a bid to prevent road accidents, India’s Supreme Court has barred liquor shops from opening up across the country’s highways, starting from April 1, 2017. That’s another roadblock for liquor companies.
The move is like a “partial prohibition being enforced on the people of India,” said Roshini Sanah Jaiswal, promoter of Jagatjit Industries, which sells the Aristocrat brand of whiskey. She added that the ban would negatively impact the industry in 2017.
Taxes and higher prices
India also remains one of the most regulated countries in the world when it comes to the sale of liquor. The tax on alcohol is a state subject, which means that the country’s 29 states get to levy taxes on alcohol sales to bolster their revenues. And taxes on alcohol increased in 2016, forcing companies to pass on higher costs to consumers.
In July, for instance, Maharashtra re-introduced a local state tax on alcohol and products containing ethanol, raising the prices of alcoholic beverages. The move “negatively impacted the bottom line in the second quarter,” USL said in an earnings statement in October.
In April, Haryana hiked taxes on the sale of beer and Indian-made foreign liquor (IMFL) by increasing the value-added tax, or VAT, by 2%. And in the capital city of New Delhi, the state government halted the issuance of new liquor licenses to bars and restaurants, citing an over-supply of existing licenses.
The only bright spot was in Kerala where the newly-appointed chief minister, Pinarayi Vijayan, signaled a reversal of the partial prohibition implemented in 2014, saying it wasn’t effective in reducing the state’s problem of widespread alcoholism. Vijayan batted for abstinence instead of a complete ban.
For beer makers, the market remained stagnant as higher raw-material costs and increased taxes stalled growth. Sales of beer, which constitutes less than 8% of the overall alcohol market in India, remained flat in the first six months of the year (pdf).
If all that wasn’t enough, liquor makers also felt the pinch of the ruling government’s decision to wipe out high-value currency notes starting from Nov. 09. With less cash to spare, consumers bought smaller packs of liquor or switched to cheaper brands.
The festive months of November and December, which typically see high growth for liquor companies, witnessed a decline of 20-25% in the IMFL category. In rural areas, the sale of country liquor was down by 30%, according to Jagatjit Industries’ Jaiswal.
“It really was the final nail in the coffin,” said Samar Shekhawat, senior vice president, marketing, at United Breweries, which makes India’s largest-selling beer brand, Kingfisher.