September 05: With wine importers facing onslaught from producers, customs, excise, distributors and Retail outlets, ever-increasing the loading factor that makes the wine prices go north every year, it is time the Excise department considers allowing one special retail license to all the L-1F licensees, on the line of L-53 that will be a win-win-win for excise, importers and consumers, writes Subhash Arora.
The suggestion is simple, transparent and will result in excise department getting richer by crores with nobody complaining. All the government needs to do is allow each of the L1-F licensee (for distributing wine, beer and alcoholic products) another license L-* for an annual fee of Rs.100,000-200,000 to retail the complete portfolio of their registered labels of only wine and beer, at MRP from the excise warehouse for which a L-32 license has become mandatory this year. The importer will have to develop the infra-structure which will be subject to the approval of excise department having the complete monitoring authority.
The license would be similar to L-53 allowed last year to the grocery stores at the cost of Rs.200,000 with the provision of retailing imported wines as well with an additional payment of 10%.
Burgeoning Costs
Five years ago when the new importers used to seek my advice on the gross margin and the loading factor, I used to suggest that after considering the direct costs and expenses , a gross margin of 30-40% ought to be considered adequate and fair under the normal circumstances. Since then the things have changed for the worse and a loading of around 100% going to as high as 200% by some, is not unheard of; this includes incidentals like logistics cost, official paperwork costs etc. But the invisible costs have been going up consistently and some importers even try to justify a loading of 120% as a standard procedure. The 70-80% is still a figure most are aspiring to on the lower end.
High Retail Margins
One of the reasons of such excessive loading is apparently high profit margins expected by the Retail outlets which have a virtual oligopoly, with a limited number of licenses issued to the private retailers. The government retail shops owned by the likes of DSIDC and DTDC have archaic purchase policies and payment terms-right from the issuance of purchase order to the dispensing of checks. Unless the total consignment is sold in 90 days, no payment can be released-not even in part. A majority of importers interviewed by delWine agree in confidence that they perpetually send their representatives to each store to monitor the sales figures and physically locate the unsold wine bottles. Sometimes they are obliged to even ‘buy’ the missing bottles and of course any unsold stocks so that they may get an NOC from the store and get the payment cleared.
The excise policy based on WSP allows a maximum deduction of around Rs. 15 to Rs.50 a bottle for Retail (15% of WSP or Rs.50 whichever is lower) whereas in reality, even the sales clerk making the sale on the floor, demands more than this as an incentive. Some importers reveal that these private retailers expect a commission of 20-25% on the MRP. The commission which is based on the price including the customs, excise and VAT, works out to more than 150% of the CIF value of the wine!
Retailers have their own woes, high real estate costs being the major factor. Monthly space rentals in a Mall can be Rs. 300,000-400,000 which cannot be easily recovered unless the volumes are several times the existing sales. The practice known in the trade as OC (over charge) is prevalent in the private sector as a means to recover the high fixed overheads. Whereas- an importer may lose his L1-F license if caught selling at a price higher than MRP, there is no such harsh action mandated for the retailer- he can get away with payment of nominal penalty.
Win-Win-Win for all
Excise will be the biggest and direct gainer with this NSL (New Suggested License). Currently, many smaller importers do not take the excise license because of the prohibitive initial costs. With a new avenue opening up, several existing importers will then take this L-1F license directly. Several potential importers are hesitant to import certain labels and sell to the retailers because of the reasons above- a given in most civilized countries globally. These new licensees will add to the Rs.600,000 a piece through this addition alone (for the record delWine continues to opposed charging such high license fee from wine n beer- only importers). Additional L-* license fee of Rs.100,000-200,000 will be recovered from most of the existing licensees of L-1F . Not all licensees may opt from this scheme initially but will gradually fall in line.
The biggest earnings would be from the additional excise duties will come from the additional sales that would be generated by the specialists in each of these retail outlets, what with some importers willing to employ Sommeliers to increase the revenues. A cross-section of importers feels that an annual growth in retail of 20-100% can be anticipated. Rhetoric apart, some are even willing to give written undertaking for the minimum increase in sales and thus the excise duty. Win situation!
Importer is of course the biggest gainer since he will be able to not only increase his sales but create a brand image of his products in the absence of advertising which is not allowed. Many importers register the entry level wines at much higher prices to help defray the undeclared expenses. At banquets, they can directly approach the hotels and compete for their market share by offering a wider choice. There is a definite market, howsoever small, for higher -end wines but they cannot presently be sold as the importer does not like to keep them with a retailer who does not store them properly. They can showcase their brand using literature, award lists and points by the wine experts. A win-wine situation, really!!
Customer may not benefit directly because of the fixed MRP (the retailers are not averse to giving some discounts unofficially – some go to the extent of collecting wines from the neighboring Haryana at much cheaper prices and resell to such consumers if the purchase level is a case or perhaps more). But many will be happier with the expert advice of the sommelier or the trained sales person to find something within their budget and what they like. Chances are that the storage of these wines is better than it would be with many of the present retailers. Many importers do not like to supply their premium wines to Gurgaon because their storage facilities are pathetic.
Win-Win-Win, all the way!!!
What are the Cons
We have seen the Pros. But what are the Cons? Besides the existing licensed retailers mouthing a symbolic protest, there ought to be no opposition to the idea. In any event, the grocery stores are being given the license and as they get their act together- most times one goes to such shops, the sales person has tried to con one into buying a cheap VDP French wine for around Rs.2000 or an equivalent, emphasizing that it is the next best wine to a Classified Bordeaux Chateau. Some existing retailers may protest that this will increase the on-paper sales to Gurgaon, an allegedly common practice today. If you look at it minutely, there is no such possibility. The leakage through that channel will in any case, continue till the duty difference between the two states is as high as it is now.
A Retail license on these or similar lines will go a long way in improving the wine culture and increasing the wine sales- slowly but surely.
Subhash Arora |
