India’s Battle With Booze Isn’t Stopping Johnnie Walker
Indian spirits market predicted to reach $31.8 billion by 2020
Source: Bloomberg
by P R Sanjai and Thomas Buckley
February 22, 2017
India has a love-hate relationship with booze. While the majority of adults are lifetime abstainers, those who enjoy a tipple tend to enjoy it a lot — mostly in spirit form.
That’s made India both the world’s biggest whiskey market and the subject, in some states, of a fresh wave of anti-alcohol laws — in one case, punishable by death. Even as the country prepares to ban liquor sales near major highways to curb drunk driving, Diageo Plc sees opportunities and may be poised to acquire a bigger stake in the country’s top distiller.
Buoyed by prospects for growth, the British maker of Johnnie Walker and McDowell’s whiskeys has made India one of three focus areas for 2017. That may entail Diageo increasing its 55 percent stake in Bengaluru-based United Spirits Ltd., people familiar with the matter said in January. Representative for Diageo and United Spirits declined to comment on whether the London-based company will increase its stake in the distiller.
“The consumer and market justification is already proven” for an increased investment in United Spirits, said Santosh Kanekar, an adviser at BeLive Corp. in Mumbai. The new liquor law will eliminate smaller competitors, and could help the company move consumers into pricier, premium brands, said Kanekar, who was previously director of marketing at Diageo’s Indian unit.
United Spirits shares have gained about 15 percent since the Jan. 17 news, reaching a four-month high of 2,415.5 rupees Tuesday. The stock rose 0.3 percent to 2,405 rupees at the open of Mumbai trading Thursday.
Diageo, with a 38 percent hold on the Indian whiskey market, has been the biggest beneficiary of the country’s growing thirst for the drink. Consumption has expanded an average of 8.9 percent annually the past six years, reaching an estimated 1.46 trillion rupees ($22 billion) last year, according to Euromonitor International.
“Our business in India is stronger than ever and and we see it as an important driver of growth,” Ivan Menezes, Diageo’s chief executive officer, said Tuesday at an event at Diageo’s Bengaluru facility.
Diageo paid 1,440 rupees a share for a 27 percent stake of United Spirits in November 2012. In April 2014, it paid 3,030 rupees a share to take its stake to 54.78 percent. Assuming Diageo spent 910 million pounds ($1.13 billion) to take its holding to 75 percent, the investment would be earnings neutral in the first year, Olivier Nicolai, an equities analyst with Morgan Stanley, wrote in a Jan. 17 report.
‘Under-Appreciated Opportunity’
The ratio of earnings before interest and taxes to revenue could reach mid-teens in the mid-term, in line with Diageo’s objective, Nicolai said. “A move by Diageo to increase its majority ownership of this fundamentally attractive market would make sense,” he said. “We see an under-appreciated opportunity for United Spirits to rationalize costs.”
Net sales in India, Diageo’s second-largest market, increased 4 percent in the six months ended Dec. 31, the British company said in January, driven by demand for locally-made liquor and scotch. Even with Prime Minister Narendra Modi’s demonetization push in November and December, scotch sales in India jumped 11 percent, bolstered by a 23 percent surge in Johnnie Walker.
Growth could be disrupted as shops nationwide will be banned from selling liquor within 500 meters (547 yards) of a national or state highway from April 1. The move will lead to the closing or relocation of some 26,800 licensed outlets, Kotak Securities Ltd. said in a Jan. 25 report.
Bigger states, including Maharashtra, Andhra Pradesh and West Bengal, may sustain a 40-to-60 percent drop in liquor sales, the brokerage said.
Retailers and state governments are looking at the ruling and figuring out how and where to implement it, Menezes said on a call with investors last month. “Is it going to impact the long-term attractiveness of the business?” he said. “No, it won’t. Our team is literally, as we speak, kind of following every move and ensuring we minimize the impact for us.”
‘Positive Tailwinds’
The world’s biggest democracy counts for about 10 percent of Diageo’s revenue and 3 percent of profit, according to Edward Mundy, who tracks alcoholic beverage companies for Jefferies in London. While a bigger stake in United Spirits isn’t going to “move the needle that much,” the prospects in India, including rising middle-class incomes, means “there’s a whole ton of structurally good stuff and longer-term positive tailwinds,” Mundy said in a phone interview.
United Spirits is the only local alcoholic beverage company with a national presence and a broad category spread. The Indian unit provides “a strong platform to push its international brands” and more than a third of the Indian spirits market by volume, Euromonitor said in a report last May.
A key strategy for Diageo is to move Indian customers up the brand ladder toward more expensive, “prestige” labels, according to a company presentation in January.
India had about 485 million people of legal drinking age in 2013. That’s more than the population of the United States and Mexico combined. Another 150 million are predicted to join this group by 2018, with the minimum drinking age varying from 18 to 25 across states.
“The underlying consumption potential in India isn’t strong, it’s extremely strong,” Pernod Ricard Chief Executive Officer Alexandre Ricard told reporters in London last week. The world’s second-largest distiller sells Royal Stag and Imperial Blue whiskeys in India. “Consumers in India are clearly developing a taste for premium India whiskeys, there’s absolutely no doubt about it. Our consumer base is literally growing by 20 million people on average net per annum, the economy is growing, and urbanization is still growing.”
Bootleg, Home Brews
As recently as 2015, two-thirds of the spirits consumed in India was bootleg, Euromonitor estimates. Illicit spirits — occasionally lethal home brews — have received a boost in recent years from alcohol prohibitions and higher liquor taxes.
In the southwestern state of Kerala, which boasts coconut palm-lined beaches and house-boating on networks of rivers and canals, laws were introduced in 2015 to phase out alcohol sales within a decade. More than 700 bars have since closed.
In the northern state of Bihar, with a population approaching Japan’s, a bill was passed last year banning the sale and consumption of alcohol, including in bars, restaurants and homes. State lawmakers have also sought the death penalty for anyone found guilty of manufacturing and selling bootleg.
The legislation will result in losses of 25 million rupees a year for hotels and 40 billion rupees for the government, and it will hurt 222 liquor labels, including the sale of as much as 12 million bottles of whiskey a year, the Hindustan Times newspaper reported in August.
Bingers v. Teetotalers
Still, the new rules will frustrate a minority of Indians. About a quarter of men and only 5 percent of women consume alcohol, the World Health Organization said in a 2014 report in which it estimated that about three in four Indians are lifetime abstainers.
The teetotalers have helped keep India’s per-capita alcohol consumption to about 4.3 liters (1.1 gallon) a year. So it’s the drinkers who are worrying doctors and policy makers.
“Despite the fact that per-capita alcohol consumption in India is among the lowest in the world, hazardous drinking — binge drinking and solitary consumption to the point of intoxication — has become the hallmark of alcohol consumption in the country and is practiced by more than half of Indian drinkers,” the New Delhi-based Public Health Foundation of India said in a 2013 report on alcohol marketing.
Young people and women have been recognized as an “untapped market,” and international alcoholic drinks companies have “joined hands with the domestic lobby to reach them,” the report said.