Liquor industry bets on festive binging to break free of 5-year margin squeeze

India’s liquor sector hopes that cooling inflation and a normal monsoon will boost consumer spending in the festival period, helping the mainstay low-cost alcohol market overcome high input costs and stagnant margins, according to the head of an industry lobby.

“While the first quarter of the fiscal year was depressed to an extent on account of the long and drawn-out election process and excessive summer heat, the second quarter has seen companies doing better,” said Anant S. Iyer, director general of Delhi-based spirits advocacy Confederation of Indian Alcoholic Beverage Companies (CIABC). “The upcoming quarters--three and four--will look positive,” he told Mint, suggesting several categories could see better sales.

CIABC represents large distillers, including Radico Khaitan, Allied Blenders & Distillers Ltd, Tilaknagar Industries and 20 others.

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India’s $32-billion liquor industry, according to London-based drinks consultancy IWSR, is estimated to grow by an incremental $7 billion by 2028. Makers of whiskies to beer are ramping up volumes, betting on a young population—460 million or 33% of Indians are in the legal drinking age, according to the Economic Survey.

The industry sold 385 million cases of 9 litres each in FY23, growing 14% above FY22 and 12% over pre-Covid levels FY20, according to CIABC data released in July. Profitability, however, has been under pressure.

Over the last five years, while everyday products like face and body washes have seen prices rise 10-12% annually, the alcoholic beverage or alcobev sector has been unable to secure hikes due to state governments’ reluctance, Iyer said. In India, alcohol is outside the purview of the goods and services tax, prices are regulated, and levies on liquor are one of the biggest sources of revenue for states.

Prices of ethanol, an essential raw material that contributes about 40% of the total production cost, have seen a steady increase for over a year due to the rising costs of barley, maize, and sugarcane, said Manoranjan Sharma, chief economist of Infomerics Ratings.

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Higher grain and packaging material prices could lead to reduced operating margins for the industry in FY25, Sharma said. “Additionally, the shift of grains towards ethanol production, spurred by government blending mandates, has intensified supply and pricing challenges for the alcobev sector.”

Companies’ commentary underscores concerns. In its April-June earnings call, Radico Khaitan, the maker of Magic Moments vodka, said its gross margin in the quarter was 2 percentage points lower at 41.5% from a year earlier "due to a significant food grain inflation".

Tilaknagar Industries said it had to negotiate better margins with vendors because of volatile and inflationary prices of extra-neutral alcohol. The maker of Mansion House brandy said its Ebitda margin of 14.5%, up 89 basis points on year, in Q1 has been driven by cost cuts and the rising share of premium products in the portfolio.

Allied Blenders and Distillers, too, flagged an unfavourable macroeconomic environment and persistent food inflation. The company, said managing director Alok Gupta in the company's Q1 earnings call, has focused on improving profitability by supplying brands based on regional consumption patterns and other cost-saving initiatives.

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More dry days enforced before elections also affected business this year, according to Iyer. And the excise departments are reluctant to approve price increases, he said.

“Policymakers are of the view that this industry is making a lot of money. This is not the case,” CIABC’s Iyer said. “Over the last few years, input costs have gone up and across the economy, inflationary cost increases have affected all sectors and goods, but prices have not moved up for us as an industry.”

The total revenue earned from the alcobev industry is upwards of ₹3 lakh crore for FY24, with Uttar Pradesh, Tamil Nadu, Karnataka, and Maharashtra generating the most, said Iyer. Price increases will help sustain the industry as it is among the top three contributors to state revenues, he said.

According to him, excise policies haven’t changed, barring minor adjustments, across states this year. Karnataka made changes to the excise levy slabs and Andhra Pradesh has yet to announce its policy altogether, he said.

States should not pass on various cesses and fees to companies but to consumers directly, he said. These further erode the already stressed product margins, he said.

Several northern states, including Uttar Pradesh, have introduced new bottling and franchise fees, impacting smaller manufacturers. These states have also imposed additional levies, like cow cess, further increasing costs.

“Policymakers are of the view that this industry is making a lot of money. This is not the case,” CIABC’s Iyer said. “Over the last few years, input costs have gone up and across the economy, inflationary cost increases have affected all sectors and goods, but prices have not moved up for us as an industry.”

The total revenue earned from the alcobev industry is upwards of ₹3 lakh crore for FY24, with Uttar Pradesh, Tamil Nadu, Karnataka, and Maharashtra generating the most, said Iyer. Price increases will help sustain the industry as it is among the top three contributors to state revenues, he said.

According to him, excise policies haven’t changed, barring minor adjustments, across states this year. Karnataka made changes to the excise levy slabs and Andhra Pradesh has yet to announce its policy altogether, he said.

States should not pass on various cesses and fees to companies but rather to consumers directly, he said. These further erode the already stressed product margins, he said.

Several northern states, including Uttar Pradesh, have introduced new bottling and franchise fees, impacting smaller manufacturers. These states have also implemented additional levies, like cow cess, further increasing costs.

A premium toast

Even as the industry faces a profitability challenge, growing demand for premium alcohol is providing some relief to most manufacturers. More consumers are choosing higher-quality alcohol even as the overall market slows. This shift is driven by younger consumers entering the legal drinking age.

“There is a big boom—post-pandemic—in premium spirits, while the ‘regular’ or entry-level segment has been relatively stagnant in several markets,” Iyer said. In states where the end-consumer prices are reasonable because of “progressive” taxation (such as Haryana, Karnataka and Goa), Iyer said the consumption of premium spirits has been driven by consumers trading up if the price differences are marginal or affordable.