Sustaining Operations - A Challenge For Alcohol Companies against the backdrop of runaway inflation

Input costs have sky-rocketed across all major fast moving consumer goods (FMCG) sectors – it has not spared the alcohol beverage industry. Inflation has been plaguing the country since the first wave of Covid-19, as supply chain pressures resulted in inflation at both retail and wholesale levels. Global fuel price rise, making transportation expensive, have only made matters worse.

Many Indian FMCG manufacturers, were able to increase their prices twice this year. In the Alcobev sector, states grant manufacturers a price increase. Unlike FMCG, the sector does not have the permission of extending the impact of the inflationary costs to the end consumers.

The Indian Alcobev market is majorly ruled by locally produced versions of global spirits, or Indian-Made Foreign Liquor (IMFL). Inflationary pressures on inputs, especially on glass bottles, cartons, labels, tamper-proof closures, and most importantly on wet inputs such as Extra Neutral Alcohol (ENA), the key ingredient of IMFL, have sharply pushed up costs. Additionally, costs of logistics, wages and statutory fees are mounting.

As an example, costs of a fast-moving brand in value segment have increased by INR 60 per case compared to the previous year. (A case is twelve bottles of 750ml each)

As per estimates by the International Spirits and Wines Association of India (ISWAI), apex body of the premium AlcoBev sector, wet alcoholic ingredients, such as ENA and Scotch, are now 5% more expensive than last year, while cost of packaging materials such as glass bottles rose by 8%, cartons by 37%, and labels and closures by 5% and 15% respectively in just one year (FY21 and FY22(est)). Additionally, transportation costs have shot up by 68% between FY18 and FY22, and you have a Molotov cocktail in hand.

Alcobev manufacturers are unable to unilaterally raise their prices as prices are controlled by state government policies that decide the suppliers’ ex-distillery prices (EDP). The retail price consumers pay for their drink is the EDP (fixed and approved by the Excise Commissioner) plus state excise duties and taxes and trade margins demanded by wholesalers and retailers. However, suppliers’ share of the consumer price has steadily declined, down almost 8% since 2016-17, which was mopped up by government and trade.

Matters were made worse during the pandemic when states imposed ad-hoc fees and surcharges. Their impact on final prices of the products ranged between 5-25%.

With most states holding onto historical lowest EDPs, no price increase leeway has been provided to the industry over the years, resulting in the Indian Alcobev sector facing a sustainability crisis.

Alcohol Single largest source of revenue for states

There are many reasons to lend the industry a helping hand. Revenue from Alcobev is a large part of States’ Own Tax Revenues (excluding SGST). The Indian alcobev industry, one of the fastest growing markets globally, employs around 1.5 million. With an estimated market size of USD 52.5 billion (2020), it is expected to grow by 6.8% between 2020 and 2023 as per the Indian Council for Research on International Economic Relations (ICRIER) report.

The first quarter of 2020 saw a 42% drop in sales due to lockdowns. Although the sales somewhat crawled back to 6% in the last quarter, overall sales of IMFL declined by 12% in FY21.

The triple whammy of suppressed volumes, runaway inflation, and reducing supplier share of the consumer rupee, is making it very hard for Alcobev manufacturers to sustain business operations.

What the industry needs is a regulatory overhaul, and an inflation-embedded approach to pricing. This would take into consideration various factors such as differences in operating conditions between states, such as state levies, cost of materials, transportation, etc. Regular consultations with industry stakeholders are essential to forge a predictable and progressive policy framework, incentivizing higher investments in the sector.

The need of the hour, however, is a price increase recognizing supply chain and inflationary pressures. The states have been urged to allow alcobev makers to raise prices to offset such pressures. The excise policies of the states need to adjust for inflation.

Inflation rates at both wholesale and retail levels have been consistently showing a rising trend in FY2021. Wholesale inflation rose to 14.23% in November while retail inflation spiked to a three-month high of 4.91%. While some of it can be explained by seasonal trends, the inflation is expected to be sticky. The disruption in global supply chains is far from normalizing, especially with the new Omicron scare, which is likely to keep transportation and logistics costs high.

Articles under 'Fortune India Exchange' are either advertorials or advertisements. Fortune India's edit team or journalists are not involved in writing or producing these pieces.