Indian liquor industry – Regulatory hangover to continue
The Indian liquor industry is a high-risk industry, primarily on account of the high taxes and innumerable regulations governing it. As a result, liquor companies suffer from low pricing flexibility and have inefficient capacities, which, in turn, have led to low margins and weak financial profiles. Moreover, even though the two large liquor groups in the country enjoy a majority market share, the price-sensitive nature of the industry has ensured a high degree of competition, which is exacerbated by the low export potential. Hence, while several strong brands have come up and the industry has exhibited healthy volume growth over the last few years (for instance, the Indian-made foreign liquor (IMFL) segment has registered a 8-10% compounded annual aggregate growth rate (CAGR) over the last three-four years), its high-risk profile continues to dog the industry.
Like the international liquor industry, the Indian one too has seen players with strong brands, diversified portfolios and large operations achieve market leadership positions. Given the regulatory constrictions, however, an added key success factor for Indian players is the need to have operations across various states. Both because of the inherent nature of liquor and because of the politically-sensitive issue of molasses, a key raw material for spirits1, the Indian liquor industry has been subjected to a high degree of governmental interference. To boot, it is a major revenue contributor to the state governments, most of which are cashstrapped today. Hence, it is unlikely that the level of taxes or control exerted by the various governments would reduce in the medium term. So the regulatory risk is expected to remain high. Nor is the industry’s risk profile expected to change significantly with the entry of multinational players or the implementation of commitments made to the World Trade Organisation (WTO). In fact, courtesy the high duty levels, the Indian market has not been flooded with cheap imports or consequently, witnessed greater competitive pressures, belying industry fears.
Yet, the market continues to be attractive to the multinationals, especially in the scotch whisky and beer segments. While most of the multinational scotch whisky manufacturers have already established a presence in the country over the last seven to eight years, the beer segment has witnessed greater interest in recent years in anticipation of higher growth here. As a result, the pace of acquisitions and joint-ventures has picked up even as established domestic players try to consolidate their market position. Hence, the industry is expected to witness a shake-out with large players and those with strong parent support likely to survive in the medium to long term.
Structure of the Indian liquor industry
The Indian liquor industry comprises the IMFL, foreign liquor bottled in India (BII), foreign liquor bottled in origin (BIO), country liquor, beer and wine segments. The estimated 80 million case2 per annum IMFL segment primarily includes molasses-based whisky, rum, brandy, gin and vodka. This segment is dominated by whisky, which accounts for about 60% of its volumes, followed by rum at about 25%. The BII and BIO segments are very small in comparison. Put together, they are estimated to be less than one million cases per annum. The country liquor segment, estimated to be one-and-a-half to two times the size of the IMFL segment, is, however, characterised by fragmented capacities with a number of small players focused on the highconsumption rural areas. The beer market is estimated to be about 70-75 million cases per annum while the wine segment, estimated at less than three million cases a year, is, again, small.
Liquors that are produced using the distillation process and have a high alcoholic content (generally above 40% by volume) are referred to as ‘spirits’. Spirits include whisky, rum, vodka, brandy and the...
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