The escalating strife between Ukraine and Russia is expected to impact barley prices and this could affect domestic beer companies, which are already reeling under high costs of packaging material. A United Breweries spokesperson told BusinessLine that the current crisis could lead to inflation pressures and supply-chain disruptions. “We have already been operating in a high inflation environment. We are actively working towards mitigating the impact through a combination of productivity, cost control, optimisation and judicious price increases for which we are in conversations with State governments,” said the spokesperson for the country’s largest beer maker. Barley accounts for 30 per cent of raw material costs for United Breweries.
Ukraine is among the top five global producers of barley, accounting for 18 per cent of global barley exports in CY22. While Indian brewers largely source barley locally, prices in India can move in tandem with global prices, should there be a disruption in supplies, said an analyst from financial services firm Motilal Oswal in a note to investors. Unlike other FMCG products, various States in the country control manufacturing, retailing and pricing of alcohol, including beer. Many States alevy higher excise duties on liquor during the annual budgetary exercise, which also negatively impacts the industry.
In an earnings call early this month, United Breweries management had said that inflation in glass prices has increased, while on barley prices, the company continues to hold inventory from the last harvest season. This was possible because the beer major was able to procure barley before inflation started peaking. The company sources barley in February-March for the entire year. Analysts tracking the sector said while agri-commodities have witnessed relatively modest inflation, barley costs have been going up for a large part of the last 10 months, with spot prices in India increasing by over 60 per cent year on year. One of the biggest fallouts of the war between the two nations has already resulted in a steep increase in Brent crude, which would affect bottling costs, a large component of total raw material costs, as fuel prices constitute a major share of bottle manufacturing costs. “Brewers could be stuck with higher cost inventories for the duration of FY23, even if the situation in Ukraine was to defuse and global prices stabilized. Even if beer companies have a blockbuster 1 QFY23 – something that they missed out on in both Q1 FY21 and Q1 FY22 due to disruptions to mobility from the first and second Covid waves – they could lose their sheen if margins get significantly affected due to substantial raw material cost inflation,” said the note.