The Effect on the Global Drinks Industry Due to Unrest Between Ukraine and Russia

Ukraine is counted among the top five producers of barley globally. And the severe geopolitical crisis in Ukraine may affect the industry executives, global supplies, and analysts tracking.

According to data by IWSR Drinks Market Analysis, the calendar year 2021 exhibits the beer industry witnessed a sharp downfall of 39% to 193 million cases.

The span between March and July usually leads to about 40-45% of annual beer sales. But, after the hot summer season, beer brands are on the edge of increasing barley prices and disturbing the supplies because of the Russia-Ukraine crisis. We all know that barley is the primary ingredient of beer.

The growing tension between Ukraine and Russia may lead to shortages and supply disruptions of other commodities, like crude. It's because Russia is one of the prime producers of crude oil, and Ukraine is one of India's largest exporters of sunflower oil.

In fact, it's a matter of fret for United Breweries Ltd., and steep peaks of geopolitical tensions in Ukraine may append the risks.

United Breweries purchase barley annually in the month of February-March for the entire year. The company was saved from the high rise in barley cost over FY22 year-to-date as it bought before the steep price inflation from April 2021.

On the contrary, United Breweries may witness notable raw material inflation with the elevation in the barley prices in Q4 FY22 and the Ukraine crisis. Brewers may get stuck with the increased price inventories for the FY23 duration, even if the Ukraine conditions get regular and global costs to stabilize.

The chief executive of premium beer brand Bira 91, Ankur Jain, said, "The development would put further margin pressure on the sector. Also, he added, "Barley prices have escalated quite significantly, and Ukraine will definitely impact global barley pricing in short to medium term. Whether beer companies will be able to react quickly and increase prices quickly is yet to be seen, and in some cases, is determined by the government.”

Barley accounts for about 30% of raw material costs for alcoholic beverage makers. While the bottling expenditures cover the significant rest, with Brent crude at $90 and more a barrel, bottling charges are expected to multiply as the fuel prices hold a considerable share of the bottle manufacturing costs.

Let's talk about some more expenses incurred:

• The packaging clutches about 34% of the raw material costs for United Spirits Ltd. and 64% for United Breweries.
• Outside of free pricing in states like Maharashtra, the state government grants the alcohol beverage price increases, but that is a time-consuming process. Therefore, the margins of such firms stay impacted.
• In-state budgets in FY23, the risk of excise increases, and the high-priced valuations are other chief reasons for the tentative view on the sector.
• Extra-neutral alcohol costs have risen as oil marketing firms offered price hikes to ethanol manufacturers. It is another crucial raw material cost for United Spirits, and it could have a negative influence on profit margins.
• United Spirits relies significantly less on recycled bottles. Over 95 % of bottles in the 'Prestige and Above' group are new, and an overall proportion of 80-85% may increase the bottle acquisition costs linked to crude prices.
• United Breweries' efficient bottle procurement strategy will allow them to cover around 75% of its bottling needs with recycled bottles (for which it pays around a fourth of the cost of a new bottle). It is subject to crude-driven inflation on new bottle prices for the rest of its bottling requirements.

A United Breweries spokesperson said they have been functioning in a high inflation situation with the ongoing crisis; they expect the inflation pressures and supply chain disruptions to speed up quickly. He also added that they are actively performing towards reducing the impact through a blend of cost control, productivity, judicious price increases, and optimization, which they are discussing with state governments.

The director general at the Confederation of Indian Alcoholic Beverage Companies (CIABC), Vinod Giri, said, “We are closely evaluating the situation as it unfolds and the impact of brewers in India. If the current situation escalates, it could be a cause for concern.”

Conclusion

As per the predictions by beer companies, the industry may catch up with heights by about 40% year-on-year in FY23 after the severe broke of two subsequent summers because of Covid-induced constraints and bars, restaurants, and clubs being closed or operating following some restrictions.