Alcohol cos lobby for price hikes to protect margins

Informist, Tuesday, Jul 11, 2023

By Reshab Shaw

BENGALURU – After raising prices by 10-12% in the last one year, alcohol manufacturers are lobbying state governments to allow them to hike retail prices again to offset rising input costs.

"(We are) in constant dialogue with the state governments and (have) made representations on this burning issue faced by the alcohol beverage industry," a spokesperson of the International Spirits & Wines Association of India told Informist. Members of the association include the makers of premium liquor brands such as McDowell's, Bacardi, Johnnie Walker, Absolut, and Jack Daniel's.

States control the pricing of alcohol across the country. They may also control its production, movement, and sale, in various degrees. In states where retailing is controlled by the government, there is a specified quota that each player can sell.

The rise in input costs is making the alcoholic beverage business unsustainable, claimed the spokesperson. Margins of alcohol companies have been under pressure for over a year due to rising prices of raw materials such as barley and packaging materials like glass following Russia's invasion of Ukraine.

The price of extra-neutral alcohol, the primary raw material for making alcoholic beverages, has risen 12% in 2022-23 (Apr-Mar) and over 25% in the last four financial years, according to the association. The price of glass, required for bottling, increased 25% and mono-cartons by 19% in 2022-23. Some manufacturers have permanently removed mono-cartons across the portfolio of brands in view of the higher costs, the association said.

"As per the industry readings, players are still looking to hike more," Mehta Equities Senior Vice-President (Research) Prashanth Tapse said.

The extent of the rise in costs is visible on the books of these companies, with a jump in the cost of goods sold. In 2022-23, the cost of goods sold by United Spirits, India's largest branded liquor company, rose over 26% to 56 bln rupees on a volume of 60.31 mln cases. Accordingly, the average cost per unit rose 16% year-on-year to 928.38 rupees, according to calculations by Informist.

In Jan-Mar, the cash profit margin of United Spirits contracted 29 bps sequentially to 11.5%, while that of United Breweries slumped by 160 basis points to 0.8%.

Compared to a year ago, the operating profit margins of liquor companies are down by 3.2-12.3 percentage points.

"We do expect to see representations across the industry to drive a rise in prices of these products to help maintain and grow margins for these brands," said Akshay D'souza, chief of growth and insights at retail intelligence platform Bizom.

The push for better pricing is an ongoing process, both at the state and the central government levels, United Spirits Managing Director and Chief Executive Officer Hina Nagarajan had said at a meeting with analysts after the company's Jan-Mar earnings. Such efforts were being pursued both by individual companies and through industry associations, Nagarajan said.

United Breweries Chief Financial Officer Radovan Sikorsky was more direct. "Our case is quite clear of why we want these price increases; (it is) due to the strong inflationary pressure (on) our business."

The government's recent decision to increase the minimum support prices of kharif crops by 5.3-10.4% will push up input costs further.

United Spirits went for a 6-7% price hike in Telangana, its management had said in May. The move would provide incremental revenue of 400-500 mln rupees on an annualised basis, the company said.

States like Telangana, Rajasthan, West Bengal, Uttar Pradesh, and Punjab, and the Union territory of Jammu and Kashmir have allowed the industry to marginally increase prices, International Spirits & Wines Association of India said.

"However, dialogue still continues with states like Chandigarh and Uttarakhand, where lack of price increases over the years has heavily impacted the manufacturers," it added.

WAY FORWARD

Analysts say demand for alcohol remains intact even in the high-pricing environment. "As of now, demand remains intact even after price hikes as in this segment, the population doesn't seem to look at prices while buying the products," said Tapse.

While companies are adopting various measures, including productivity initiatives, to mitigate the increase in input costs, it remains to be seen when and by how much these companies can hike prices in the days to come.

At 1237 IST, shares of United Spirits were up 0.6% at 920.35 rupees on the National Stock Exchange, while those of United Breweries were 0.4% higher at 1489.00 rupees. Shares of Radico Khaitan were down 1.5% at 1,327.90 rupees. End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Avishek Dutta

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