Is change afoot in India’s spirits market?

With a new government recently voted into power, what does the future hold for the Indian spirits market? Melita Kiely reports

“Good days are coming” for India, but does that include its spirits industry?

*This feature was printed in The Spirits Business November 2014 issue.

India displayed the world’s largest exercise in democracy in May this year when 537 million voters took to polling stations and elected Hindu nationalist group, the Bharatiya Janata Party (BJP), into government.

After the party’s landslide victory, leader Narendra Modi took to Twitter reassuring, “good days are coming” for the people of India. Whether this hopeful promise extends as far as the spirits industry, however, will only be revealed in time. India’s prosperous potential continues to be hindered by the eye-watering 150% tariff on imported spirits, plus further arduous state tariffs and taxes.

While others may be filled with joy at the overturning of the former Nehru-Gandhi dynasty and look to the future with fresh optimism, it seems as though there will be little relief for the spirits sector. “We have absolutely no idea whether the new government has any plans to reduce import tax or keep it the same,” says Rick Jagdale, advocate director of Amrut Distilleries.

“A lot of pressure is being put on the government to reduce taxes on alcohol, but I think it will be quite some time before anything changes – if it changes at all.”

The end for ‘cheap’ dark rum?

It is a frustrating concern that has burdened spirits producers for years and one whose ripple effect is felt around the world. EU-India Free Trade Agreement negotiations began back in 2007, but as of yet, they have come to no avail. And while the emerging market experienced an explosive surge in growth back in 2008, the initial increase is now slowing down and looks set to “normalise” according to Spiros Malandrakis, senior alcoholic drinks analyst for Euromonitor, part of which he attributes to a decline in sales of dark rum – India’s third biggest spirit after whisky and brandy.

“Overall, there has been a massive slow down in the overall growth of spirits in India,” he explains. “The first stages of growth tend to be quite dramatic but after a while they calm down. Consumers now seem to be shifting away from cheap dark rum and seeking more aspirational brands.”

Whisky still remains the country’s biggest selling spirit with 175.7m nine-litre cases sold in 2013, according to figures from the IWSR. Plus despite troublesome taxes, Scotch whisky exports to India reached £36m in the first half of 2014 according to the Scotch Whisky Association (SWA), up a staggering 31% from £27.6m over the same period in 2013. It means India is now the 13th biggest market by value for Scotch, which now sells 32.6m bottles in the country.

“India is becoming an increasingly valuable market for Scotch whisky,” says Rosemary Gallagher, SWA communications manager. “It has reached current levels despite a 150% tariff on imported spirits. We see great potential.”

Brands like ABD’s Officer’s Choice are wising up to the commercial benefits of premiumisation

Seeking trendy and cool drinks

It’s perhaps a sign of how times are changing. For decades, India has been notorious for its love affair with cheap, low-end spirits, but it seems aspirational consumers are becoming inspired and venturing towards better quality products.

According to Sumeet Lamba, executive director of business development at Pernod Ricard India, as disposable incomes increase consumers are opting to shun lower-end cheap dark spirits in favour of premium alternatives. “India’s growing economy has resulted in an increase in consumers’ spending power, leading to an increased demand for premium brands; aspirational brands are doing well in India,” reveals Lamba. “Within the pyramid of local brands the ones at the top of the price ladder have had the highest growth rates, while those at the lowest end have been stagnant.”

But as Paul John, chairman of John Distilleries, laments: “There is still a way for Indian consumers to go.” Most of the population in India is still very young – 55% are below 35-years-old. But with age, John predicts will come greater intrigue in premium products.

In order to entice India’s younger demographic, Beam Suntory recently launched Bottled in India Jim Beam on tap for consumers seeking a “trendy and cool” whiskey that can be enjoyed neat or mixed.

High-end growing faster than rest of market

Teachers continues to be the leading brand in India for the drinks firm within the combined standard and premium sector, surpassing Scotch giants such as Johnnie Walker, 100 Pipers and Black Dog, according to data by AC Nielsen. “The Bourbon category in India is in its nascent yet fast-growing stage,” comments Vidyut Arte, managing director for Beam Suntory India. “The super-premium and premium brands are growing much faster than the rest of the market. Demand for high-end brands such as Laphroaig, Bowmore and Teachers Origin has been huge.”

At the other end of the spectrum, white spirits still account for a much smaller portion of the Indian spirits market. For a while, vodka was growing year-on-year, but demand has decreased and volumes declined 1.8% from 2012 to 2013 (IWSR). Consumers appear uninterested in standard brands, but within the premium sector, Diageo’s Smirnoff Vodka continues to perform well. Just last month, the company launched two ready-to-drink (RTD) expressions, Smirnoff Ice and Smirnoff Black in India.

For the past five years, RTDs have been growing at around 9% year-on-year according to Malandrakis, who explains: “Historically, RTDs have been used as a stepping-stone to increase growth in markets and create an emotional connection with the younger demographic. RTDs right now are booming and in India, they are the stepping-stone to higher end spirits for consumers who are less familiar with the more sophisticated makes of alcoholic drinks.

“They offer things that are much more flexible with sweeter flavours that appeal to the younger, aspirational generation.”

The movement towards premium and super-premium brands in India is most definitely in full swing, and while some producers suggest consumers are “not quite there yet” when it comes to appreciating single malt whiskies, they have certainly managed to whet their appetites for the category. Outside of India preconceptions of the nation’s ability to provide spirits of a high-standard have markedly improved. One need only look at Allied Blender’s & Distillers’ Officer’s Choice, which stole the crown from Johnnie Walker this year to become the world’s biggest-selling whisky.

Indian spirits companies like Amrut are focusing on quality as a priority

A reputation for quality

John Distilleries provides further evidence following the launch of two new single malts in the UK market last year, which have both received “good reviews” according to John. “Consumers are pleasantly surprised that India is able to produce such high quality spirits,” he says. “The response we have had is very encouraging. The international population of consumers is coming to accept that India is capable of producing very good single malts, and in time I think they will also see some very good rum and brandies emerge too.”

However, while many producers such as John Distilleries and Amrut Distilleries are leading the way for high-end products, the SWA is “still concerned” about the quantity of cheap Indian whisky flooding the European market. “The difficulty is that the products are not whisky as defined by the EU,” explains Gallagher. “In Europe and many other countries around the world, the definition of whisky is based on long-standing traditional methods of production. The vast majority of spirit produced and sold in India as ‘whisky’ does not comply with this definition for a variety of reasons, such as not being distilled from cereals or containing flavourings.

“The sale of such products as ‘whisky’, or as a constituent in a ‘whisky’, is illegal and damages the reputation of the whole whisky category in the EU.”

Seeking standards

But with no regulations governing whisky production in India, control over production methods is pretty impossible. It is something producers in India, who feel the full force of its negative effect, would also like to see implemented by the new government. “I would like the government to come out with some standards for alcohol products, not only in terms of whisky, but brandy and rum as well,” John says. “Something has to be done; it would really boost the reputation of Indian spirits both here and globally.”

Looking to the future, while Euromonitor’s trajectories forecast further slow-downs in spirits growth across the board for India, distillers themselves are more optimistic about what lies ahead. Amrut Distilleries claims sales have grown 15% over the past two years and is confident it can sustain double-digit growth next year of between 12-15%. Jagdale reveals plans to launch a super-premium Amrut single malt in the near future, which he believes with the right methods of consumer education, will fill a space in the market.

“We are confident in our company as an artisanal business,” he adds. “Currently, we sell in about 40 different countries and we would like to increase our footprint over the next couple of years.

“For a lot of people still, Indian whisky is something new and different. We just want to show them that it can be really good.”

United Spirits

Diageo is now set to focus heavily on its United Spirits subsidiary

To say 2014 has been a tempestuous year for United Spirits Limited (USL) could be construed as an understatement. Diageo officially confirmed its £1.1 billion offer to acquire a 55% majority shareholding in India’s biggest drinks company back in July this year, thus making India one of the group’s largest markets.

At the time, Euromonitor analysts said the acquisition would give Diageo an “unassailable” position as the world’s largest spirits producer by volume. It meant that combined, USL and Diageo command more than 30% of total global whisky volumes, approximately 17% for rum, nearly 10% for vodka and 15% for gin.

“India has now become one of Diageo’s largest markets and will be a major contributor to our growth ambitions,” declared Ivan Menezes, CEO of Diageo, at the time. “We can now combine that [USL’s] strong platform with Diageo’s strengths to create a compelling future in India for Diageo, USL and the Indian spirits industry.”

But by August, USL had again delayed publishing its full-year sales results for 2013/14 in order to seek “certain clarifications and information on the draft financial results and related issues”. When results finally came out in September, a net loss of some £445m came out of the woodworks, which USL attributed to the large writedown on the sale of its Whyte & Mackay Scotch whisky business, purchased by Philippines-based spirits producer Emperador for £430m. Further question marks loomed over loans equating around £140m issued to its previous parent company UB Holdings, owned by USL chairman Vijay Mallya, resulting in Diageo launching an enquiry into loans paid out by the Indian company.

And if that wasn’t enough turmoil, Mallya faced expulsion as chairman of USL in September after the United Bank of India declared him a “wilful defaulter”, but was reelected as chairman at the beginning of October.

For now, USL remains at the top of the food chain in India, but with debt-ridden Mallya having already yielded a 55% stake to Diageo and investigations into unaccountable loans, it will be interesting to see how long the tycoon can hold on to his empire.