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Hotels to Bring Wine Prices Down

April 17, 2008: The government has given an ultimatum to hotels and restaurants enjoying duty free wine and liquor purchase to bring down their prices on wine and liquor or face withdrawal of duty- free benefits. If the FHRAI directives are followed in the right spirit, it will be a move in the positive direction for the wine industry in India, feels Subhash Arora.

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 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 expats 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 from the Finance Minister of withdrawal 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 card. 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 to the government the compliance. 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 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. 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 in their mind. But that is an individual business decision even though many allege the existence of a cartel among the hoteliers. Justifiably so, after 9/11 the market had slumped 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 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, definitely the impact will 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 the whiskies 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 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, mood is distinctly downbeat in most hotels. Unwilling to discuss and skirting the issue 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 past, nobody has heard the music yet and one wonders if it was a fools' day prank.

Source – IndianWineAcademy.com