Can India’s spirit tax issues be resolved?By Chris Mercer
The huge potential of India’s emerging young middle classes is being frustrated by the thorny old issue of excise duty, reports Chris Mercer.
Is there another destination in the known universe that draws such gushing enthusiasm from international distillers, while at the same time remaining so closed to their spirits? Against the odds, India’s stock only rises.
Pernod Ricard’s Paul Scanlon is unequivocal about the place. “It is the most complicated country to deal with in the world,” says the international commercial director of Pernod’s Chivas Brothers whisky and gin business.
Beyond a 150% federal tariff on imported spirits, India’s 28 states have spun a web of regulatory intrigue at the local level. New threads are woven and others cut loose, but progress is often hard to decipher for distillers and consumers alike. “If things work out better for the consumer, that’s just pure luck, I think,” says Delhi-based sommelier Magandeep Singh.
Still, international spirits makers, and domestic ones to a lesser extent, appear content to humour costly bureaucratic whims for a shot at the big time. “There’s going to be 50 million middle class consumers in 10 years’ time, so it’s clearly a big, big opportunity,” Scanlon says.
He cites forecasts that India will have 22m people earning more than US$100,000 by 2022. That figure is 1m today. The number of those earning at least US$60,000 is set to double to 36m over the same period. India is also bursting with yuppies – young urban professionals – with three-quarters of the population still under 35 years of age.
Plenty of them want a drink, too. It seems sensible to assume that fledgling beer and wine consumption will rise, especially given the arrival of more international players, from Gallo to Heineken. Still, spirits consumption was set to near 2.5 billion litres in 2012, up 56% on five years ago. By the end of 2016, it will rise by another 44%, according to Euromonitor International forecasts.
“People want to be seen drinking vodka – it’s about conspicuous consumption,” reports Singh. And bartenders are also pushing the spirit. “At cocktail competitions, nine times out of 10 it will be vodka-based,” he adds.
Volume sales of Radico Khaitan’s Magic Moments vodka brand jumped by a fifth last fiscal year, putting it 25th in Euromonitor’s league table of spirits brands in India. In 2006, it was 57th.
More generally, there is a trend towards premium domestic spirits. Higher-priced Indian Made Foreign Liquor (IMFL) is filling a gap created by the tax slapped on imported brands. Competition is intensifying. Radico Khaitan launched Florence brandy at above INR550 a bottle in 2012, while Tilaknagar Industries unveiled its Mansion House Gold whisky in Andhra Pradesh, priced at INR484.
Even United Spirits, accounting for around 42% of total spirits market volumes and owner of two of the three leading brands, McDowell’s and Bagpiper, acknowledges it must upgrade its collection. Signature Premier, which uses eight-year-old Scotch whisky in its blend, represents an effort to do so, as do Vladivar vodka and Cariba rum.
Pernod Ricard is the international player making the most inroads into IMFL, having secured a solid footing in India following the Seagram acquisition more than a decade ago. Premium line extensions such as Blender’s Pride Reserve Collection and Royal Stag Barrel Select are beefing up Pernod’s portfolio.
Diageo, by contrast, has endured a much rockier journey in India, although its launch of Rowson’s Reserve at up to INR885 a bottle in late 2011 is an effort to up its focus. While Scanlon says premium IMFL has nowhere near the cachet of imports, it does act as a bridge to international brands.
“Big liquor producers and foreign manufacturers are targeting price points that would allow consumers to move up the price ladder,” adds Beam Inc’s MD for India, Harish Moolchandani.
Among the international spirits brands, there is enough success to keep the big distillers salivating, despite a heavy reliance on duty free and hotel bars. Alongside Pernod’s IMFL business, volume sales of Chivas Regal have risen steadily, while top-end Royal Salute has doubled volumes off a small base in the past couple of years. There is also a growing thirst for Scotch single malts, such as The Glenlivet. Diageo is no slouch at this level either. Scotch whiskies such as Johnnie Walker Black Label and VAT 69 drove its India business to a 24% rise in net sales in its last fiscal year, to the end of June.
“Beyond whisky, the two categories that show great potential are vodka and rum,” says Diageo’s newly appointed MD for India, Abanti Sankaranarayanan. “Smirnoff is the leader in the premium vodka segment with over 80% market share,” he adds, citing Nielsen data.
With Captain Morgan, Sankaranarayanan sees “huge potential” to steer young consumers away from India’s fledgling beer market and into rum. “India already has a large but low-value rum category on which we can build,” he says. Captain and cola, it seems, has landed.
Talking of mixed drinks, Beam’s Moolchandani says India’s ready-to-drink spirits market “is growing at 30% year-on-year”, off an estimated 1.2m-1.6m cases. Teacher’s RTD is proving a hit by offering young people “a low-price entry point to taste a premium Scotch brand”, he says.
There are other examples of India developing a deeper and broader spirits palate. “Patrón Tequila is being consumed in trendy lounges and clubs and social events such as weddings, which has traditionally been brown spirits,” says Patrón Spirits’ Greg Cohen.
And we’ve barely mentioned Cognac and brandy, a category set to overtake rum to become the second largest by volume in 2013, according to Euromonitor International. There is less of a clamour for gin, an old favourite among the British Colonial set, but this too can be found in top hotels and restaurants, such as Arola in Mumbai.
Market access remains the disclaimer on all of this excitement, and Scotch whisky provides the clearest example. India is the 20th largest export market by value for Scotch, worth £57.7m in 2011, according to the Scotch Whisky Association (SWA).
Export value has doubled since 2009, but import tariffs mean “only the very upper end of the middle class can consider buying Scotch whisky”, says SWA spokesperson Rosemary Gallagher.
European Commission officials hope to reach a Free Trade Agreement with India in the coming months, but talks have already taken several years. The EU is pushing for “meaningful tariff reductions” on wine and spirits imports, a Commission spokesperson says. “It will help when it comes,” says Chivas Brothers CEO Christian Porta. No-one, though, is pretending an FTA deal will solve all ills. “Even when the FTA is concluded, each state will still control its own alcohol market,” warns Gallagher.
For now, mergers and acquisitions remain the main ways of entering India and crossing state borders. “Consolidation is expected to continue, with companies extending their production capabilities across India,” Radico Khaitan told analysts in August last year. This might sound a little strange coming from a company that only recently confirmed it will end its IMFL joint venture with Diageo.
Nomura analysts believe that the lift to Diageo’s profits in India following its deal to acquire a 53.4% stake in United Spirits could be “enormous”, while also handing the Johnnie Walker maker “the lion’s share of growth of Scotch in India”.
How might Pernod Ricard, which currently garners some 6% of its net sales from India, react to such a deal? “Our business model in India works very well,” is all that the company’s CFO, Gilles Bogaert, will tell sb. Christian Porta adds that organic growth remains the main plan in the country. “We’re happy with what we’ve got,” he says.
Their comments, together with Diageo’s reluctance over recent years to dive under the covers with Dr Mallya, reflect the sub-continent’s position as a long-term bet. A few blueprints will be torn up and redrawn yet, but India continues to captivate.