Fitch: Thailand#s New Beverage Excise Tax to Hit Beer Harder

Stocks and Financial Services Press Releases Tuesday September 26, 2017 18:31
Bangkok--26 Sep--Fitch Ratings

Thailand's new Excise Tax Act will have a greater impact on local beer producers than domestic spirits producers as the beer market is more competitive and demand is sensitive to prices, says Fitch Ratings. The producers of non-alcoholic beverages will also be hit by the imposition of a first-time tax on sugar content in drinks.

Fitch expects some pressure on beer producers as their ability to pass on the increasing tax cost to consumers and maintain their profit margins largely depend on the magnitude of the tax increase and consumers' purchasing power to absorb higher prices. Other than prices, beer demand is also sensitive to economic conditions and the festive mood in the country. Domestic beer sales volume has been volatile over the past 10 years - a drop of 9% in 2009 amid political protests and an excise tax increase, a 14% decline in 2011 due to severe flooding, and a 5% fall in 2013 after a restructuring of the excise tax, according to figures from the Office of Industrial Economics.

Local spirits producers are likely to experience a minimal impact on sales from the new tax structure, despite a higher incremental tax due to the higher alcohol content of spirits. Thailand's local spirits market has few players, with the largest, Thai Beverage Public Company Limited (BBB/AA+(tha)/Stable), occupying a 90% market share by sales volume. Limited competition together with inelastic demand for spirits should support the operating performance of spirits producers over the medium term. Producers with a wide range of products in terms of alcohol content or price would be able to provide customers with a variety to match their purchasing power.

Spirits sales volume, represented by the sales volume of the dominant player, has been fairly stable, despite several tax rises, with a CAGR of 2% per annum over 2006-2016. The 10-year CAGR of net revenue (excluding excise tax) from spirits has been higher, 6% a year over the same period, reflecting producer ability to raise prices without hurting demand.

The non-alcoholic beverage market's high degree of product variety, product substitution, and competition limit producers' ability to pass on cost increases to consumers. The impact of the additional levy on those producers should be high once the tax scheme is fully implemented, likely in late-2019. However, during the two-year grace period, producers could minimise the tax-cost increase by complying with the government's policy to reduce the sugar content of the drinks or use sugar substitutes. These could incur product development and marketing costs that would burden expenses and pressure margins.

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