Som Distilleries & Breweries Ltd is gearing up for major expansion of its business, riding the consumption boom in beer in India with its Woodpecker and Hunter brands.
In keeping with its ambitious targets, the company reported robust 67% year-on-year volume growth in its beer portfolio during the third quarter of FY2024. Total beer sales stood at 44.5 lakh cases, compared to 26.6 lakh cases in Q3 FY2023.
The stellar volume performance was led by the company’s mainstream brands – Hunter, Black Fort and Power Cool. These flagship labels registered 68%, 59% and 57% volume growth respectively over Q3 of last year.
On a 9-month basis, total beer volume was 150.7 lakh cases, higher by 54% compared to the same period last fiscal. Here again, Double Diamond brand Hunter expanded by 21% in terms of volume along with Black Fort and Power Cool which saw 72% and 49% growth respectively.
The strong uptake indicates rising preference for Som’s products across key markets like Madhya Pradesh, Uttar Pradesh, Delhi, Karnataka and Kerala. This has prompted the company to expand its production capacity by 60 lakh cases annually in Karnataka and augment capabilities in Bhopal as well to meet the robust demand scenario.
Target 10%
The Bhopal-based company has set a target to grow its pan-India market share from 5.5-6% currently to 10% over the next 2-3 years.
It is adding new capacity in Karnataka and Bhopal and also entering high potential markets like Tamil Nadu where it has received regulatory approval to supply its beer brands.
Additionally, Som Distilleries aims to drive volume growth through its mainstream brands such as Hunter, Black Fort and Power Cool which registered strong 68%, 59% and 57% volume growth respectively in Q3 FY2024. The company’s premium beer offering, Woodpecker, is also expected to become a flagship millionaire brand within the next few years.
Som Distilleries & Breweries is aiming to establish its premium beer offering – Woodpecker – as a millionaire brand within the next 2-3 years.
Woodpecker is currently sold across 6 states in India including Karnataka, Goa, Maharashtra, Madhya Pradesh, Chhattisgarh and Jharkhand. However, Som Distilleries is now working on driving distribution and visibility of the craft beer label more aggressively nationally.
As per industry terminology, a millionaire brand refers to one that sells over 1 million cases annually. The company believes that on the back of increased brand-building efforts and leveraging food & beverage tie-ups, Woodpecker has the potential to achieve this milestone by FY2026-27.
Apart from modern trade, the company aims to widen Woodpecker’s reach by tapping wine shops, premium retail channels and the hospitality sector. Backed by a balanced bitterness and citrus taste profile, Woodpecker is expected to find appeal amongst millennial and urbane consumers willing to upgrade within the beer category.
If Woodpecker reaches its targeted sales trajectory within the next three fiscal years, it will join Som’s flagship mainstream brands Hunter, Black Fort and Power Cool in the millionaire league – signifying the brand’s successful premiumisation by the company.
Geographical Expansion
The company will also try to expand its geographical footprint.
It has received regulatory approval for supply of its beer brands into Tamil Nadu and will commence seeding operations by end of FY2024.
Som Distilleries aims to establish presence of labels like Hunter, Black Fort and Power Cool across on-trade outlets as well as retail channels over the next 6-12 months in the state.
While Tamil Nadu as a market is still dominated by strong beer brands, Som sees potential to gain share on the back of rising popularity of mild beer. Its mainstream portfolio is well-placed to tap youth-centric consumption in urban centres along with tier-2 regions. Som Distilleries will also leverage local events and activations to drive trials for its products.
Earlier, the company had successfully entered states like Uttar Pradesh, Delhi, Jharkhand and Rajasthan where its brands have found good traction. Similarly, by entering Tamil Nadu it aims to strengthen market share in the southern flank and reduce seasonal risk associated with summer-centric demand in the northern plains.
Capacity Expansion
On the capacity front, Som’s additional capacity in Karnataka will allow it to cater to the new market without hampering supply to existing regions. The move aligns with its aim to achieve 10% national market share in the Indian beer industry within the next 2-3 years.
The company is adding 60 lakh cases of annual capacity in Karnataka, where its brands have gained significant traction. Additionally, it is also expanding capabilities at its Bhopal, Madhya Pradesh plant by installing new packaging lines.
The total investment for the capacity enhancement is estimated to be around Rs 60-65 crores. The additional output is expected to come onstream before the peak summer season, allowing Som Distilleries to capitalize on seasonally strong demand.
The move comes on the back of a 67% volume growth delivered in Q3FY24, with total beer sales volume at 44.5 lakh cases. Mainstream labels Hunter, Black Fort and Power Cool registered 68%, 59% and 57% volume growth respectively during the quarter.
With the new capacity, Som Distilleries aims to drive growth in existing strongholds like Karnataka and Kerala while also entering new markets such as Tamil Nadu. Easing of supply pressures can allow it to service these geographies optimally.
Along with increased production firepower, Som Distilleries is targeting to expand its pan-India market share from 5.5-6% currently to 10% over the next 2-3 years. Its capacity growth efforts align with the ambitious volume expansion plans.
In addition, the company has entered into a contract manufacturing arrangement for Indian Made Foreign Liquor (IMFL) in the state of Jammu & Kashmir.
As per the deal, Som will manufacture IMFL brands owned by third parties at its production facilities on a contract basis. The company is already present in the IMFL category through its own brands which contribute nearly 10% to overall revenues currently.
The strategic intent behind contract manufacturing is to optimize the capacity utilization of Som’s IMFL bottling lines when its own brand volumes are lower. Additionally, entering such partnerships helps lower the working capital requirement as well.
From a geographical perspective, the focus on J&K allows Som Distilleries to save on transportation and logistics costs which can be significant for breakage-prone glass bottled IMFL. This can aid in improving margins and deepening presence in the northern state.
While IMFL contract manufacturing is still at a nascent stage, the segment holds strong growth potential for players like Som Distilleries. With pan-India supply chain infrastructure and long-standing regulatory rapport across states, Som is well-positioned to capitalize on this opportunity.
Profitability
The beverages segment has been hit in recent months by rising raw material costs.
Som Distilleries & Breweries, however, remains confident of maintaining a healthy 12-13% EBITDA margin going forward, despite higher glass bottle packaging costs weighing on profitability.
The company’s management highlighted that gross margins have dropped from earlier peak levels due to greater share of new glass bottles in total packaging. As Som registers strong volume growth across regions, dependence on fresh bottles supplied by manufacturers increases.
However, with current gross margin position stabilizing around 35% levels, the company sees scope for operating margins to sustain at 12-13% level. This indicates that despite input cost pressure, Som Distilleries has been able to drive cost efficiency in other operating areas.
Moreover, as the overall sales mix shifts more towards premium offerings, it will offset some of the impact of higher packaging material costs. Brands which deliver better realizations will aid in protecting operating margins.
Som Distilleries also highlighted that with significant capacity expansion coming on-stream, fixed costs are expected to become optimal. Better capacity utilization across locations can result in operating leverage benefits.
The company’s strong volume outlook and cost optimization efforts across key expense buckets will help Som Distilleries report industry-leading EBITDA margins, despite short term fluctuation in commodity prices.