Pernod Ricard, Allied Blenders results improve at USL’s expense
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Bengaluru: Results of two of the top three liquor firms—Pernod Ricard India Pvt. Ltd and Allied Blenders and Distillers Pvt. Ltd—improved significantly last year, thanks to the large market share gains they made at the expense of larger rival United Spirits Ltd in a year when liquor demand grew at its weakest in a decade.
Growth in liquor demand slumped to less than 5% in the past two years because of weak economic growth, following a decade when a strong economy and rising incomes led to consistent volume increases of more than 10%.
In the past two years, India’s liquor market changed from being a growth market to one where grabbing market share from rivals became crucial; in such a scenario, United Spirits, used to benefiting most from market expansion in its position as the leader, lost out to rivals.
Gross sales at Pernod Ricard, owner of Royal Stag and Blenders Pride whiskies, jumped 19% to Rs.7,216 crore and its net profit rose 18% to Rs.810.3 crore for the year ended March, according to documents with the Registrar of Companies (RoC).
Allied Blenders, maker of Officer’s Choice whisky, reported an increase of roughly 27% to Rs.1,504.9 crore in revenue and its profit soared by more than three times to Rs.28.7 crore last fiscal, RoC documents show.
Diageo Plc-controlled United Spirits, which is investigating its past accounting practices and senior executives for suspected financial irregularities, reported a rise of just 1% in sales to Rs.10,615 crore while it reported its biggest-ever loss of Rs.4,488.7 crore because of one-time writedowns last year.
Both Pernod Ricard and Allied Blenders have grown significantly faster than United Spirits in three of the past four years, documents with the RoC show. Their market share gains have continued into this year, with Pernod Ricard registering volume growth of more than 15% and Allied Blenders reporting an increase in volumes of roughly 30%, according to several executives at liquor companies.
Pernod’s three high-margin whisky brands—Blenders Pride, Royal Stag and Imperial Blue—have all posted consistent volume gains, while Allied Blenders’ Officer’s Choice has hammered rival Bagpiper, made by United Spirits, in several markets over the past four years. New, higher-priced labels such as Officer’s Choice Blue and Officer’s Choice Black also helped boost growth at Allied Blenders.
“We have been investing consistently behind our brands and our new brands, particularly Officer’s Choice Blue, has exceeded our expectations,” said Deepak Roy, chief executive officer (CEO) at Allied Blenders. “With the expected pick-up in the economy next year, our high growth should continue.”
United Spirits, however, has struggled to show consistency in expanding sales of its higher-priced brands despite trying to move sales toward premium products. Apart from its McDowell’s No.1, Royal Challenge and Antiquity whiskies and McDowell’s rum labels, no other large brand has shown consistently high growth rates over the past four years. Bagpiper’s, which was the single largest selling brand in India until 2012, does not even figure in the top five now; brands such as Signature and Director’s Special Black whiskies have grown well in some years and lost steam in others, according to data with International Wine and Spirits Research, a research outfit.
United Spirits also had to cut prices of McDowell’s and Royal Challenge whiskies in the last financial year to sustain their growth.
In the September quarter, the company posted an increase in sales volume of 5.8%, its strongest in at least 18 months. It is also starting to increase consumer-facing marketing spend on brands such as Black Dog and Signature.
Even so, United Spirits continues to lag sales growth at rivals by a significant margin and with the company still struggling to deal with legacy issues related to its Indian promoter, a reversal of market share losses looks tough for now, analysts said.
“USL (United Spirits) hasn’t been able to cope with a new market reality where the growth comes from stealing share rather than market expansion,” said Santosh Kanekar, a former marketing head at Diageo India, and who now advises funds on investing in India. “Pernod, which was actually always focused on increasing the market rather than competing with USL, has learnt how to play the market share game...ABD (Allied Blenders) had always aimed to take on USL and they have been big gainers.”
After Diageo bought a controlling 25.02% stake in United Spirits in July 2013, analysts predicted a dramatic turnaround in sales and margin growth at the Bengaluru-based company.
That hasn’t happened so far.
United Spirits did not respond to an email seeking comment for this story.
Diageo, which now owns nearly 55% in United Spirits after buying an additional 26% of the company’s shares from public shareholders for £1.11 billion in July, appointed Anand Kripalu as the new CEO at United Spirits this year.
But rather than focusing on battling rivals, United Spirits has been trying to clean up its books, deal with legacy issues and improve corporate governance. Last week, its public shareholders shot down proposals to approve nine-related party transactions with Vijay Mallya’s UB Group. The company is also investigating its past accounting practices and the role of its senior management in allegedly striking illegal deals with vendors, among other things.
“If the economy improves, then Pernod and ABD will still be in a much better place to take advantage of it than USL. It’s not as if Pernod and ABD spend particularly more on marketing than USL. They do invest in building brands, but clearly they are also doing sales and distribution much better than USL. So unless USL makes drastic changes at its sales processes and invests heavily in marketing, I don’t see how they are going to be able to turn around,” Kanekar said.