With no liquidity, liquor sales on the rocks


You know the glass is half-empty when a major company selling liquid stimulants holds back on pushing sales because the trade is hit by a liquidity shortage.

United Spirits Limited, India’s biggest liquor firm which sells brands including Johnnie Walker and McDowell’s, told investors during an earnings call last week that in order to “minimise credit risk” in a liquor trade facing a “big time liquidity crunch”, it’s no longer doing aggressive sales.

Basically, the liquor company fears traders will stock the products but won’t be able to pay, adding to its bad debts. “This time the reality is, there are real liquidity issues in the marketplace with the trading community. So, if you supply, they will take the stock, but it’s at your peril,” Anand Kripalu, managing director at USL, told investors.

“It is not as if we are not supplying at all. We are just being cautious about the last push,” Kripalu said. “Some of the competitors in the marketplace decided to increase credit in high-risk market. We decided we won’t do that.”

Poor Growth
“This remains part of our philosophy to not keep having provisions of bad debt, because you sell and then you just find it hard to collect,” he said.

Liquor trade’s hangover from the economic slowdown is similar to FMCG failing to take a bigger bite out of consumer spend, again thanks to liquidity issues. Hindustan Unilever, the country’s largest packaged consumer goods firm, had last month said trade was facing an acute liquidity crunch.

Diageo-controlled USL reported volume growth of just 1% year on year in the quarter ended September, mainly because of a slowdown in consumer demand along with liquidity challenges. The company had posted 10.3% volume growth a year ago.

Similar to FMCG, the overall liquor market in the country recorded 2-3% growth in the nine months to September, which companies attribute to floods in some states and an increase in taxes, on top of a broad economic slump that has taken a toll on consumption. Adding to the impact on numbers is the high base of 2018, when the market grew 10% to a six-year high.

Sales volume of locally made foreign liquor increased 1.4% year on year in the September quarter. Whiskey and brandy showed poor growth, vodka and gin segments declined, industry executives said, citing excise department data. A year ago, the market had grown 12.9% in the same quarter.

Diageo’s biggest rival, Pernod Ricard, too, saw its Indian business growth slowing to 3% in the September quarter from 34% in the year-earlier period.

Analysts expect liquor sales to remain subdued for the rest of the fiscal. “We expect demand to remain subdued Q2FY20 onwards,” said Abneesh Roy, executive vice president of institutional equities at Edelweiss Research. “Spirits, being more discretionary in nature, are expected to face volume deceleration in ensuing quarters. While the volume decline may not be as severe as in the four-wheeler and two-wheeler segments, we nevertheless expect softness in demand for the liquor sector,” he said.


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