Sri Lanka: Beer industry expected to regain market share due to more favourable tax regime in the 2018 budget

Sri Lanka's beer industry will regain market share from hard liquor following a more favourable tax regime for the segment announced in the 2018 budget, according to Fitch Ratings.

The budget reduced excise taxes on strong beer by 33 per cent and raised that on hard liquor by 2 per cent, effective immediately. The budget also introduced a Nation Building tax of 2 per cent on all alcoholic beverage sales, which will take effect from April 2018.

Fitch said in a media statement that with the latest tax revisions and barring further changes, beer's market share of total reported alcohol consumption in Sri Lanka would increase to around 24 – 25 per cent in the medium term.

“We expect hard liquor sales volumes to contract 2 per cent over this period, reversing some of the market share gains it made in the last few years. Hard liquor's share rose to 84 per cent in 2016 from 71 per cent in 2014, after a series of tax increases for beer. The market share for beer fell to 14 per cent from 27 per cent over the same period,” it said.

Beer makers will also be helped by the removal of a tax on beer cans in the government budget. Fitch expects beer to regain market share lost to hard liquor during the last two years, when frequent tax increases on beer eroded its price advantage.

“We expect sales volumes of hard liquor market leader Distilleries (DIST) to drop, as consumers substitute strong beer for arrack, the most popular hard liquor in the country. Effective immediately, spirit producers will also have to pay additional duty on raw materials used for ethanol production, which will increase input costs for hard liquor makers. However, we expect these taxes to have minimal impact on DIST's profit margins because the company has increased the price of its key product, Extra Special Arrack, by around 6 per cent per bottle to reflect both the higher input costs and taxes,” Fitch said adding that it believes the government is unlikely to impose further taxes on the industry to the extent that alcoholic beverages become prohibitively expensive to the average consumer, because the alcohol excise taxes contributed 8 per cent to government tax revenue in 2016. “As such, we expect further tax increases to be gradual, especially for hard liquor.”

Both Lion (brewery) and DIST command leadership in their respective segments given their entrenched brands which continue to benefit from a complete ban on advertising of alcoholic beverages, Fitch said.

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