LIQUOR BOTTLING PLANT (IMFL BOTTLING UNIT)

An Alcoholic beverage is a drink containing ethyl alcohol of agricultural
origin in any percentage, derived either through natural fermentation, or
addition during process. Ethanol or ethyl alcohol is produced through a
natural process when the yeast converts the sugar contained in fruit,
cereals and sugarcanes, into alcohol. Pure alcohol is a colorless, pure
liquid. The process used for its preparation is called fermentation.

India is the third largest global spirits market by volume in the world,
just behind China and Russia. It is also one of the fastest growing markets
in the world. The domestic alcohol industry has recognized that the young
people and women are the key target populations for them and they are
assertively focusing on these vulnerable groups through their marketing
campaigns.

India is one of the world‘s most restrictive places for trade and doing
business. In 2014, it is ranked 110 out of 152 countries, in terms of
economic freedom, by the Economic Freedom of the World Report. Its Freedom
to Trade Index was 6.2 (highest score 10.0), 124 Doing business in India
remains difficult for both foreign and domestic companies. The country was
ranked 133 out of 152 countries by the World Bank this year in its Doing
Business Score. Many studies have indicated trade barriers continue to be a
major hindrance to India‘s development and prosperity, making trade
liberalization and further deregulation critical to its economy.

The industry is consistently launching new products, such as flavoured
alcoholic drinks, to attract the nondrinkers in this group.The availability
of alcohol is increasing in India; there are more outlets in shopping malls
and popular market places, which make it easily accessible. In some states,
certain alcoholic beverages like wine and beer can be sold in supermarkets
that further increase the availability. Increase in physical availability of
alcohol leads to rise in alcohol consumption and alcohol related harm.
Intensive engagement of the alcohol industry is observed in social
initiatives and policy related activities under the broad framework of
corporate social responsibility (CSR), which now-a-days are part of a more
general strategy that is designed to further the industry’s political and
economic interests.

The Indian alcohol industry is a high-risk industry, on account of the high
taxes and innumerable regulations governing it. The international liquor
industry, the Indian one too has seen players with strong brands;
diversified portfolios and large operations achieve market leadership
positions. The Indian liquor industry comprises the IMFL, country liquor,
foreign liquor bottled in origin (BIO), illicit alcohol, beer and wine
segments.

Indian made foreign liquor:

The maximum permissible limit for alcohol content in spirits is 42.8 per
cent v/v (volume to volume). The overall IMFL market is increasing at the
rate of 9 to 10 per cent annually. There is a tremendous growth in the vodka
market. It is the fastest growing among all types of liquors. Vodka
consumption has been growing at the rate of about 44 per cent over the past
few years.

Country liquor:

The average alcohol content in country liquor is 33 per cent volume to
volume. It is produced in local licensed distilleries and is made of cheap
raw material, primarily rectified spirits of grains or molasses. In the
southern states coconut and other palms are used as raw materials in the
production of local liquor. It is called as arrack, desi sharaab, daru,
tharra, toddy, fenny and tari. The production cost for country liquor is
low; the excise duties are also lower than they are for other liquor. The
idea behind country liquor was to provide cheap alcohol and thus check the
illicit trade of alcohol.

Beer:

Beer has become a popular beverage in the country only over the last two
decades. It’s growing at a rate of about 17 per cent per year. In India,
beer is manufactured in licensed breweries and there are more than 60 beer
brands available in the market. The growth in the beer market appears to be
driven by young consumers and professionals who consider beer a trendy
drink, as compared with traditional spirits. There is also a small demand
for foreign beer in the up market urban areas. The highest levels of beer
consumption in India are observed in the southern states.

Foreign liquor bottled in origin (BIO):

Imported liquor forms a very small part of alcohol consumption in India. It
is usually consumed by the rich and upper middle class in metropolitan
cities. It is also subjected to customs duty, making it much more expensive.
The imported spirits market in India is growing at the rate of 25 per cent
annually.

Wine:

Wine is an alcoholic beverage made from fermented fruit juice, usually that
of grapes. Wines made from other fruits are usually named after the fruit
from which they are produced (for example, apple wine or elderberry wine)
and are generically called fruit wine. The term “wine” can also refer to the
higher alcohol content of starch-fermented or fortified beverages such as
barley wine, sake, and ginger wine.

The alcohol industry is very important for the government. It generates an
estimated Rs. 18,000 crore per annum in spite of the fact that the per
capita consumption of liquor in India is the lowest in the world. The total
liquor industry is worth Rs. 2,000 crore. IMFL accounts for only a third of
the total liquor consumption in India. Most IMFLs are cheap and are priced
below Rs. 300 per bottle.

Alcohol sales proceeds account for 45% of the total revenue collection in
the country. Whiskey accounts for 60% of the liquor sales while rum; brandy
any vodka account for 17% 18% and 6% respectively. MNC’s share is only
10%and they have been successful only in the premium and super premium
ranges. Post WTO the government may have opened India to foreign
distilleries, but the duty has been increased from 222% to 464-706%.This is
due to the fact that there is a 100% customs duty, 150%contravening duty,
local taxes, distributor’s margin, retailer’s margin and publicity charges.
The cost is finally borne by the consumer. Though the government claims that
this is being done to protect the domestic liquor industry, the domestic
industry accounts for 99% of the market share.

This protectionist policy could prove to be counterproductive and lead to
smuggling. As of now, only 45% of the sales are through legal channels and
only 25% of this is duty paid for. Within India itself, the policy of
alcohol retail differs form state to state. While some states like
Maharashtra. Uttar Pradesh, and Tamil- Nadu have a liberal policy, come
states like Haryana and Andhra

Indian Liquor Industry is divided into two broad categories

• Indian Made Foreign Liquor (IMFL)?
• Country Made Liquor

Indian Liquor Industry is growing at 12-15% P.A over last 2 yrs.

• Shift from country liquor to IMFL because of rising per capita.

Industry Structure Alcoholic beverages (8500 Crore) IMFL Country Liquor Rs
6150 Crore Rs 2350 Crore Brown Spirits White Spirits Licensed Illicit Whisky
Vodka Brandy Gin Rum

Major Competitors Manufacturer Brands United Breweries (UB) Group
(Bangalore) King Fisher, Kalyani Black Label, Signature, Blue Riband Shaw
Wallace (Calcutta) Haywards Jagajit Industries (Kapurthala, Punjab)
Aristocrat Mohan Meakins (Solan, Himachal Pradesh) Golden Eagle Associated
Breweries & Distilleries (Mumbai) London Pilsner, Smirnoff, Gilbeys Green
Label, Malibu, Archers Peach Schnapps

Legal Environment

• Ban on direct advertising Excise regulations and Licenses

• Regulated industry – movement, prices of intermediate goods
(molasses, ethanol) tightly controlled – state governments exert
considerable influence.

• Subject to licensing under Industrial (Development and Regulation)
Act, 1956

• Cap on licensed capacity; special license for expansion

• Plethora of duties and taxes from bottling to sales stage; varying
from state to state.

Custom & Duties

• Sales tax, Bottling Fee, Litre Fee, Vend Fee, Privilege Fee, Import/
export Pass duty

• Other taxes levied are: Excise Duty : Liquor from spirits – Rs. 45/-
bulk litre; Premium Malt Whisky – Rs. 60/- bulk/ litre; Litre Fee – Rs.
20/- bulk litre; Sales tax : 60%; cess 5%

• Import duty on whisky, rum, gin & vodka, liqueur – 230 %
www.crisil.com

Social Environment

• Increase in disposable income

• Changing lifestyles of middle class

Western culture influence

• Changing Trends – Youngsters, Parties and Celebrations Hard liquor –
from 21 to 25

• In India 40-50 % of all males and 1% of all females Beer – from 18
to 21 Minimum age consumed alcohol last yr.

• 62% drinkers classified as light, 29% as moderate drinkers and 9% as
hard drinker.

Prohibition in India

Soon after independence, prohibition was imposed in the erstwhile state of
Bombay.

• The first large-scale movement against alcohol began in the 1970s,
when rural women in various parts of the country protested against the sale
of liquor in their villages.

• Information and Broadcasting ministry of India banned the ads.

• Even after the ban, liquor companies continued to advertise their
drinks in the form of surrogate advertisements.

Legitimate business & their surrogate advertisements Brands Surrogate
advertisements McDowell’s malt whisky McDowell’s Soda/water Radico Khaitan’s
8 pm whisky Radico Khaitan’s water Hayward’s 5000 Beer Hayward’s water/soda
Derby Special Derby special soda Bacardi Liquor Bacardi Blast CDs &
Cassettes Bagpiper liquor Bagpipers soda and cassettes Kingfisher Beer
Kingfisher bottled drinking water Royal Challenger whisky Royal Challenger
golf accessories & mineral water & cricket team White Mischief Liquor White
Mischief holidays Smirnoff Vodka Smirnoff cassettes & CDs

Threat of New Entrants

• There are huge complexities and high regulations to get entry in
this industry. The new players need to satisfy the licensing and need to get
approvals by the states and central government.

• For international players, the key is find the right partners and
links who understand the Indian market and legislations. With liquor makers,
both local and foreign, becoming active, competition is intense.

• UB-Carlsberg, South African Breweries and some others are awaiting
clearance following government stalemate on account of the Supreme Court
judgment, the judgment has created a confusion whether the proposals related
to FDIs and the issuing of licenses for the liquor industry will be
addressed by the Central or the State governments.

A lot of mergers and acquisitions in the international arena have begun to
impact the joint ventures.

Bargaining Power of Customers

• The Liquor industry has witnessed the consumers always at a weaker
end.

• There is not much bargaining power in the hands of the consumers in
Indian liquor industry as the prices are set by the forces of demand &
supply and the demand for liquor here is high as compared to the supply.

• Hence, the producers are at a beneficiary end and charge higher
prices.

• In India, a liquor brand is identified and is appreciated only on
the basis of its higher price.

• It is an interesting fact that Companies use “High Price” as one of
its promotional strategy to attract the consumers.

Bargaining Power of suppliers

• The key raw material for IMFL players is Molasses which is a
byproduct of sugar. Molasses is distilled & processed to form rectified
spirit called Ethanol.

• The players which have primary distillation facilities in their
Plants directly consume molasses, rest all have to purchase Ethanol.

• As molasses demand arises only from ethanol demand, the demand
supply scenario for ethanol determines the raw material prices for the IMFL
Players.

• Ethanol demand is expected to rise in future, when the commercial
blending of ethanol with petrol (for producing Gasohol) will take off.

• In Long term -Molasses supply is going to increase as more sugar
manufacturers are expected to set up primary distilling facilities and as
new sugar factories are expected to come up in the form of integrated plants
with cogeneration & distilling facilities

• The suppliers are able to play easily with the prices of these raw
materials hence charging higher prices from the Liquor producers.

Predictions regarding Raw Materials

• It is predicted by the analysts that after the commercial production
of “Gasohol” the prices of Molasses is likely to increase.

Rivalry within the industry & their Market Share The top five competitors in
Liquor industry are: United Breweries (UB) Group (Bangalore) 48% Shaw
Wallace (Calcutta) 36% Jagjit Industries (Kapurthala, Punjab) 6 % Mohan
Meakins (Solan, Himachal Pradesh) 5.5% Associated Breweries & Distilleries
(Mumbai) 4.5%.

Rivalry

• Major players create competition on the basis of: – Looks of the
liquor bottle – Pricing the product much higher – Innovative promotional
campaign

• Beer sales in India are forecasted to grow at CAGR of 17.2 % in near
future.

• Future plans for the industry depicts strong growth for the Indian
beer market as the major players like kingfisher have been quoted saying
that they have significant expansion plans for the next few years.