If you want to start a liquor business in India, there’s something more to be afraid of than the mafia...
👉🏼 Excise duty is the biggest cost for an alcohol business in India, and eats up 60-70% of the revenue of the business, varying by state
👉🏼 You’ll also notice that this cost across liquor companies increases year on year, and has easily grown from say 68% to 71% as a percentage to Revenue, increasing by a CAGR of ~2% annually over the past few years
👉🏼 Now imagine, if there’s price sensitivity in the market because there are too many brands trying to fight for market share, you can’t increase price, but your main cost increases by 2%... it wipes out more than half your margin if you’re anyway earning an EBITDA of sub 5%
👉🏼 And for the states, it’s the easiest lever to pull to increase Excise duty on liquor when they need to cover up some deficit in their state budget on the revenue side
👉🏼 Which is why, even if you’re a profitable liquor business, you’re always afraid of what change in Excise duty will do to your unit economics... the uncertainty is killing.
👉🏼 Only the top 3-4 liquor companies may show an EBITDA of 8-12%. For context, I pulled out the financials of United Breweries, and their EBITDA is at ~3.8%. They practically own the most sold beer brands in the country.
👉🏼 The ROCE may vary between 10-18% p.a. and UB stands at 10%. I feel it’s not enough for all the risk there is, and profits only show up at massive scale.
👉🏼 Most companies also represent their Net Sales after removing the Excise Duty from Revenue recognized on the books, so the other cost margins are a % of such Net Sales and not Gross Revenue at MRP.
So, you know, if you really want to build a business in this industry, I’d suggest you rather build trail mixes and mixers, chasers...
I’d love to know comments of folks working directly in the industry, and how they’re navigating this. Any niches with smaller brands being profitable?
I’ve learnt a great deal about the liquor industry financials from a report by Technopak. Must read when you have the time.
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A Chartered Accountant with about 10 years of experience in areas of Tax Advisory, Startup Consulting, Fundraising, Audits, Deal Advisory, Business Modelling and contract CFO services.
Winner of the ISB Young Leader Award 2017 and the Best All Rounder, PGP Class of '17, Sarthak has also been published about in the leading financial newspapers such as The Financial Express as possibly the youngest Indian to have completed the courses of CA, CS and CMA along with a graduate degree in Financial & Investment Analysis from University of Delhi, all by the age of 23 years.
