Financial Times

Liquor industry suffers from illicit sales
Although Sri Lanka's per capita consumption of alcohol - at around 8.25 litres a year - is one of the highest in the world, the potential for growth in the market is constrained by the dominance of illicit liquor. High excise taxes that discourage the consumption of 'soft' liquor such as beer is also hampering growth, industry officials said.

About 65 percent of the total alcohol market in Sri Lanka is estimated to be illicit, with 30 percent consisting of legal hard liquor and just five percent beer. Beer remains the most expensive alcoholic beverage, in marked contrast to the trend elsewhere, where the reverse is true, because of skewed excise duties and highly restricted wholesale and retailing licensing and distribution systems.

"Taxes on beer are higher than on hard liquor in contrast to other countries where taxes on alcohol reflect the alcohol content," said an official at The Ceylon Brewery Ltd.

Distilleries Company of Sri Lanka Limited (DCSL) Managing Director Harry Jayawardene said sales of hard liquor had increased "marginally" owing to the upturn in the economy and increased incomes among consumers following the ceasefire. But he said illegal sales of hard liquor such as arrack and illicit brews were preventing the sale of legal liquor from increasing further. There were more than a dozen manufacturers and some were selling 'uninvoiced' or duplicate liquor with forged stoppers which were much cheaper than the legal variety.

"There is a lot of under strength arrack being sold," Jayawardene said. "Now it is rampant because of the new year. There are mobile bottling plants." While increased spending power among people had led to increased consumption, the sale of duplicate liquor at Rs 30-40 less than legal liquor was preventing sales from growing. Another constraint is that the distribution of alcoholic beverages is restricted by an outdated licensing requirement.

As a result, there are only around 2,000 licensed retail outlets in the whole island serving a population of 20 million. Many of these are 'upmarket' outlets such as hotels and clubs not accessible to ordinary consumers. The beer industry is supportive of planned government initiatives designed to achieve a sustained reduction in per capita alcohol consumption by shifting consumers from hard to soft liquor, officials said.

It advocates reducing excise taxes on beer and liberalising licensing requirements to make beer more available, while cracking down on illicit alcohol production and distribution."The market for beer in Sri Lanka is extremely small but the potential for growth is enormous if the right policies are implemented by government," the brewery official said.

Sri Lanka's per capita beer consumption is two litres a year compared with a 100 litres in the US and 20 in Singapore. The nature of Sri Lanka's market is the exact opposite of world trends where 80 percent is beer, and only 4-5 percent is hard liquor. Brewers are restricted by their ability to distribute.

In other countries beer can be sold relatively freely while hard liquor sales are restricted. In Sri Lanka both beer and hard liquor are sold through restricted sale practices. "Illicit alcohol consumption is going from bad to worse," said a beer industry official.

"Since it is not taxed consumers can buy a bottle with 30-40 percent alcohol content for Rs 60. Considering an individual consumes about a quarter of a bottle, the price is almost the same as a bottle of beer."

Even though people know illicit alcohol consumption is harmful, they have no choice because they cannot afford to buy beer. Furthermore, illicit alcohol is freely available. The beer market saw "some" growth last year after 2-3 years of slack demand but the growth was not in keeping with growth in GDP.

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