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Higher VAT squeezes
May, 05th 2010

For a change, soft drink and ice-cream makers are feeling the heat this summer. Higher value-added tax (VAT) rates and raw material costs have hit the margins even as sales failed to match the rising temperature, partly because prolonged power cuts discourage retailers from stocking ice-cream.

"Sales are not growing in sync with the temperatures," said Kapil Agarwal, CEO of Cream Bell ice-cream.

So, instead of sitting back and enjoying record sales as North India suffered the hottest April in 52 years, makers of ice-creams and soft drinks are out in the scorching sun, lobbying for VAT rollbacks or blaming power cuts.

"We havent seen any incremental sales over last year. Bottomlines are bleeding," said CK Jaipuria who controls Delhis franchisee bottling operations for beverage maker PepsiCo. "Besides, we cant pay VAT and also keep retailer margins intact at the same time," he added.

Delhi, one of the key summer markets, recently increased VAT on soft drinks from 12.5% to 20%. This has squeezed the margins of PepsiCo and Coca-Cola, which were already under pressure due to high sugar prices.

Soft drink makers have increased prices by more than 20% earlier this year and they dont want to do it again for fear of impacting demand, which has been growing at 20-30%.

They are now trying to persuade the state government to roll back the VAT hike.

The hike (in VAT) is substantial and would force manufacturers to pass on the entire burden to consumers, the Indian soft drinks manufacturers association said in a letter to Delhi chief minister Shiela Dixit.

Ice-cream companies, meanwhile, are battling another problem: melting sales.

Prolonged power cuts in most states have resulted in retailers refusing to keep ice-cream stocks. This has hit their sales.

Volumes are not growing as per expectations because in key markets like Uttar Pradesh and Rajasthan, retailers are not stocking ice-cream due to lack of electricity, said Mr Agarwal of Cream Bell. Once the ice-cream melts its no use for either the retailer or consumer.

RS Sodhi, chief GM at Gujarat Cooperative Milk Marketing Federation (GCMMF), which makes Amul said there has been no drop in sales of ice-cream, but added that the month of April hasnt seen many marriages for lack of auspicious days which has dented demand.

Since catering in marriages is a big business for ice-creams, it has impacted ice-cream sales to some extent. But we hope demand will pick up in the next two months, he said.

The only silver lining for ice-cream and cola makers is that sugar prices have softened. But here too, they may have burnt their fingers. We imported sugar when domestic prices were at an all-time high but now they have fallen so its cheaper to buy locally, Mr Jaipuria said.

Meanwhile, higher VAT in Delhi has made many distributors buy their products from neighbouring states. This is similar to what happens in grey markets.

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