Bengaluru: India’s alcoholic beverages industry has had nothing short of a challenging 2017 in terms of volume growth, especially during the first three quarters of the year. A strong rebound in 2018 would be the ideal balm.
But the industry is only cautiously optimistic as it heads into the new year, with uncertainties around the impact of route-to-market changes in a few states and elections in others. As a result, most major alcobev companies plan to further sharpen their focus on the premium part of their portfolio as they chase value rather than volume growth.
Overall sales volumes—a key measure of performance—saw a small decline of 1-3% in 2017, according to industry estimates. While there are signs of positive momentum starting to build in the October-December quarter, how that progresses and whether it will make up for lost ground remains to be seen.
“As we enter 2018 I feel some of the ‘black swan’ events of 2017 are behind us. But we expect big distribution structure changes in 2018 and how these impact industry value growth is an unknown right now,” said Anand Kripalu, managing director at India’s largest liquor company United Spirits Ltd (USL).
The year 2017 was riddled with policy changes that put volumes under the pump at alcobev companies. Those changes included demonetisation, the Supreme Court’s highway liquor sales ban and the implementation of the goods and services tax (GST) that pushed up input costs.
Consequently, volume growth at many companies was flat until September, i.e. the second quarter of financial year 2017-18. Market leader USL’s volumes declined 17.19% in the six months to September, compared with the year-ago period according to its latest quarterly filing, as it continued to focus on value instead.
French liquor giant Pernod Ricard SA, India’s second largest spirits company, does not report volume growth but overall India sales growth was a marginal 1% in 2016-17. It follows a July to June financial calendar. Pernod’s India sales in the July-September quarter grew 2%.
Kingfisher beer maker United Breweries Ltd (UBL) reported volume growth of 11% during the July-September quarter. But beer companies have had a tougher October-December quarter than other alcobev firms because of a steep excise duty hike in Maharashtra, a top market for beer consumption.
“Effectively for over two months, from 23 October until now (19 December), we’ve had practically no sales and zero production in the state of Maharashtra and it is a very, very important market for us. We are in discussions with the government to find a middle road and we’re hopeful about finding a solution,” said Shekhar Ramamurthy, managing director of UBL.
Officer’s Choice whisky maker Allied Blenders & Distillers Pvt. Ltd’s (ABD) volumes were flat for 2017 while that at single-malt whisky maker Amrut Distilleries Pvt. Ltd grew 3% for the same period.
Despite policy changes, volume growth at a few companies—particularly those that mostly operate in the premium space and with smaller bases to grow from—grew at a healthy pace. For instance, rum maker Bacardi & Co. said it witnessed a healthy double-digit growth rate in 2017. John Distilleries Pvt. Ltd’s chairman Paul P. John said the company had a good year in 2017 and expects the same momentum to continue in 2018, but did not disclose numbers.
“From 2018 onwards we are concentrating more on our premium portfolio and we expect that to grow about 12% while the regular range will grow about 5-7%,” said Abhishek Khaitan, managing director of India’s third-largest spirits company Radico Khaitan Ltd. His views are echoed by several others including Amrut’s executive director Rakshit Jagdale, winemaker Sula Vineyards Pvt. Ltd’s marketing head Kenneth Pritchard and Bacardi India’s managing director Vijay Subramaniam.
But according to research firm Euromonitor International, in value terms the spirits industry is expected to grow only by 2.9% on a compounded annual growth rate (CAGR) basis between 2016 and 2021. That compares with a 6.6% CAGR in terms of value growth between 2011 and 2016. It is also slower than overall volume growth, which is estimated at 4.2% between 2016 and 2021.
And additional policy obstacles could be in store. Haryana, Punjab and Uttar Pradesh could possibly change the way they distribute alcohol and give governments more control over the process. This could pose a challenge for organised liquor firms as sometimes those managing state-run alcohol outlets are lowly-paid employees, and that could lead to issues of graft, according to industry executives.
A few states are also headed for election, including Rajasthan, Chattisgarh and Karnataka. “Fears will always remain whenever there are elections,” said ABD’s chairman Deepak Roy, citing the example of the Panvel Municipal Corporation (PMC) in Maharashtra that called for a ban on the sale of alcohol in the municipality last week.
But Edelweiss Securities’ senior vice-president Abneesh Roy had a different take on elections. He expects an election year to be good for liquor consumption as political parties dole out a whole lot of incentives and policies, for instance farm loan waivers, which in turn push up all consumption in general.
Indeed, despite the fears, ABD’s Roy expects volume growth to bounce back to 12-13% at ABD next year. Radico’s Khaitan expects 7-8% overall volume growth at his company next year and Amrut’s Jagdale is targeting 5-7%.
“The fundamentals of the Indian market are very strong and favourable for the alcobev market even though the robust demand side was constantly kept in check by the tough operating environment in 2017. India offers one of the largest growth potential in spirits consumption amongst all markets,” a spokesperson for Pernod Ricard said in an emailed response.