According to Interfax, the government plans to restrict the retail distribution of alcohol to entities with over 50% state ownership. We assess the probability of the legislative initiative being introduced and estimate its potential impact on Russian food retailers and spirits producers.
Excise tax collections are becoming a ‘big deal’ for the state budget. In its attempt to curb excessive alcohol consumption, the government has adopted a spirits excise tax increase of 120% in 2011-14F. We estimate incremental tax collections from spirits sales at RUB 229bn, bringing its share in total budget revenues from 0.4% to 1.5%.
The need for new budget revenue sources is a convincing idea for lobbyists pushing the state monopoly. We argue that it would take minimal time and capex to establish a monopoly retail chain based on existing private retail outlets and possibly (but not necessarily) motivate retailers to join partnership as minority shareholders.
Retailers could be hit in the short term, but benefit in the long term. As alcohol revenues would be generated at the gross margin for wholesale and not fully offset by lower wage and rent costs, we see EBITDA margins dropping 20bp. The law would accelerate the consolidation of modern trade in the long term, making it possible to compensate for part of the profitability compression.