As the summer season approaches, United Breweries, known for its Kingfisher beer, is facing potential profit pressures due to rising input costs linked to the ongoing conflict in West Asia.
Vivek Gupta, the managing director and CEO of the Bengaluru-based company, indicated that after experiencing two sluggish quarters, demand for beer is starting to recover. However, the company is bracing for a 5-6% increase in cost of sales, primarily driven by higher freight and bottle prices.
Impact of the Conflict: Gupta highlighted that the war's influence on raw material costs is significant, with bottle manufacturers seeking price hikes and freight costs rising due to increased oil prices. This situation is expected to exert downward pressure on profit margins.
In several key markets, including Telangana and Karnataka, beer prices are regulated by state authorities. This pricing structure means that brewers like United Breweries often have to absorb rising costs, further squeezing their profitability.
Despite these challenges, Gupta noted that the company is optimistic about the beer market's growth, projecting a 6-7% increase in the coming months. To adapt, United Breweries is focusing on local production, with about 80% of its premium portfolio manufactured domestically, which helps mitigate reliance on imports.
Policy Changes and Market Dynamics: Recent policy shifts in states like Uttar Pradesh and Maharashtra have been beneficial, allowing for greater retail access and potentially enhancing sales. For instance, Uttar Pradesh has doubled the number of beer retail licenses, contributing to a 13% sales growth despite weather-related disruptions.
However, other markets remain challenging. In Delhi, policy clarity is still awaited, while demand in Punjab and Haryana has weakened due to high retail prices. Gupta pointed out that affordability is a critical factor, as beer consumption declines when prices rise.
Future Outlook: United Breweries is also introducing new products to attract consumers, such as Kingfisher Smooth, a less bitter strong beer. The company is hopeful that a recent announcement in Karnataka regarding pricing based on alcohol by volume may provide some relief.
As the summer peak approaches, United Breweries is preparing to optimize its production capabilities while remaining cautious about potential supply constraints, particularly concerning raw materials and packaging.
