Whisky sales in India rocket 15% in 5 years

India’s pent-up demand for imported whisky, particularly Scotch, remains as strong as ever, reports Tom Bruce-Gardyne, despite the high taxes and the ever-present threat of prohibition.

*This article was first published in the November 2016 edition of The Spirits Business

India’s passion for whisky shows no sign of cooling, with sales growing 15% in the past five years to 189 million cases, according to the IWSR. That represents just over 60% of the country’s total spirits market, while vodka and gin combined account for just 2.5%. Most of the whisky is what is known as “Indian-made foreign liquor” (IMFL), a term that covers any “non- traditional” locally made spirit and is produced from molasses.

Within this vast lake of Indian whisky sits a comparatively tiny island of Scotch. Of the 90% that is shipped in bulk, some becomes bottled-in-India Scotch whisky like Teacher’s, while most is dribbled into Indian blends for added cachet. The Scotch Whisky Association (SWA) reckons the category accounts for just 1% of the Indian spirits market, and yet as a country India is the third biggest importer of Scotch by volume. It now ranks ninth in value, having risen 28% to £42.6m in the first half of this year, versus the same period in 2015.

Shipment figures “bounce around a bit,” says David Frost, the SWA’s former chief executive (see page 8). “But what we hear from people in the market is that the underlying rate of growth is around 10% year-on-year, maybe a bit higher, and that’s pretty good when you consider all the barriers there are.”

First among these is the notorious 152% tariff on imported spirits, which the UK will now have to negotiate without its EU partners after the Brexit vote. “Yes, the cost of entry to India is very high,” says Sandeep Arora, a whisky ambassador who runs Spiritual Luxury Living, a spirits management company. Having paid the tariff as an entry ticket, brands are then battered by local taxes and state levies, such as the annual registration fee. In New Delhi, this fee equates to £900 per label, according to Arora, which makes the owners of the niche single malts he handles think twice before heading to India. In his view there may be some respite on the international tariff before too long, but he does not expect much change at a local level.

The dark cloud of prohibition

Despite the abject failure of US Prohibition, the issue refuses to die in India, where the northern state of Bihar is the latest to ban the demon drink under its chief minister Nitish Kumar (although this is being contested in the courts). Three years ago Kumar persuaded Carlsberg to build a new US$25m brewery near the state capital, Patna. “It was a sizeable investment, but they decided to do prohibition in 12 hours,” the chief executive of Carlsberg India, Michael Jensen, told the Economic Times. “You can’t do stuff like that,” he complained. In India, it seems you can.

Kumar’s opposite number in Tamil Nadu is also touting the idea of going dry, while the southern state of Kerala introduced a phased ban in 2014, though arguably without much effect. So far, prohibition is enforced in Gujarat, Nagaland and the union territories of Lakshadweep. However ‘enforced’ is probably overstating things in Gujarat where, with the right contacts, you can get booze delivered faster than a pizza, or so it is claimed. Allegedly it is the state with the highest per capita consumption of whisky, and few believe prohibition will ever be repealed there because of all the money and reputations tied up in smuggling. While prohibition appeals to many women voters in a country where 70% claim not to drink alcohol regularly, the real question is how many states could afford to go dry?

“I think the industry has to be really concerned if this happens anywhere,” says David Pattison, Edrington’s commercial director for India, South East Asia and Japan. However, he goes on to say: “The liquor industry is often probably the second biggest revenue earner in each state. Haryana is a good example of a state that imposed prohibition in 1996. The end result was a massive drop in revenue and a huge loss of jobs, and the ban was lifted two years later.” So for all the pain of paying those endless local taxes, they may represent the industry’s best safeguard against India ever repeating America’s ‘noble experiment’.

Meanwhile Uttar Pradesh recently slashed its booze tax by 20%, so one should not generalise about this vast and often contradictory country. “Whatever you say about India, the opposite can exist,” says Vidyut Arte, MD of Beam Suntory India, who describes it as “among the most attractive, stable emerging markets for any spirits manufacturer”. Indian consumers are clearly trading up, with Scotch growing at 2.5 times the rate of the total whisky category. Arte says: “The migration from premium IMFL to imported whiskies will perhaps accelerate over time.”

Whether some future tax cut will cause demand to explode, he is not sure. Affordable aspiration’
For now one wonders if there is something counter-intuitive going on, whereby the taxes pump up the prices, making imported brands even more desirable. Yet Arte talks of “affordable aspiration”, and most Indians simply cannot afford a bottle of Teacher’s at 1,600 rupees (about US$24). Cutty Sark costs the same since Edrington went for local bottling, saving 25% on the bottled-in- Scotland price and at no loss of status, according to Pattison. Its stablemate The Macallan was recently re-launched in India with what he calls “a very-targeted strategy focused on five or six top cities. I guess our overarching strategy in India is to slowly build quality distribution”.

Meanwhile, John Distilleries has released its Paul John Indian single malt here after its UK launch in 2012. Matured for at least six years, it enjoys significant tax advantages according to the company’s founder, Paul John. With its relative bargain price of 2,800 to 3,500 rupees (US$42-$53) compared to Scotch single malts, he predicts it will eventually become the market leader. His Original Choice blend comes in at number six in a top 10 dominated by Diageo’s United Spirits (USL) and Pernod Ricard, whose Blender’s Pride, Royal Stag and Imperial Blue sell more than 40m cases.

Diageo gained control of USL in 2014 and for more than a year “nothing happened”, Edelweiss analyst Abneesh Roy told the Economic Times. “It was a complete mess financially and they were just trying to understand the company.” In the four years to March 2015, USL’s net worth slumped by 84%, but its recovery is well under way now that former chairman Vijay Mallya has left the building. The erstwhile ‘king of good times’ fled for the UK this spring, armed with a US$75m sweetheart deal from Diageo. The Indian authorities are seeking his extradition as a ‘wilful defaulter’ over, among other affairs, the collapse of the airline he founded, Kingfisher.

“India will be a real difference maker in the shape of Diageo over the next decade,” said the firm’s Indian-born CEO, Ivan Menezes, after it reported a 6% jump in its latest half-year net sales in India. The plan is to streamline the 150 brands and focus on beating Pernod in the prestige-and- above whisky category. “That is the main battleground, the real profit pool, where historically USL has underperformed its key competitor,” Menezes says. Amrit Thomas, USL’s chief marketing officer, says the company is also aiming to achieve 20% of its sales from NPDs, such as the recently launched Silk, a honey-flavoured whisky.

Beyond Scotch

Brown-Forman’s head of marketing for the region, Vineet Agrawal, says: “Well-travelled Indian millennial consumers are not very different from their counterparts across this digitally connected world.” Jack Daniel’s is the obvious market leader in a category that claims a CAGR of over 14% in the past decade in India, albeit off a low base. It has been a busy year for Jack: 2016 marks the 150th anniversary of the distillery, and the brand has celebrated with a number of special releases in travel retail and “Jack Daniel’s barrel hunts” in Delhi, Mumbai and Bangalore.

Locally bottled Jim Beam is also doing well, though sales are still “relatively small” says Vidyut Arte, who talks of “a propensity among millennials to engage and experiment with Bourbon, particularly Jim Beam”. He sees “a significant future for the brand in India”. Beam Suntory has not gone down the IMFL route of Diageo and Pernod, and Arte is keen to explore all the sub- categories of imported whisky.

While younger consumers are more open to trying American whiskeys, he feels Scotch brands that have stayed contemporary and youthful will keep growing. Beyond whisk(e)y, Beam is also having some success with Tequila in India, but “at this point in time”, Arte says, “we can’t see much evidence of white spirits becoming the future”.