USL for franchise-based fixed fee model in popular liquor brands
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In a bid to focus on the more expensive blends in its portfolio, liquor maker United Spirits Ltd said on Monday it will franchise out some brands from its popular business segment in some states starting this month.
The idea is to maintain gross margins from popular brands such as Bagpiper, Director’s Special and Haywards whiskies and McDowell’s No 1 rum while throwing more weight behind the ‘prestige and above’ business that now accounts for about 60% of net sales, USL chief executive officer Anand Kripalu said in a call with analysts on Monday.
Key brands under its ‘prestige and above’ segment include McDowell’s No 1, Signature, Royal Challenge and Antiquity Blue whiskies.
“We are about a third of the way through this journey and over the next 6-9 months we will get to the destination that we want to get to. What is really important to us is we are securitizing on a fixed fee basis the franchise margin that we are going to get. And we are trying to securitize within the zone of gross profit that we currently make,” Kripalu said.
Diageo Plc-owned USL is franchising out all of its brands in Kerala and only select brands under its popular segment in other states—such as Andhra Pradesh, Puducherry, Goa and Andaman and Nicobar. Franchisee agreements will last for a period of three to five years and are effective from January 2017.
The strategy is to deploy the model in states where the company anticipates a real constraint on margins or growth opportunity, its executives explained when asked why all of its brands will be sold via franchisees in Kerala.
In such states, the advantage can come from cost and a franchisee will be able to operate at a much lower cost than USL—both in terms of manufacturing and particularly in terms of overheads.
“Moving towards a franchise-based fixed fee model in popular brands will allow better focus on the key strategic area of growth, but could result in lower yields (though the intent remains to achieve similar gross profits),” analysts at Edelweiss Securities wrote in a note to clients.
Volume and net sales from USL's now franchised brands accounted for 7.4 million cases and Rs480 crore in the fiscal year that ended 31 March, 2016. The numbers were 4 million cases and Rs280 crore in the nine months to 31 December. The company expects annualized income from franchisees' royalty fees of Rs100 crore.
"USL remains the best play on India’s liquor industry (in the listed space) by virtue of robust market share and benefits arising from management control of Diageo. Recovery in urban growth will enhance disposable incomes, further aided by GDP revival (Indian-made foreign liquor volumes surge 1.5x GDP when GDP growth revives), low per capita consumption (at 2.2 litre per year per person versus 4.5 world average), favourable demographics (64% population in working age group by 2020 from 50% now) and steady conversion from country liquor to IMFL, of which USL will be a prime beneficiary over the long term," Edelweiss analysts added.
On Saturday, USL reported standalone net profit that grew almost fourfold to Rs147.7 crore in the October-December quarter versus Rs37.23 crore in the same period a year ago.
But on the Monday call with analysts, it highlighted risks that could arise from a Supreme Court ruling banning liquor outlets from operating within a distance of 500 metres of state and national highways in the country from 1 April.
“I don’t have completely clarity on what the impact could be. If liquor stores are going to be closed and moved 500 meters (away) from the highway that’s something that the state governments and the retailers will be wanting to do to protect their own business and states to protect their own revenues. The critical part will be how we manage this transition period so that the ball does not drop during the transition period,” Kripalu said.
USL shares rose just over 6% to Rs2,203.10 on the BSE on a day the benchmark Sensex gained 0.31% to 27,117.34 points.