Ale trail.. The beer pricing conundrum

An increase in raw material costs, rising inflation and unforgiving taxes may take the fizz out of this festival season for beer manufacturers who are struggling to remain profitable. Some beer companies are brewing a solution for this. They want to draw up a new, super mild category with an alcohol content of less than 3.5 per cent, about 1 per cent lesser than their premium mild beer range. The reason: they could then advocate with state governments to decrease taxes on these new products based on alcohol content.

Skewed taxes

Excise taxation on beer is largely skewed in India, unlike any other country which taxes beer much lower than hard spirits. In most states in India, beer is taxed more than hard liquor. In Maharashtra and Haryana, beer taxes are at least double than those of other spirits.

In India, beer is taxed depending on its volume, whereas globally, it is charged based on its alcohol strength or content. This has led to a preference among Indian customers for hard liquor over low-alcohol beverages like beer. However, a growing set of consumers understand the harmful effects of alcohol and are shifting towards lower-alcohol beverages like beer and wine. In Haryana and Chandigarh, the government has taken steps to reduce taxes for low-alcohol beverages. States like West Bengal and Uttar Pradesh too have restructured their excise tax structure by reducing tax on low-alcohol beverages, which has led to an increase in revenue for them.

Brewing change

Through excise policy interventions, State governments can create behavioral change among consumers. Currently in many States, there is a flat rate of liquor tax. So beer with 3.5 per cent to 8 per cent alcohol is taxed at the same rate as Indian Made Foreign Liquor (IMFL) with over 42 per cent alcohol. Inevitably, consumers then buy liquor with higher alcohol content as it is more affordable. In Karnataka for instance, one beer bottle of 650 ml (one mug) costs ₹140 as against ₹420 for a 750 ml bottle of blended whisky, which could yield as many as 25 pegs.

This is why beer manufacturers launched a variety of “strong beer” with an alcohol content of 8 per cent several years ago to arrest sliding sales. It did help them to grow sales. Still, rising raw material prices due to global supply chain challenges, including the war in Ukraine, one of the largest barley suppliers, have brought the problem back for the brewers. Now, the beer producers, most of whom are foreign multinationals, are advocating a more rational approach in pricing beer products in the country.

The IMFL slabs are well-defined and stratified across multiple price points, promoting the viability for manufacturers, as they can offer mass to premium, but the same is not available for beer. Beer is a price-elastic product; reducing excise duty leads to low MRP making it more accessible to consumers. Therefore, increase in consumption leads to incremental revenue for the State governments.

It’s a pitcher perfect pitch. But will the State governments play ball?

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