Drink up: It’s the season of stress for breweries

livemint.com:

alcohol, or ENA. Beer maker United Breweries recently warned analysts that it does not see glass prices softening till the end of the year. More recently, tighter supply of rice—among the key raw materials used for ethanol production—has rattled distilleries.

The government is now mulling increasing the price of ethanol, a move that could cause a surge in costs for liquor companies. Recently, Karnataka hiked the additional excise duty on IMFL and beer. While the additional excise duty on IMFL has increased by 20% across 18 price slabs, that on beer has risen from 175-185% of the declared price.

While the hikes would boost the state’s revenue, it could see a proliferation of “informal supply-chains", the industry body ISAWAI warned. Karnataka accounts for nearly 20% of India’s liquor market, according to the Confederation of Indian Alcoholic Beverage Companies, so these taxes could lead to multiple outcomes for consumers and companies. Alcohol could start flowing from neighbouring states into Karnataka.

Consumers typically tend to move to cheaper brands in response to price hikes, and that could make things difficult for premium brands. Worse, drinkers at the bottom of the consumption basket could switch to illicit liquor. Liquor producers aren’t unfamiliar with high taxes.

But these headwinds can pressure margins this fiscal. In its earnings call last month, United Spirits said maximum retail prices of its brands are likely to go up 14%-17% because of the tax hikes in Karnataka. United Breweries said prices in the state across its brands have increased by 3-5%.