Beer drinkers to switch to arrack this year following tax hike: Fitch

Fitch Ratings yesterday said Sri Lanka would witness a shift in consumer behaviour from beer to hard liquor this year. “We expect the trend of drinkers switching to beer from hard liquor to reverse in 2016, as taxes on the alcohol content in strong beer have caught up with those on hard liquor (spirits) after increases in excise taxes in October and November 2015,“ Fitch said. Taxes on strong beer have increased 70 percent while taxes on spirits have increased 24 percent from October 2014 to November 2015.

Sri Lanka’s largest brewer Lion Beer recently slammed the government for the country’s peculiar alcohol policy,

which according to them, endangers health of the population. Fitch expects demand for alcohol in 2016 to rise as tax-led price increases are likely to be absorbed by rising disposable income.

Distilleries Company of Sri Lanka PLC (DIST) is the market leader in alcoholic beverage production in Sri Lanka, which Fitch has rated at ‘AAA(lka)’ with a stable outlook. DIST’s product portfolio includes its massmarket Extra Special Arrack brand, which accounts for the majority of sales, and licenced international brands channelled through its subsidiary Periceyl (Pvt) Ltd. As of the latest published statistics, DIST accounted for around half of Sri Lanka’s total alcoholic beverage production and 72 percent of the country’s total arrack production.

Arrack production declined 3 percent annually over 2011 to 2014, resulting in a smaller share in alcohol sales for arrack, DIST’s main product. However, Fitch expects sales of spirits to grow in the mid-single digits over the next three years, which will help the segment to regain lost market share. Sri Lanka’s liquor industry is highly regulated, with a complete ban on advertising and licencing across the value chain acting as a barrier to entry.

The industry is also characterised by high and frequent tax revisions, which put increasing pressure on industry players.