The Future Looks Bright for the India Alcoholic Beverage Market

The year 2017 started with the lingering after-effects of demonetisation, which impacted volumes in the first quarter. While the industry was yet to fully recover from the temporary demand shock caused by demonetisation, it received another blow in the form of the Supreme Court’s ban on alcohol sales within 500 meters of state and national highways. This impacted volumes for all suppliers with overall volume down by high single-digit to low-double digit percentage points in specific states.

The second quarter of the year posed another challenge: the introduction of the Goods and Services Tax (GST). As stockists and distributors tried to destock older consignment, an industry-wide temporary supply bottleneck was created. However, for all intents & purposes, this issue appears to have been factored into the Q1 results.

Finally, several state governments announced that they were considering or about to implement a new liquor distribution structure. West Bengal, for instance, turned from a free market into a regulated market. While regulated markets are generally seen as negative for the alcoholic beverage sector, syndicated markets could potentially be worse, as they cause companies to depend on personal arrangements with private distributors and to become subject to their whims. Conversely, government markets also tend to restrict a company’s abilities to drive demand via trade marketing and are open to clientelism.

Industry sources report an overall positive, albeit very low, volume growth for the combined beer and IMFL categories. On a YTD basis, beer showed approximately 1.8% volume growth (from April to December). IMFL started off the financial year on a poor note, losing over one million cases per month from April to June compared to the same period in 2016. By the end of Q4 CY 2017, the IMFL sector had recovered and was adding nearly 0.9m cases every month. This helped IMFL reverse some of its earlier losses, and for the nine-month April-December period, the net decline was only around one million cases.

Maharashtra was most impacted by the highway ban, and the local authorities compounded the issues by severely increasing excise duties on beer. As a result, beer companies decided to reduce supply, which impacted volumes, until the matter was resolved in December, with the state government increasing the price for suppliers. Distribution structure changes continued to disrupt the market in a few states, such as Himachal Pradesh and West Bengal (Kolkata).

2017 continued the trend of multiple external shocks to the domestic alcoholic beverages market. The marginal volume loss, despite the closing of 6% to 8% of all outlets, indicates that companies were successful in shifting demand to remaining outlets and venues. Against a backdrop of multiple regulatory and policy headwinds, this is indeed a very good performance for the industry.

Overall volume indicators started to improve at the end of 2017 and ongoing reports from Karnataka, Andhra Pradesh, Rajasthan and Kerala paint an improving picture.

From a raw material perspective, India is expected to see a bumper sugar cane harvest in the current year. This should keep the domestic molasses price at a reasonable level. Furthermore, many state governments have already given price hikes to suppliers, and we expect another round of hikes from the markets, which didn’t materialise in 2017, towards the start of the next financial year. This will support margins at current level.

With economic activity picking up, upcoming state and national elections, the summer football world cup demand boost and prognosis of a good monsoon, we expect the overall demand scenario to remain very healthy over the next 12-month period.