Party over for pubs, restaurants

Bangalore/New Delhi: Liquor may be quicker but Indians are discovering that it is also costlier, especially if imbibed at a bar or pub and, in a trend that is posing a hangover-style headache for the owners of these establishments, many are beginning to drink at home.

On 7 January, Ashok Sadhwani, owner of Couch, a bar on Bangalore’s arterial MG Road, received a notice from the Karnataka state excise department asking him to pay a penalty of Rs15 lakh for not buying the minimum 52 cases of liquor that a bar has to purchase under the state’s laws.

His was one of the 38 establishments to receive the notice. Sadhwani says he hasn’t been buying the required quantity because he doesn’t do as much business. “What 52 cases? We can’t even sell five cases a month,” he says.

Tax on sale of liquor is a major contributor to the treasuries of states and in many, bar licences are given against guarantees that the establishment will buy a minimum quantity of liquor, usually from the state itself (many have liquor distribution agencies).

Liquor sales aren’t down, although the pace of growth in consumption has slowed, meaning that more Indians are drinking at home. “Total consumption is not going down, but we are seeing that drinking is getting more broad-based,” says Harish Moolchandani, chief executive officer of Beam India and ISC.

According to Nikhil Vora, managing director of IDFC Securities Ltd, who tracks the sector, growth by sales volume across categories slowed from 14% in 2010 to 10% in 2011.

The fact that more Indians are drinking at home rather than tippling at bars is also borne out by evidence from Maharashtra. According to the state’s excise department, the contribution of tax revenue from bars and restaurants in Mumbai declined by as much as one-fifth.

Up until 2010, the contribution to the treasury from bars and retailers was almost equal, says Mohan Varde, superintendent of excise (Mumbai City). In 2011, revenue from retailers accounted for 70% of the total, and that from bars only 30%.

“High taxes in bars and hotel/establishments, coupled with external venues becoming more expensive and smoking not being allowed, are driving more home consumption,” says Vijay Mallya, chairman of the UB Group, the world’s third largest liquor company by volume.

Then, there’s the prevailing economic sentiment.

“It’s been a double whammy—higher taxation impacted prices significantly, and indirectly the worsening economic situation has affected consumption of alcohol in pubs and bars,” says Abhishek Malhotra, head of consumer markets at consulting firm Booz and Co.

States decide on the rate of tax applicable to liquor. Last year, some of them increased the rates at which liquor sales in bars and restaurants would be charged. Maharashtra, for instance, now imposes a 20% value-added tax on all hotels above the so-called four-star category.

And Delhi and Karnataka effected an increase of 10 percentage points across categories. On top of that, the Union government has also imposed a minimum 3% service tax on air-conditioned bars. Consequently, bars and restaurants had to increase prices.

People usually tend to spend less on liquor in some way when faced with uncertain economic conditions, according to Amitabh Mall, partner and director at the Boston Consulting Group, India. That could explain the “increase in in-home consumption”, he adds.

That has spelt bad news for bars. According to Feroz Ali, beverage manager at New Delhi’s Q’BA restaurant and bar, sales were down 40% in 2011 compared with the previous year.

byravee.i@livemint.com

Tarun Shukla in New Delhi contributed to this story.