A Deep Dive Into Cartelisation in the Indian Liquor Industry

"Breweries brewing bilious buzz busted"

As much as we appreciate bold attempts at literary alliteration, watching this headline in an SCCOnline publication reinforces the idea that the news about liquor cartelisation in India is far from over.

Last week, a panel appointed by the Competition Commission of India (CCI) imposed penalties worth ₹873cr ($118.4m) on three liquor companies — United Breweries (UBL), Carlsberg India and AB InBev (erstwhile SABMiller India) — for indulging in cartelisation in the sale and distribution of beer in various states and Union Territories.

The development came as a consequence of CCI’s raid into the offices of the three brewers in October 2018 which prompted an inquiry soon after. The investigation has since proven to be conclusive proving collusion at not only the “highest levels of management in the companies” but also being carried out by the industry body All India Brewers’ Association (AIBA) which represents 83 manufacturing breweries in the country.

What’s truly shocking is, however, the fact that this has resulted in over 11 years of price fixation in the markets.

Today, we bring you an explainer on this case and an overview of the competitive spectrum in the liquor industry in India.

The Story So Far

Cartels essentially crop up when all big players join hands to make decisions that will impact the business of the entire industry. They not only hamper competition but also stifle innovation.

But the biggest attribute of a cartel lies in the aspect of price control. If two or three players decide to maintain prices of products at an artificial high or low, it compels the others to do so as well in an effort to retain customers and consequently sustain their businesses.

The fact is, Carlsberg India, AB InBev and UBL control nearly 88% of India’s $7bn beer market which enabled them to indulge in this cartel. And as it turns out, the cartel didn’t just limit itself to price fixation but also to other market manipulating measures like supply restriction, industry lobbying, tax evasion etc.

First Rule of Cartels — You Do Not Talk About Cartels!

In 2016, the world’s largest brewer Anheuser-Busch InBev (or AB InBev) acquired SABMiller along with the latter’s India business. In the process of this merger, AB InBev discovered that SABMiller executives had been complicit in a price-fixing cartel for quite some time.

In an effort to amend this, the company approached the CCI with essentially a plea bargain. FYI, CCI has a “leniency programme”, which offers reduced punishment for parties in exchange for information on anti-competitive practices.

This led to an interesting turn of events. The cartel arrangements are usually so nefarious that they can only thrive in secrecy. But upon knowing that AB InBev was trading information in exchange for immunity, Carlsberg India and UBL came forward too. Soon, it turned into a classic beat-me-to-it race wherein the parties were spilling all information in hopes of commuted penalties.

This led to raids, probes and indictments of all the cartel members in the following months unearthing a series of disclosures. Most prized among them were the messages exchanged between senior executives of beer companies (at least 19) on matters related to — discussion of prices, violation of competition laws, exchange of commercially price-sensitive information and collective attempts to defraud state governments and evade taxes.

Following is a summary of all the cartel abuses uncovered by the CCI in its 248-page report:

• Price coordination in states like Andhra Pradesh, Karnataka, Maharashtra, Odisha, Rajasthan, West Bengal, NCT of Delhi and UT of Puducherry.
• Collective restriction in the supply of beer in states like Maharashtra, Odisha and West Bengal.
• Coordination in supply of beer to premium institutions in Bengaluru.
• Coordination between UBL and AB InBev in the purchase of second-hand bottles.
• Using AIBA as a “common platform” to decide on prices collectively. AIBA then lobbied on the companies’ behalf for price increases with the authorities.

The WhatsApp messages exchanged between the executives reportedly indicated an increase in prices of beer by as much as ₹60 ($0.8) per case in some states. These refer to the ex-brewery prices which would include all the production and marketing costs as well as the proposed profit margins and were used by state governments to set maximum retail prices or MRPs.

Regulations Overboard?

The Indian liquor industry is one of the most heavily regulated in the world with stringent state-specific rules which encompass all aspects of business ranging from taxation, price control, distribution models etc.

Excise and other taxes on alcohol constitute an important source of revenue for state governments. In states with more sales and consequently higher liquor revenues, the governments control even the manufacturing, distribution, retailing, pricing and other such functional areas of the business which makes it difficult for most companies to seamlessly increase their profit margins, let alone succeed in market manipulation schemes.

How is it then that this cartelisation came to be?

The answer lies in two words — secrecy and precision. The companies, pursuant to discussing amongst themselves and fixing their prospective quotes, approached the state machinery through collective lobbying under the AIBA’s umbrella. The strategic appeal through an industry body gave them ample leverage, as well as cover, to succeed in price-fixing measures.

This extended to supply and distribution too. If companies don’t sell a lot of beer, states won’t earn a lot of revenue. So, by limiting their beer supplies, companies can influence a state’s tax revenues and nudge them into considering favourable policy changes like, say, tax cuts or production-linked incentives.

But such an elaborate scheme could only succeed with a consensus-based approach. The masterminding of a dishonest arrangement, ironically thus, relied upon the “honour system” amongst the three biggest players, until AB InBev essentially ratted out the rest.

The Pursuit of Hoppiness

A penalty in the order of $118m is insignificant for companies with multibillion dollar operations across several continents. The darkest shadow this will cast will be on the smaller companies whose profit margins already run thin in a business that faces stringent compliances and acute state-level regulations. Plus, higher import duties and taxes continue to disincentivise players in the IMFL (Indian-Made Foreign Liquor) segment.

There’s also a brewing angst from the industry against the Government’s decision to exempt liquor from the ambit of GST. Doing so, in their opinion, leads to a rise in overall costs due to increase in input taxes and longer working capital cycles accentuated by the elongated tax refund process.

Be that as it may, the decision to exempt was justified on two counts — maintaining strong revenue inflows for states and limiting the consumption of so-called sin goods.

But with a ₹3.9trn ($53bn)-valued alcohol beverage market that is projected to grow at 6.8% CAGR till 2023, India is one of the fastest-growing liquor markets in the world. The sector also contributes to nearly 15 lakh jobs and is estimated to lead to a 70% rise in consumption over the next decade, mostly fuelled by middle-class spending and product premiumisation.

So, perhaps, it is time to rethink policies especially in relation to the frequent and ad-hoc changes in pricing formulae that drive uncertainty in businesses and presumably steer the players to indulge in anti-competitive practices in order to keep up growth. There is an urgent need for implementation of data-driven policies and phased tariff formats to improve the liquor industry’s health and promote trade.

(Originally published September 28th 2021 in transfin.in)