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Business News/ Industry / Liquor volume growth falls to slowest in a decade
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Liquor volume growth falls to slowest in a decade

Growth falls sharply for third year in a row so far this year to 2%; USL losing market share to rival firms

India’s liquor market, at least for now, has changed from being a growth market to one where grabbing market share from rivals has become crucial, experts and analysts say. Photo: Ramesh Pathania/MintPremium
India’s liquor market, at least for now, has changed from being a growth market to one where grabbing market share from rivals has become crucial, experts and analysts say. Photo: Ramesh Pathania/Mint

Bangalore/Mumbai: For India’s liquor companies, the current decade hasn’t been kind.

Strong economic growth and rising incomes spurred liquor demand for a large part of the 2000s, with distillers enjoying volume growth of over 10% every year.

But as the Indian economy slowed and state governments increased duties on alcohol to generate more revenues, liquor volume growth has fallen sharply for the third year in a row so far this year, even as rising costs of extra neutral alcohol (ENA), a key ingredient, dent margins.

In the six months ended 30 September, liquor volume growth dropped to its lowest in a decade to less than 2%, according to data obtained from industry executives.

India’s liquor market, at least for now, has changed from being a growth market to one where grabbing market share from rivals has become crucial, experts and analysts said.

“Liquor companies have been taken by surprise—they are just not used to single-digit volume growth. And it looks like most companies still haven’t adjusted to this new reality," said Santosh Kanekar, a former marketing head at Diageo Plc’s Indian unit, and who now advises funds on investing in India.

“A substantial number of players are having their internal issues such as high debt levels and the distraction of M&A (merger and acquisition) talks. The players which are focused on expanding the consumer franchise and have few internal issues will do well. And right now it looks like only one or two companies are managing that," Kanekar said.

So far this year, Kishore Chhabria-promoted Allied Blenders and Distillers Pvt. Ltd, Tilaknagar Industries Ltd, French distiller Pernod Ricard and Radico Khaitan Ltd have all taken market share from United Spirits Ltd (USL), according to data collected from industry executives.

Volumes at Allied Blenders and Tilaknagar Industries increased more than 20% in the six months to September, according to the data. Pernod Ricard’s volumes rose more than 12%, and Radico has grown 5-7%, though the growth is lower than last year at both companies. USL’s volumes crept up by less than 1%, the data showed.

Industry executives said USL’s integration process with Diageo was giving rivals an opportunity to take market share from the Bangalore-based distiller, which controls over half of India’s liquor market.

Diageo, the world’s largest liquor firm, completed its purchase of a 25.02% stake in USL in July from the company and promoter Vijay Mallya, after the deal was first announced in November.

The UK-based distiller, which also has its own company in India, has made compliance and cost-cutting the top-most priorities at USL, and that contributed to the drop in volumes, said a person with direct knowledge of the matter.

Diageo has appointed a head of legal compliance in every region and these heads are closely monitoring how USL executives spend money allocated for marketing, especially on gifts and entertainment for clients, this person said, declining to be identified.

Diageo has asked USL to cut spending on promotions and commissions to wholesalers, and to focus more on generating consumer demand, the person said.

Liquor companies in India sell their brands to wholesalers, who then push these products to retailers. Maintaining good relationships with wholesalers, which are government-owned organizations in many states, is key in the liquor industry.

“When the largest player is cutting commercial spend, it creates an opportunity for others to get more aggressive. Earlier, USL relied a lot on wholesale spending to drive volumes. Now they don’t have that lever, so a short-term volume impact is likely," Kanekar said.

Among USL’s major brands, Antiquity, McDowell’s No.1 and Royal Challenge whiskey and Celebration rum reported volume growth of 15-25% in the first half of the year, according to the data cited above. But its Signature whiskey brand saw growth slowing, and Bagpiper and DSP Black whiskey and White Mischief vodka reported declining volumes.

“The integration process (with Diageo) is giving others a chance to make inroads into their territory because it will take them time to understand and implement the strategy and operational changes that Diageo wants. Although that advantage will taper off over time," said Deepak Roy, chief executive at Allied Blenders. “What has helped us is that over the past five-six years, we have consistently invested in marketing and building our brand, however good or bad market conditions are. We’ve been consistent with our brand positioning and it’s paying off even when the industry is struggling."

USL did not respond to an email seeking comment.

The sustained weakness in liquor demand and the pressure on margins due to rising ENA costs may force distillers to sell or close under-performing brands and look for M&As, experts said.

USL has more than 25 brands across its portfolio, Tilaknagar has more than 20 brands, and Radico 16. In comparison, Pernod Ricard, the most profitable liquor company in India, sells just three major whiskey labels—Royal Stag, Seagram’s Imperial Blue, Blender’s Pride—and 100 Pipers scotch.

“You need to have a rationalized portfolio. Whatever be the seduction of having volumes, it creates enormous pressure on manufacturing, supply chain and wholesale system to push the brands," Kanekar said.

At least three liquor firms are currently in talks to sell stake.

Allied Blenders is in talks with at least three private equity firms for selling a minority stake and may announce a deal in about a month, two persons familiar with the matter said, both requesting anonymity.

Tilaknagar Industries is in discussions with several investment firms to sell stake, the persons said. The firm was also approached by Allied Blenders for a merger, but the companies have for now stopped discussions and a merger looks unlikely, one of them said.

The Times of India newspaper had reported last week, citing unidentified sources, that Chhabria, who owns 95% of Allied Blenders, has bought 50% of the Mansion House brandy label. Tilaknagar and Dutch liquor firm Herman Jansen have been fighting a legal battle over the ownership of Mansion House. Herman Jansen did not respond to an email seeking comment. Allied Blenders and Tilaknagar declined to comment.

Radico, which said on 21 October that it would hive off its Indian-branded alcohol business into a separate company, is in discussions with Japanese liquor maker Suntory Holdings Ltd and may sell up to 50% of the new company, a third person familiar with the matter said, also declining to be named.

Radico did not respond to questions seeking comment. Suntory could not be reached for comment.

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Published: 04 Nov 2013, 11:33 PM IST
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