United Spirits sales hit by India prohibition

23rd January, 2017 by Kristiane Sherry

Diageo-controlled Indian drinks group United Spirits saw Q3 sales growth slow to 3%, with its ‘popular’ segment collapsing 6% due to the impact of prohibition in the Bihar state.

McDowell’s maker United Spirits has seen the impact of prohibition in India in its financial results

Sales for the nine months to 31 December climbed 6% to Rs. 6,583 crore (about US$966.5 million), with gross profit up 10% to Rs. 2,823 crore (US$414.5m).

While the ‘prestige and above’ sector climbed 12% in the quarter and 16% for the nine-month period, year-to-date sales were pegged back to 6% as the impact of local government-backed prohibition began to bite.

Bihar, India’s third most populous state, completely banned the sale and consumption of alcohol in April 2016, despite a legal challenge claiming the legislation was “unconstitutional”.

Despite the declines, third quarter profit after tax climbed 296% to Rs. 148 crore (US$21.7m), boosting nine-month profit to Rs. 274 crore (US$40.2m), an increase of 129%.

“We have delivered a strong net sales growth of 6% despite the subdued economic environment in the third quarter due to de-monetization,” said Anand Kripalu, United Spirits CEO.

“Although our third quarter net sales growth of 3% has been directly impacted by de-monetization, I am pleased that we have been able to manage through this period better than our initial expectations. This growth was underpinned by our continued focus on premiumisation, increased investments behind our power brands and our selective participation in popular [segment].”

He added that the company continues to face “challenges in the regulatory environment in certain states”, referencing tax and excise changes, in addition to the supreme court judgement on the sale of liquor near highways, which “remains a risk”.

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The company also used its financial statement to announce it is to enter into franchise agreements for some of its popular segment brands in Andhra Pradesh, Union Territory of Puducherry, Goa, and the Union Territory of Andaman and Nicobar.

In addition, it has moved to a complete franchise agreement for all USL brands in Kerala.

Franchise owners will be responsible for the manufacturing and distribution of the brands on payment of an annual royalty fee, which will be accounted for in United Spirits’ net sales.

According to the company, the brands to be franchised accrued Rs. 480 crores (US$70.4m) net sales last year, equating to 7.4 million case sales.

“These changes were made to further improve our operating model and focus our business on the biggest growth opportunities,” Kripalu added.

The 2016/17 financial year is the first following the resignation of chairman Vijay Mallya after Diageo agreed to pay the tycoon US$75m.

Earlier this month, Diageo declined to respond to comment on reports that it is considering increasing its majority stake in United Spirits.

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