First Published: Wed, Mar 26 2014. 11 49 PM IST

Liquor set to get costlier in some states as firms pass on costs

Price increases will affect states such as Maharashtra, Goa, Rajashtan, West Bengal that allow more freedom to liquor companies in setting prices
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Liquor set to get costlier in some states as firms pass on costs
The latest price increase may further dampen demand for liquor, already at its lowest in over a decade, analysts said. Photo: Ramesh Pathania/Mint
Bangalore: Liquor will get costlier in many states including Maharashtra, Goa and Rajasthan by up to 10% as companies such as United Spirits Ltd (USL) and Allied Blenders and Distillers Pvt. Ltd (ABD) finally pass on increasing costs of extra neutral alcohol (ENA), a key ingredient, to buyers.
The latest price increase may further dampen demand for liquor, already at its lowest in over a decade, analysts said.
Rising ENA costs, along with higher interest payments, have dented margins at liquor companies, but because of weak demand liquor firms had only passed on increased taxes to customers in many states over the past year. But with ENA prices rising by 8-10%, on average, over the past six months, several liquor companies are set to increase prices by 5-10% from the coming financial year.
ENA costs are rising partly because oil marketing companies are implementing the government’s initiative to blend 5% of petrol with ethanol, executives at liquor companies said.
“ENA prices have become unsustainable and we need to increase prices wherever we can,” said Deepak Roy, chief executive at ABD. “There’s no point in gaining market share but making losses, and because of the ENA costs and the increased duties in most states, it’s come to the point where without price increases we’d be selling at a loss. So regardless of what the competition does, we will raise prices.”
ABD, maker of India’s largest selling whisky, Officer’s Choice, is looking to increase prices by roughly 10% across its portfolio, which includes Officer’s Choice Blue and Jolly Roger rum, starting next month.
USL, India’s largest liquor company, Pernod Ricard and Jagatjit Industries Ltd are also likely to raise prices in the coming financial year, two people familiar with the matter said.
USL declined to comment. Jagatjit Industries did not respond to an email seeking comment. Pernod could not be reached for comment.
The price increases will affect states such as Maharashtra, Goa, Rajashtan and West Bengal that allow more freedom to liquor companies in setting prices. Liquor is a state subject in India and it is notoriously difficult to raise prices in some states such as Andhra Pradesh, Tamil Nadu and Kerala. This hurts liquor companies as the four southern states, including Kerala and Karnataka, account for more than half of all branded alcohol sales in India.
“Not just ENA costs, even working capital costs and packaging costs have risen significantly over the past two years,” one of the persons cited above said, requesting anonymity as he isn’t allowed to speak with reporters. “Despite the fact that demand is weak, there’s a need to raise prices.”
Liquor is one of the largest revenue generators for state governments, and over the past two years most state governments pushed up duties on alcohol to raise more funds, resulting in increased prices for consumers. This, along with slowing economic growth, has led to liquor volumes growing at less than 2% in the current financial year—the lowest in more than a decade, according to industry executives.
“This price increase will impact demand because discretionary spending is still very weak and it comes on top of already high prices because of duties,” said Abneesh Roy, an analyst at Edelweiss Securities. “I think the lower end would get impacted more, as the consumers there are more price sensitive than in other categories.”
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