India’s liquor market needs the right kick



In 2022, India overtook France to become the largest market of Scotch whisky by volumes. What does it mean for India's liquor market?

Even as inflation sullies consumers’ spirits, tipplers are on a high. In 2022, India overtook France to become the largest market of Scotch whisky by volumes. But it’s still just 2% of the country’s overall dark spirits market, and a potential 150% reduction of tariff burden under th-e UK-India free trade agreement could boost market access, the Scotch Whisky Association said. The market is projected to grow at an annualized 7% rate by 2026.

Companies are now tapping into consumer preferences to innovate, but Indians have been whisky guzzlers for long. “With India being the largest whisky-drinking nation worldwide, there is always scope for expansion and diversification within the category," said Vijay Dev, category lead (whiskies) at Bacardi in India.

Being predominantly a spirits market, whisky has been one of the key growth drivers for the Indian-made foreign liquor (IMFL) segment, contributing to nearly two-thirds of its volumes. “The contribution of whisky has increased from 59.5% in 2014 driven by volume growth of 1% compounded annual growth rate over 2014-21 compared to no growth in industry volume," said an Antique Stock Broking report published in November 2022. The top three players contribute almost 50% of the spirits markets by volume. But there could be a lot behind a wee dram of whisky: both brand and taste takes precedence for urban Indians while buying a new brand of alcohol, a recent YouGov India survey showed. Among those who had whisky, flavour matters much more among the Gen-Z and younger millennials, whereas brand comes first among older cohorts.

Premium Play

The sector is reaping the fruits of the country’s demographic sweet spot, higher disposable incomes and expanding middle class, and premium segments like Scotch whisky are leading the way. “Over the last decade, companies have increased focus on ‘prestige’ and above segments due to higher profitability and rising demand for premium products," the Antique Stock Broking report said. ‘Premium’ and ‘luxury’—the two segments above ‘prestige’—contributed 14% to whisky volumes in 2020-21, up from 9% in 2014-15, the report said.

The growing shift towards premium brands is here to stay. A 2021 survey by the Indian Council for Research on International Economic Relations (ICRIER) and PLR Chambers showed that over 70% of the growth in alcoholic beverages consumption in India in the next decade will be driven by the lower middle and upper middle-income groups and 26% consumers are estimated to move to higher brands by 2030.

Industry Woes

However, the industry has witnessed several episodes of disruptions in the recent past, including excise duty hikes across states, changes in route-to-market in some states, demonetization and highway ban. An extra burden of regulations—a ban on advertisements, consumer health concerns, and fragmented state-wide policies—only creates high entry barriers for new players. The inflation has added to the worries: rising input costs squeezed the operating and net profit margins of alcohol beverages firms by 10.1 and 7.4 percentage points sequentially in Q3, as per Mint calculations.

“Unlike most sectors where the inflationary impact is passed on to the consumers, it is difficult in alcobev [alcohol beverages] since consumer prices are controlled in most states, leading to taxes accounting for 67-80% of the product prices," said Nita Kapoor, chief executive officer of International Spirits and Wines Association of India.

Filling Coffers

Unlike the West, sale and consumption of liquor in India is under the jurisdiction of states, which have multi-layered excise duty structures. Liquor has historically contributed to around 25-40% of revenues for states, and is also among the top three revenue streams of states’ tax revenue. When states’ revenues dipped in 2020-21 on account of the covid-induced slump, they turned to excise duties to boost collections.

States have even budgeted higher revenue receipts in 2022-23, with excise duties being one of the prime drivers. In states such as Uttarakhand, Sikkim, Uttar Pradesh, West Bengal and Chhattisgarh, revenue share from alcohol taxation is more than 20% of states’ own tax revenues in 2021-22 .“The need of the hour is a supplier price increase, rationalization of taxes, and predictability of policies that encourage deeper investments and generate employment allowing the industry to continue to contribute 25-40% of revenues to the state," Kapoor added.

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