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FHRAI has given a 'directive'
to cap the gross margins on wines to 250% of the cost and liquor margins
to four times the total costs, including munchies. If it is self-imposed
in the right spirit (pun intended), it could result in a price drop of
25-40 %, fuelling demand and spelling a boom for importers, hoteliers
and consumers alike.
Hotels and restaurants get a special license under SFIS
(Served from India Scheme) which entitles them to import wine and spirits
etc. at no customs duty (against the normal 150%), limited to 5% of their
average foreign exchange earnings through credit cards.
Duty- free import was allowed first to the hotels and
later to restaurants over four years ago under pressure from the strong
hotel lobby convincing the government that the move would help promote
tourism and promising that the benefits of duty reduction would be passed
on to the consumer. However, they were apparently not fully passed on
and there has been a general resentment from self-paying Indians, diplomats
and ex-pats alike.
The Commerce Minister, Mr. Kamal Nath had warned them
to pass on the benefits to the consumer ‘or else’. Prices
have been moving downwards, but slowly. During the last year's budget
speech there was a veiled threat of withdrawal from the Finance Minister
unless there was compliance. When there was no such talk at this year's
address, it gave rise to speculation that duty benefit withdrawal was
on the cards. But the strong hotel lobby had an upper hand.
Smaller importers are happier over the directive which
comes in the form of a 'voluntary' commitment by trade associations, FHRAI
and also the Hotel Association of India (HAI) committing compliance to
the government . They feel that with this policy their chances of survival
will get better.
One such importer says under conditions of anonymity,
'my Barolo and other premium wines like Amarone should now be available
for under Rs.4000 ($100) in hotels. The demand should increase and I can
sell a much bigger quantity.' He has a portfolio of high quality wines
which languish as the demand is flat for such wines after taxes and heavy
mark-ups.
The hoteliers have found an ally in Sanjay Menon, a leading
importer, who ridicules the 'directive' as untenable. 'How can you force
someone to reduce the sales price in a free country!' he wonders excitedly.
'It's true the hotels were charging huge margins years ago. Now, they
(hoteliers) are better informed and believe in aggressive pricing,' he
says, adding that 'in Mumbai premium hotels like Hyatt, Oberoi and Taj
already charge much less than the directed margins'. 'After all the hotels
are not forcing anyone to come, if they feel the prices are too high.
How come nobody complains when they sell a coke costing Rs.10 (25 cents)
for Rs.150 ($3.75), justified by the huge overheads?’
One factor which the hoteliers often cite for high prices
has been the unreasonable annual license fees they have to shell out.
'License for each restaurant serving alcohol costs Rs. 500,000 ($12,500)
a year. They must recover these costs through low sales volumes,' adds
Sanjay. The same license allows the sale of wine and all other alcohols.
No one would disagree with his logic. Hotels collectively
raised tariffs to more than twice or even three times in the past couple
of years due to room shortage and tourism promotion has been the last
thing on their minds. But that is an individual business decision even
though many allege the existence of a cartel among the hoteliers. Justifiably
so, the market had slumped after 9/11 and tariffs were slashed by more
than half by the same hotels in order to stay afloat.
The point Sanjay fails to address is that the 150% duty-free
benefits were given to the hotels not as a reward for earning foreign
exchange, which might have been the case 10-15 years ago when the country
was dried out of foreign exchange reserves. The government had taken a
selective, magnanimous view so that they would pass on the benefits to
the customer. In fact, this would have resulted in a sizeable expansion
of the wine drinking base. If the government decides to withdraw the benefits,
then it does not have a legal or moral position to put pressure on them,
even though it will stifle the growth of the wine industry.
Sula Vineyard is the country's leading wine producer,
who is also expanding the imported wines portfolio after a brief lull.
Says Rajeev Samant, 'As a producer, I feel this is not a bad thing. This
was after all the intent of the duty-free program. The problem we were
facing was that our wines are available in retail at known prices, whereas
the consumer is usually unaware of the FOB price of the duty-free imported
wines. A fair number of these wines come in at unbelievably low prices.
So the hotels had an incentive to sell these wines instead of Indian wines.
That situation will now correct itself to some extent.'
'As an importer, the impact will definitely be felt
by lower-end imported wines. Hotels were charging huge percentage markups
on cheap imports. Now hotels will prefer higher-priced imports on which
they were anyway charging lower percentage markups', he adds.
Rajeev might be jumping the gun. If one goes by the list
being circulated for whiskey, vodka etc, the industry is going to try
to bring down the margins on the high end, low selling wines and still
keep the margins higher than 250% on the cheaper wines, say 300% or even
350% and still manage to show that the profit margins have been kept under
the cap, on the average. By doing this exercise, the industry has shown
an average of 16% drop in liquor prices, whereas in fact the fall has
been mostly 12% only for the popular whiskies etc. as you may see from
the the
Table.
It would have been the intention of the government to
cap the price on every bottle of wine and not the average cap as is suggested
by the Table.
Another interesting situation would arise in the case
of stand-alone restaurants like Olive and Diva where the license covers
only a part of the purchase. Says A D Singh, Director of Olive group which
had opened Olive Beach Restaurant in Delhi a few months ago and are ready
to open a Japanese restaurant soon,' I don't know how the directive applies
to us but most of our purchases are on duty paid basis. And we, being
a wine destination restaurant, keep our profits very low-seldom do we
go above 100-120%. So we don't have to worry about it. In any case we
don't compete with 5-star hotels and will continue to promote wine as
a part of our cuisine offering.'
Despite the long term benefits to the industry, the mood
is distinctly downbeat in most hotels. Unwilling to discuss the issue
and skirting it , but admitting privately that they are being coerced
to follow the 'directive', the finance departments of hotels are working
overtime to change the wine menu prices, so that they at least appear
to follow the directive, lest the industry loses the duty-free bonanza.
Although the promised date of April 1 that gave less than 24- hour notice
to the hotels to roll down the prices came and went , nobody has heard
the music yet and one wonders if it was a fools' day prank.
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