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Report

Indian Alcoholic Beverages Market resilient and growing

22 February 2022 by Ambrosia Magazine

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It has been a tumultuous two years for the alcobev industry globally and in India. The third wave is likely to hamper the global market and the Indian market is likely to grow at a much faster rate.

The global alcoholic beverages market was estimated to be at USD1.58 trillion in 2020 and is projected to grow at a compound annual growth rate (CAGR) of around 3.5% between 2020 and 2023.

According to Market Research.com, Theglobal alcoholic – beverages market grew from $425.45 billion in 2015 to $499.76 billion in 2020 at a CAGR of 3.27%. The global alcoholic-beverages market is expected to grow from $499.76 billion in 2020 to $735.83 billion in 2025 at a CAGR of 8.04%.

According to Statista, in India revenue in the alcoholic drinks market amounts to US$44,343m in 2021. The market is expected to grow annually by 7.30% (CAGR 2021-2025). The market’s largest segment is the segment spirits with a market volume of US$31,119m in 2021. In global comparison, most revenue is generated in China (US$311,827m in 2021). In relation to total population figures, per person revenues of US$31.82 are generated in 2021. In the alcoholic drinks market, 0.4% of total revenue will be generated through online sales by 2021.

By 2025, 13% of spending and 10% of volume consumption in the Alcoholic Drinks market will be attributable to out-of-home consumption (e.g., in bars and restaurants). In the alcoholic drinks market, volume is expected to amount to 14,712.6ML by 2025. The market for Alcoholic Drinks market is expected to show a volume growth of 12.0% in 2022.

The average volume per person in the Alcoholic Drinks market is expected to amount to 8.32 L in 2021. Other than India being the largest consumer of whiskey in the world, wine is becoming extremely popular especially among women in India. There is 22.8% growth in the vodka’s demand. The punch here is that with the growing middle
class population, these current numbers will pale in coming years. The consumption of alcohol in India will reach 16.8 billion litres by the year 2022. By 2030, 50% of Indian drinks consumers are set to buy more of the same category of alcoholic drinks that they are consuming, 26% are expected to move to higher brands and 24% will spend on newer categories of alcohol.

Non-alcoholic beverage sales increased 33% to $331 million recently, according to data from Nielsen. The products have done especially well in e-commerce, as Nielsen found a 315% increase in online non-alcoholic and low-alcoholic beverage dollar sales in the same time.

Heineken, for instance, bet big on its non-alcoholic beer and subsequently brought in $54 million in 2020 sales. In the Non-Alcoholic Drinks market, volume is expected to amount to 36,105 ML by 2026. The Non-Alcoholic Drinks market is expected to show a volume growth of 5.6% in 2022. The average volume per person in the Non-Alcoholic Drinks market is expected to amount to 21.57 L in 2021.

Americans are drinking less overall than they have at most points over the last 20 years, according to a recent Gallup analysis, so it’s not surprising that non-alcoholic drinks are gaining popularity. And Millennials and Zoomers – who are drinking less than Boomers and Gen X did at their age – are leading the sober-curious movement.

While the industry faced a heavy blow during the first half of 2020 with a sales decline of 29% due to the nationwide lockdown induced by the pandemic, but a strong revival in sales took place in the second half of 2020 because of which the segment could restrict its overall decline to 9% in the fiscal year 2020-21, confirmed Confederation of Indian Alcoholic Beverage Companies (CIABC).

For years altogether, the Indian alcohol market was dominated by large brands like Allied Blenders’ Officer’s Choice, United Spirits’ McDowell’s, Pernod Ricard’s Imperial Blue, and United Breweries’ Kingfisher, among others. However, today with the increase in demand for alcoholic beverages, rise in disposable income, and urbanisation of tier-II and tier-III cities, a number of start-ups have come to the fore with a fresh and unique approach to manufacturing, packaging, and marketing, to offer a plethora of alcoholic beverages and also mixers and premixed cocktails with distinctly Indian flavours to the consumers.

The alcoholic beverages industry contributes to around 1.5 million jobs in India and generated around USD48.8 billion in sales revenue in 2019. The sector is open to foreign investments and many states offer subsidies for local manufacturing (for example, Maharashtra and Karnataka for wines). From the demand side, factors such as rapid urbanisation, changing consumer preferences and a sizeable and growing middle-class population with increased purchasing power have contributed towards growth in demand for alcoholic beverages.

The sector is open to foreign investments and many states offer subsidies for local manufacturing (for example, Maharashtra and Karnataka for wines). From the demand side, factors such as rapid urbanisation, changing consumer preferences and a sizeable and growing middle-class population with increased purchasing power have contributed
towards growth in demand for alcoholic beverages.

According to industry estimates, the number of people consuming alcohol increased from approximately 219 million in 2005 to 293 million in 2018; it is projected to increase to 386 million by 2030. The share of the upper middle income group in alcohol consumption has increased steadily from 7% to 21% and is expected to increase to 44% by 2030.

Alcoholic beverages are among the top three sources of revenue earning across most states. Yet there seems to be a lack of transparency, predictability, and clarity in the tax regime to ensure that the revenue earning objective is aligned with other objectives of the government like ‘Make in India’ and exports from India. The governance and pricing models for alcoholic beverages vary widely across the states. The states through their excise policies, control the entire supply chain of alcoholic beverages from manufacturing and distribution to registration and retail. There are frequent and ad-hoc changes in these policies, creating uncertainty and preventing manufacturers/distillers to plan their investment.

Given this background, this report, based on secondary information analysis and a primary survey, provides an overview of the Indian alcoholic beverages market, highlighting market trends and contributions of the sector to the economy. It specifically examines the regulatory and pricing related policies across select states and their impact on the industry, its supply chain, quality of products available to consumers and consequent effects on health. Specifically, it examines the different models followed by states such as corporation model, wholesale model, direct model and distribution model and their impact on designing an efficient supply chain. It examines whether price control measures have been successful in achieving the desired objectives, namely (a) higher revenue earnings and (b) consumer protection. The report also shows how policies and excise duties have been sporadically changed during the recent coronavirus (Covid-19) pandemic.

India is a small player in global alcoholic beverages trade. In 2019, India’s total share in global exports of alcoholic beverages was only 0.27%, with a global rank of 32, much below a number of developing countries. In the same year, India’s share in global imports was 0.75% with a rank of 20. India has an export potential in this sector, which can be addressed through measures like tariff reduction and ensuring transparency in regulations across states to support manufacturing and “Make in India”.

During the Covid-19 pandemic, around 21 states have increased excise duties, additional excise duties, maximum retail price (MRP), bottling fees, and imposed Covid-19 specific fees, cess and surcharges to avoid revenue shortfall and meet consumer health needs. The impact on final prices of the products ranged between 5-25%; except in Delhi, where prices increased by 70% initially due to imposing of a special corona fee of the same percentage.

States decide the channels for alcoholic beverages sales through their excise policies. Majorly, there are four types of distribution channels across states – (a) distributor model (company> distributor> retail) in states such as Maharashtra and Assam; (b) corporation model (company>corporation>retail) in states such as Rajasthan, Karnataka, Madhya Pradesh and Tamil Nadu; (c) wholesale model (company>wholesale>retail) in states such as Haryana; and (d) direct model (company>retail) in states such as Delhi.

Prior to the pandemic, only in-premise sales were allowed but during the Covid-19 pandemic, home delivery and e-commerce channels have been allowed in some states such as Odisha and Delhi.

High import tariffs and cess of 150%, even for intermediate products, counters the basic premise of “Make in India”. While imports will not be more than one percent of the domestic consumption even if tariffs are phased out, imported liquor prices in India are significantly higher than 95% of the countries in the world and India’s trading partners have repeatedly raised this as a key barrier in their trade agreement negotiations.

The Way Forward
The report prescribes five-point policy recommendations towards developing transparent and predictable regulatory and pricing principles for the alcoholic beverages sector. These are as follows-

Adopt Clear and Predictable Policies: The state excise departments should lay down clear policies at predictable intervals of two to three years, which can help businesses to expand, to make longterm investments, and encourage new business models to flourish. To encourage transparency, the excise departments should focus on adopting a ‘cost-based’ EDP formula over the ‘minimum EDP’ criteria and evaluate the impact of changes in pricing across various categories of beverages (like premium, standard, etc.) for effectiveness of taxation policy. This report highlights some core principles of developing a model taxation policy, which are based on best practices adopted globally and in India. Such a model can help the state governments to meet their objectives of higher revenue, consumer health protection and addressing the issue of tax leakages and illicit markets. The tax slabs need to be revised periodically in line with inflation and changes in prices of raw materials. Greater transparency and predictability would encourage entrant of new players and competition.

Technology Interventions: The state excise departments need to switch to digital methods of granting licences and
permits, which can prevent unaccounted transactions and corrupt practices. Data analytics and technology-based solutions need to be adopted by the states to monitor the supply chain and develop front-to back traceability. Specifically, physical monitoring should be replaced by technology driven tracking and tracing initiatives to monitor transportation of products from the manufacturer to the distributor to the retailer. This can be especially helpful in case of inter-state movement, where there are chances of illegal sourcing of liquor.

Develop Data-Driven Models: To achieve the desired policy objectives (such as protecting consumer health or enhancing state revenues) and to enhance transparency, evidence-based pricing and taxation models should be developed by states based on detailed research and longitudinal production and consumption data analysis. There is a need to invest in collecting structured and periodic data on household consumption patterns (by age, social indicators, area, type of alcohol, etc.) and the impact of price increase or other policy changes on consumption patterns. In this regard, state governments can refer to global best practices for implementing such models. This report has highlighted how an effective model can be designed.

Conduct Regular Consultations: State excise commissioners, finance ministers, and other stakeholders should engage in regular in-depth discussions to start off a process of transparent, predictable and consultation-based price determination. To begin with, such consultations can be held at the level of individual states and on demonstrable metrics being met, a bigger group of states can come together in identifying uniform principles of taxation and to set the stage to develop a transparent and uniform model pricing framework.

The states should also consult and provide inputs to national-level agencies such as the Department of Consumer Affairs, in helping them to establish definitional uniformity regarding maximum retail price (MRP)/maximum or minimum selling price (MSP) of products.

Phased Tariff Reduction and Exports: The government should focus on phased tariff and other duties reduction and Indian companies should be encouraged to export to improve the trade balance. Duty reduction for intermediate products can enhance value addition in India and boost domestic manufacturing potential. Duty reduction above a threshold level will only allow entry of high-end produce, which do not compete with domestic production.

In conclusion, if the recommendations of this paper are implemented, it can help the state governments in meeting the objectives of earning higher revenue, addressing consumer health concerns, and creating employment.

Adoption of technology can enable removal of irregularities along the entire supply chain, with limited government intervention.

The recommendations can help India in bringing in more investments into the sector, encourage innovation, improve ease of doing business, increase domestic manufacturing capabilities and enhance exports.

India is one of the fastest growing markets for alcoholic beverages. Various factors including a sizeable middle-class population with increased purchasing power, rapid urbanisation, changing consumer preferences, and reduction in cultural barriers to drinking, have contributed towards growth in demand for alcoholic beverages. Revenues from taxation of sales in this sector are among the top-three revenue earning sectors for the state governments and the sector generates significant direct and indirect employment.

The states through their excise policies, control the entire supply chain of alcoholic beverages from manufacturing and distribution to registration and licensing processes, labelling and packaging requirements, and retail. Price control is one of the core components through which the states regulate this sector. However, the pricing policies and governance models vary across states, creating different routeto- market channels. There are frequent and ad-hoc changes in policies, creating uncertainty and deterring manufacturers/distillers to plan their businesses in advance. The variations in regulations and operating models across states have added to the compliance burden of participants across the supply chain, leading to low ease of doing business. It has resulted in India becoming a fragmented market, undermining the concept of India as a single market. Further, unlike other countries such as Chile, India has not been able to leverage its export potential in this sector, inspite of having potential.

Given this background, this report, based on secondary information analysis and a primary survey provides an overview of the Indian alcoholic beverages market, highlighting market trends and contributions to the economy, the supply chain and the various routesto-market followed across states. The report outlines the regulatory framework governing the sector, both at the centre and across states; and presents the changes effected in the regulations, sales channels and duties, among others, with the onset of the Covid-19 pandemic. The report is a first of its kind, which specifically examines regulatory and pricing related barriers and their impact on the industry, its supply chain, quality of products available to consumers and consequent effects on health, states, and the Indian economy as a whole.

The aim of the report is to help the state governments to develop regulations based on certain principles which makes the regulations predictable and transparent. The report suggests the way forward on how the state governments can learn from global best practices in creating uniformity in developing their pricing models, building transparency and creating more predictable policy environment through data driven and evidence-based policymaking. If the recommendations of this paper are implemented, it can help the state governments in meeting the objectives of earning higher revenue, addressing consumer health concerns, and creating employment. The recommendations can help India in bringing in more investments in to the sector, encourage innovation, improve ease of doing business, enable “Make in India”, enhance exports and the country can be a key player in global value chains of alcoholic beverages.

This report was contributed by knowledge partner:

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