Demand for beer likely to go up as it becomes affordable option compared to spirits: Fitch

• Believes demand for beer may benefit from consumers trading down from spirits
• Affirms Sri Lanka-based Lion Brewery (Ceylon) PLC’s National Long-Term Rating at ‘AAA (lka)’, with a stable outlook
• Forecasts drop in strong beer sales volumes to moderate in next 12-18 months
• Mild beer sales expected to rise from FY24 on a gradual recovery in tourism

Sri Lanka is expected to witness an increase in demand for beer going forward, as the high cost of living coupled with soaring inflation makes it a more affordable option, Fitch Ratings said.

The rating agency said it believes that the demand for beer may benefit from consumers trading down from spirits to strong beer, as affordability weakens. Reason being, beer has a lower price point than spirits but higher alcohol content than lager.  Fitch yesterday affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC’s National Long-Term Rating at ‘AAA (lka)’, with a stable outlook. The entity’s strong financial profile is expected to act as a buffer against weak consumer demand and escalating costs amid higher commodity prices and tax hikes. It pointed out that the purchasing power of domestic consumers is expected to weaken in the next six to 12 months, amid the sharp depreciation in the rupee and persistently high inflation. 

With strong beer accounting for the bulk of Lion’s revenue, Fitch forecasts the drop in sales volumes to moderate in the next 12-18 months, assuming an ease in inflation spikes. 

Fitch forecasts mild beer sales to rise from FY24 on a gradual recovery in tourism. “Consumers are likely to prioritise spending on essentials, driving a slowdown in beer demand and we forecast a 12 percent drop in sales volumes in the second half of the financial year ending on March 31, 2023 (FY23) and one percent in FY24,” said Fitch.

However, the agency forecasts revenue to expand by 40 percent in FY23, as Lion is likely to pass on cost and tax hikes to consumers.Brewers are seeing a rise in taxes with the imposition of a social security tax of 2.5 percent on revenue from October 2022, in addition to the increase in Value Added Tax to 15 percent, from 12 percent. The agency said domestic alcoholic producers are likely to pass on the costs completely to consumers, in line with historical practices.

Fitch believes a further excise tax hike is likely but will be gradual, as the industry is important to government revenue. Excise duties from alcoholic beverage makers made up 11 percent of government tax revenue in 2021.

 Fitch expects the current excise tax regime, where spirits are taxed higher per proof litre than beer, to be maintained over the medium term, as it encourages consumption of drinks with lower alcohol content.