India – still not the promised land

Author: Jeremy Cunnington

Date published: 15 Oct 2007

Strong forecast spirits growth on the back of greater prosperity and the reduction of import taxes, makes India an attractive proposition to many international players. Yet many obstacles lie in the way of fulfilling India's potential. Euromonitor looks at these and which companies could be best placed to exploit any premium potential.

Great potential

Euromonitor International predicts that rum and brandy are expected to grow strongly between 2006 and 2011, up 34% and 25%, or 6.5 and 3.6 million cases respectively. Gin and vodka are expected to grow by over 1.7 million litres each and blended and single malt Scotches will grow by 280,000 and 4,000 cases respectively.

This, combined with rapid growth in disposable income, offers opportunities in volume and value sales. Growth will be particularly strong amongst the economic elite, classified by Euromonitor International as those who have been educated to at least undergraduate level. Between 2006 and 2011 this section of the population is expected to see its average income increase by 50% to just under US$1,100 in 2011 and its numbers by 20% to over 42 million people.

Difficulties in selling alcoholic drinks in India

The regulatory framework for the alcoholic drinks market in India is highly complex. This is largely due to both central and the state governments issue licences for production units, but it is the state government that administers duty rates and excise, as well as retailing legislation. A plethora of tax rates, rules and regulations may exist in one state but be completely different in another, the extreme being that some states, such as Gujarat, prohibit the sale or production of alcoholic drinks altogether. Such complexity and high costs mean black market sales are significant.

The complexity facing spirits companies entering the country can be seen in the variety of different distribution methods. There are three types of markets in the states that permit the sale of liquor: open, auction and government-controlled. Open markets (eg Mahasashtra) are where companies are permitted to appoint their own distributors. In auction markets (eg Punjab), governments auction off the wholesale and retail shops at the beginning of each financial year. The state fixes the reserve price and the auction winners establish their own retail network and sourcing from manufacturers. For government-controlled distribution (southern Indian states), wholesale distribution is implemented by the particular state body, with consumer price decided upon by the state.

Sales in the off-trade, which accounts for nearly 80% of spirits volumes sold in 2006, are generally restricted to specialist retailers although some states such as Delhi and Rajasthan allow sales in supermarkets. Across India, on-trade channels are crippled by the red tape that has to be endured before permission is obtained to open such an establishment. The licence fees that need to be paid by pubs and bars to operate are also considered very high.

National problems

In addition, the advertising of alcoholic products is expressly banned in India. No broadcaster is permitted to show advertisements which promote, either directly or indirectly, the sale or consumption of tobacco products, wine, liquor or other intoxicants. However, companies can get around this by event sponsorship and producing branded sales promotional materials or launching soft drink variants of the alcoholic drinks product.

If the myriad of restrictions and regulations were not difficult enough, any company doing business in India has to deal with the country's weak infrastructure. This can clearly be seen in its road transport. Between 1997 and 2004 (latest provisional figures) the number of vehicles rose by 95% to 72.7 million. In contrast, the National Highways network (main arterial roads) grew by 90% to 65,600 km between 1997 and 2007. Not only is road development not keeping pace, many of the existing National Highways are in a poor state of repair and not wide enough, with the majority of the them no wider than two lanes.

Local giant best positioned

This means the spirits companies with the widest geographic spread across the country are those best able to cope with the conditions and exploit the growth in India. UB Group's spirits division United Spirits is undoubtedly one of these. In 2006 the company had around 70 distilleries in India, although many of them were contract distilleries. Despite its plans to rationalise its contract distilleries the company's unrivalled spread of production and bottling facilities in the country leave it best placed with its product portfolio to exploit volume growth.

Radico Khaitan, the country's next biggest distiller, is not so well placed. Despite having four offices for the various zones and six regional offices spread across the country, with the exception of its plant in Andhra Pradesh, its facilities are all located in North India, a region from which it has traditionally derived the bulk of its volume. For the rest of the country Radico Khaitan uses third party bottlers. In 2006, North India accounted for only around 25% of the country's spirits volumes and while its plant in Andhra Pradesh gives it some access to the country's biggest spirit region, South India (36% of India's volume sales), it has difficulty exploiting the other regions due to its weaker presence there.

Pernod Ricard is the only international company to have a major presence in India, and was the third biggest spirits producer by volume in 2005. Unlike other companies such as Diageo, Pernod Ricard did not withdraw from the Indian Made Foreign Liquor (IMFL) sector in the early part of the century. Owning its own manufacturing and distribution network has allowed it to become the third biggest spirits company in India. Pernod's Indian operation has four regional offices and 14 manufacturing locations. The company's strength is in the North and West regions and its weak point is the South.

Bacardi, like Pernod Ricard, has its own presence in the country through a joint venture with small player Gemini Distilleries, in which it owns a 74% stake. Bacardi's operations in the country are small, especially since it sold its Whytehall IMFL business in 2004 to its minority partner Radico Khaitan. Since then it has focused on selling its international brands in the country and has a limited presence there with only one manufacturing facility near Mysore in South India.

Of the other international companies, only Fortune Brands has a production facility in India following its acquisition of Allied Domecq's bottling operations in Rajasthan in North India, but like Bacardi its presence is relatively weak. Other international spirits companies have a purely import operation in India and rely on third party distributors. These companies include Diageo, Brown-Forman and William Grant & Sons. Edrington Group, in the meantime, is searching for a new distributor, following the ending of its agreement with Radico Khaitan in 2007.

Diageo's joint venture with Radico Khaitan to produce and market premium IMFL products should allow the company a good route to market and bring in new consumers for its premium international brands by enticing Indian consumers with lower-priced IMFL and persuading them to trade up. To exploit strong volume sales in South and West India in particular, the joint venture should look to expand its production and distribution facilities in those regions. In both these regions blended Scotch, gin and vodka, and in South India, rum, are all expected to see stronger growth than in North India.

Rewards still to be had

Despite hurdles to overcome India's long-term growth prospects still represent a real opportunity, and although domestic manufacturer United Spirits has a significant advantage, it is not a market international companies can afford to ignore. Of the international players Pernod Ricard is currently best placed with its presence in IMFL, but having rejoined IMFL Diageo has set out its stall, a move others such as Fortune Brands would do well to follow.

Alcoholic Drinks