India to prove troublesome in 2017 for drinks MNCs

A combination of increased taxation and alcohol sales restrictions – and the withdrawal of high-value notes – could make India a major headache for Diageo and Pernod Ricard in the year ahead, writes Ron Emler.

Crushing bottles of beer and spirits seized in Gujarat, where the sale and consumption of alcohol is banned. Picture source: hindustantimes.com

Diageo and Pernod Ricard, respectively the world’s two largest premium beverage alcohol groups, have just drawn the lines under their figures for the six months that ended on New Year’s Eve.

When they announce those results in about four week’s time, both are expected by analysts to show continuing progress growing in organic sales and profits, confirming their previous guidance.

Key to that will be the continuing pick-up in the US market, which accounts for the largest single slice of their sales and operating profits. Both groups have encountered difficulties in the US over recent years, notably with key vodka brands such as Smirnoff and Absolut, and are working their way through them with various strategies.

Similarly, the Chinese crackdown on gifting and Beijing’s austerity drive sent that market into reverse in 2013. But again both groups are pointing to successful action to bring sales back on track, albeit over a longer timescale than they might like.

So with the US and China moved from their “To Do” lists to the “Monitor Progress” files, where is the next headache coming from for both Ivan Menezes and Alexandre Ricard, the respective heads of both Diageo and Pernod Ricard?

It could well be India.

The sub-continent has become a battlefield. As its economy expands rapidly, boosting demand for spirits, especially coveted high margin international brands, the Indian market has become a huge prize, especially as demographics favour rapid expansion. Mid-income consumers in the 20- to 35-year-old bracket are an increasingly key part of the market, becoming more discerning and adventurous in their choice of drink.

Pernod Ricard stole a significant march by setting up its own distribution network in the early days of this century but Diageo fought back with its purchase of a controlling stake in United Spirits (USL) in 2012/13. Diageo now has 37% or so of the Indian spirits market and is trimming its locally-produced portfolio. Meanwhile, Pernod Ricard remains the market leader in Indian Made Foreign Liquour (IMFL).

Following its takeover of USL, Diageo predicted that India could generate 10% of its organic growth within a decade. Pernod Ricard has made similar, but less specific, noises about the country’s potential.

But in 2016, several road humps were unexpectedly thrown under the wheels of the juggernauts. Following 2015, in which Indian demand for alcohol grew by just 0.2% overall, it is unlikely that 2016 will have shown any increase at all.

Each of the regional governments is responsible for a large measure of legislation and taxation of alcohol in India’s 29 component states. In April, Bihar imposed prohibition, costing the state an estimated £750 million in annual tax revenues. The overnight measure also hit the major producers who were left with duty-paid inventory on their hands.

Tamil Nadu and Goa have both said that they too plan to restrict heavily alcohol sales. Kerala has a ban to be introduced gradually by 2024, but a new state government is said to be reversing the process.

Haryana’s taxes on beer and IMFL went up by 2% in April, while Maharashtra’s already punitive alcohol taxed were increased in July, a move which USL said had “negatively impacted the bottom line”.

Meanwhile, the supreme court has ruled that no liquour shops can open up beside highways from this April and the local authorities in Delhi are refusing to issue any new retail licences.

Another blow came with the overnight announcement in November that the Indian government was withdrawing high value notes in a bid to stamp out black marketeering and corruption. Local reports suggest that the immediate impact of much less cash in circulation was a decline of up to 25% in sales of IMFL in November and December, normally festive months.

None of these developments will boost the bottom lines of the big players in India’s alcohol market. And while the long-term prospects remain buoyant, especially for lower taxation as India becomes further integrated in global trading patterns, there will no doubt be head-scratching In London and Paris about how to counter the new diversions on the road to growth.