A Dispiriting Ruling in India -- WSJ
High-court highway curbs threaten liquor makers as well as local sellers
GOA, India -- An increasingly hard-line view on alcohol in India is threatening sales for global spirits makers as a new ruling forces many local sellers to shut down or adapt.
In an attempt to reduce alcohol-fueled road accidents, India's Supreme Court banned the sale of booze within 500 meters (547 yards) of national and state highways starting this month, a decision that affects liquor stores, bars, restaurants and hotels.
The move has shaken India's bar and restaurant industry and sent a chill through large spirits makers that are betting on growing demand in the emerging middle class in India, the country that is the world's largest whiskey market by volume.
On Thursday, Pernod Ricard SA, which owns brands such as Chivas Regal Scotch whisky and Absolut vodka, warned that the highway liquor ban would hurt its sales in India through 2017.
Chief Financial Officer Gilles Bogaert said in an investor call that it was still too early to assess the full impact. "It will just create disruption over the short term," he said.
Investment bank Jefferies Group LLC estimated the ruling affects roughly 35% of India's liquor outlets. Danish brewer Carlsberg A/S estimates there are 66,000 of these across the country.
Roughly one million jobs could be affected and $9 billion to $15 billion lost because of the ban, according to estimates from Riyaaz Amlani, president of the National Restaurant Association of India. In the tourist-heavy state of Goa, 85% of liquor stores could close or be forced to move because of their proximity to highways, he said.
Jefferies earlier this month cut its per-share earnings estimate on Diageo PLC's Indian affiliate, United Spirits Ltd., for fiscal 2019 by 6.5%, saying volumes of high-end liquor would be weaker through 2018 than previously expected.
Carlsberg CEO Cees 't Hart in February warned that 2017 "could be a volatile year for India."
One venue already feeling the impact is the Leela Ambience, a five-star hotel in the city of Gurugram near Delhi. Just off a major highway, the hotel this month stopped serving alcohol throughout the property, including via room service.
"As of now, until we get information through the government, we won't be able to serve anything," said Siddharth Singh, a reservations associate.
Global spirits makers have invested heavily in India in recent years, attracted by its expanding middle class, young population and longstanding preference for hard liquor over wine or beer.
India became Diageo's second-biggest market by sales behind the U.S. after the Johnnie Walker maker in 2013 and 2014 built up a stake in Bangalore-based United Spirits, India's largest liquor maker. India has also become Pernod Ricard's second-biggest market by sales after the U.S., pushing China to third.
Spirits companies have already seen sales hit in India after the government in November abruptly scrapped high-denomination bank notes in an attempt to crack down on tax evaders. Pernod on Thursday reported just 1% growth in India for the nine months ended March 31, compared with growth of 14% in the year-earlier period.
India is also one of the toughest places in the world to sell alcohol, thanks to a complex patchwork of regulations. The country's constitution recommends prohibition, influenced by Mahatma Gandhi's antipathy to alcohol, which he viewed as the root of many social evils. Imported spirits are taxed 150%, and each of its 29 states separately regulates domestic liquor manufacturing, pricing and distribution.
Some states ban alcohol entirely, and a number of others are considering doing so, as recommending prohibition has become a popular tactic to secure votes. The chief minister of the Indian state of Madhya Pradesh said this month that the state would move to ban alcohol.
"We believe anti-liquor rhetoric could increase in other states as well, as more states experiment with this populist measure," Mumbai-based Jefferies analyst Nitin Mathur said.
Binge drinking and its consequent social and health problems are a big concern in India, where male drinkers over the age of 15 years drank an average of 32.1 liters of pure alcohol in 2010, 77% more than in the U.S., according to the World Health Organization.
The highway liquor ban stems from a 2012 petition filed in a state high court by a nonprofit called ArriveSafe, which was founded by a road-crash victim, Harman Singh Sidhu. Road deaths in India have been rising, with 146,133 people killed in road crashes in 2015, up 4.6% from a year earlier, according to government data.
Still, state governments depend heavily on liquor as a revenue stream, and some have moved to have state highways reclassified as roads in response to the ban. Indian liquor retailers have taken their own creative measures.
One outlet in the coastal state of Kerala has constructed a maze patrons must walk through, which puts the door more than 500 meters from a highway, according to local media reports. Others have moved their entrances, forcing people to drive more than 500 meters. The Supreme Court ruling hasn't clarified whether the distance is to be measured as the crow flies or otherwise, leaving open a loophole that retailers and bars are determined to exploit.
"We Indians always find a way out," said Shivkaran Singh, who expects that Circus, a restaurant he owns in Gurugram, will be allowed to serve liquor again after the entrance to the site housing it and about 30 other pubs and restaurants was moved.
Mr. Singh said business at his restaurant is down about 50%, while many bars at the site, called Cyber Hub -- a short drive away from the Indian headquarters of multinationals like Alphabet Inc.'s Google, Coca-Cola Co. and Nestlé SA -- have had to shut down.
Corrections & Amplifications The name of Carlsberg Chief Executive Cees 't Hart was misspelled as Cees t' Hart in an earlier version of this article. (April 24, 2017)
Write to Saabira Chaudhuri at email@example.com
(END) Dow Jones Newswires
April 25, 2017 02:47 ET (06:47 GMT)