New Delhi: Feeling the pinch from shrinking margins due to increasing input costs and restrictions on rising prices to offset these, the alcoholic beverages (alco-bev) industry is seeking an inflation-linked pricing model from state governments.
In India, alcohol prices are controlled by individual states.
Stressing that it’s a myth that liquor companies make a lot of money, the industry says it’s seeking the change to cover up its costs and not for commercial gains.
“Why inflation becomes a compounded problem in its intensity for our industry is because we do not have free pricing…the state gives us prices. Very often, when we submit inflation data to the state, we arrive at a number that says this inflation will impact these kinds of segments of an industry. But rarely do we get a price increase,” Nita Kapoor, chief executive officer at industry body International Spirits and Wines Association of India (ISWAI), told ThePrint.
“Very often, for 4-5 years, we don’t get a price increase. So what happens is the inflation pressure gets compounded,” added Kapoor.
According to ISWAI’s November 2023 report, the Indian alcoholic beverage industry was estimated to be $52.4 billion (Rs 3.9 lakh crore) in CY-2021, and forecast to reach $64 billion over the next five years driven by rising incomes, urbanisation, increased access, and premiumisation.
Noting that India was the fifth largest player in the global alcohol beverage market, the ISWAI report said that given the size of the industry, it’s important for policymakers to recognise its economic impact in India.
Poonam Chandel, managing director at NeuWorld Spirits, said that apart from essential goods, Alco-Bev is the only one where pricing is controlled by the government.
“Each state and union territory has different pricing for the same product. Like any FMCG company and consumer products, Alco-Bev companies should be allowed to determine the price of their products. Yes, there certainly is a need to have a policy change as far as pricing goes,” she said.
According to Chandel, the Alco-Bev industry looks very glamorous and there is a myth that liquor companies make a lot of money. However, the reality is that the ratio between the gross turnover and profit after tax is probably the lowest for Alco-Bev companies in the entire FMCG space, she said.
“Till the time a company reaches significant volume and that too in the premium space, it’s impossible for the smaller and newer companies to survive,” she said.
Kapoor stressed that while companies try to rationalise costs and “keep squeezing till the bottom of the barrel and then there comes a point of time where sustaining the business becomes a challenge”.
“It is only when it comes to an absolute breaking point (that) some states will give us price increases. And even then, the increase will be far lower than what the four-year compounded inflation has been,” she said.
State excise duties account for nearly 70-80 percent of consumer Maximum Retail Price, she said, adding that the industry is in a “dire state”.
“Our simple point is a) we are unnecessarily over-regulated. b) We are asking for an inflation model. Let’s be transparent. Why can’t this industry have an inflation model to be able to transparently discuss the issue of pricing with the state?” she asked.
Also Read: UP is the new liquor capital—Record revenues, home bars, model shops. Yogi govt loving it
‘Gap between intent and execution’
One of the reasons that states control alcohol prices is the contribution of the industry to their revenues. In most states, taxes from alcoholic beverages are the largest or second-largest source of tax revenues.
“Alco-bev contributes roughly 25 percent to a state’s GDP. So it’s a golden goose. So the state believes…very often we have conversations like won’t increase prices because volumes will fall, leading to a fall in collections (sic). Whereas the alcoholic beverages industry is like any other. Volumes will go up and down and, finally, like water will find its own level,” Nita Kapoor said.
She argued that with India seeing urbanisation and premiumisation, and Indian states’ per capita incomes rising, state governments not raising consumer prices could be counterproductive.
“The question is what is the logic that prevents you from not having an inflation model, from not considering the economic data of your state to offer free pricing for segments that can afford it and thereby expanding your kitty of excise collections?” Kapoor asked.
Chandel added that the price increase does not happen every year, and when it does, it’s marginal. Price rise may vary between 2 and 4 percent of the ex-distillery prices and no consideration is taken into account for the increase in production costs, including input costs.
According to ISWAI data, the price for ENA (Extra Neutral Alcohol) — the primary raw material for making alcoholic beverages — has increased by 53 percent since FY2018 and by 9 percent in just one year in FY24 over FY23.
Likewise, the price of glass has increased by 79 percent since FY2018 and 11 percent in one year, and that of paper packaging has also increased by 22-31 percent from FY 2018 to 2024.
“Last price hike varies from state to state. For example, if we look at larger states, price hikes happen on an average of 3-4 years. And when it happens it is sub-optimal,” Kapoor said.
Another industry body, the Confederation of Indian Alcoholic Beverage Companies (CIABC), had previously written to some state governments to allow free pricing. “Costs are dynamic in nature and rise throughout the year, but currently, suppliers can seek a price increase only during the annual tendering process, which is often not granted. That is unlike other consumer products, which can change their prices depending on changes in the cost of production and according to the demand/brand pull of products,” the letter said.
Asking state governments to allow free pricing and permit companies to determine prices of their products according to their costs and brand pull, the industry body had said that the apprehension that suppliers would increase their prices substantially in a free pricing regime is misplaced because there is immense competition in the state with the presence of hundreds of brands.
“The dichotomy is that there are very good conversations with most states. Today, the state bureaucracy is extremely open to conversations, discussions, ideas, and thoughts. It’s always a pleasure to meet them in most states, but when you come out of the meeting and then you see the outcome of the excise policy…” Kapoor said, adding that there is a “gap between intent and execution”.
(Edited by Uttara Ramaswamy)