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WHISKY INDIA: The end of the rainbow
“standfirst”>With the end of India’s Additional Duty on spirits and a leading Scotch whisky brand now in the hands of an Indian parent company, Ben Grant considers the future of Scotland’s leading export in one of the world’s largest spirits markets
THE NEWS in July that the Indian government was bowing to international pressure and scrapping the discriminatory Additional Duty was greeted with delight by many in Scotland. But this landmark decision is only the first step along the road to normalised trading relations, and there is still much progress to be made before international spirits can operate on a level playing field in the market.
One thing remains certain, however. When it comes to the potential for growing Scotch volumes, India’s thirst dwarfs the demand that is being generated by its fellow BRIC members. And the current spate of expansion activity north of the border – not least Diageo’s ambitious £50 million Roseisle project – is undoubtedly being undertaken with one eye firmly fixed on the latent potential of India. But it remains a uniquely challenging place to do business.
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When it comes to tapping into the South Asian market, one Scotch producer is in a rather more favourable position than its contemporaries. Following Whyte & Mackay’s acquisition by Indian spirits behemoth UB Group, the Glaswegian operation is well positioned to take a significant share of the Indian pie. Underscoring the company’s ambitions, head of branding and marketing Alok Gupta explains that the brand aims to control 25% of the total Scotch business in India by March 2009. And given the strength of UB’s network this ambitious target certainly seems manageable. Before taking on the Whyte & Mackay role, Gupta was executive vice president, marketing and business development, for UB – and he was a key figure in finalising the deal. Prior to the acquisition, he explains, the brand was present in India, but didn’t sell “volume worth talking about”. But the support of the manpower, expertise and network of UB has totally changed the dynamic. Led by bullish business mogul Vijay Mallya, UB is truly a force to be reckoned with in its home territory. So significant are the company’s sales that it is the second biggest spirits producer in the world by volume – in spite of the fact that the business is focused so heavily on the domestic market. While the international competition is scrabbling around to establish effective routes to market, Gupta proudly states: “We are present in 100% of the market – there’s not a single outlet in India where UB product isn’t sold.” Whyte & Mackay thus enjoys a staggeringly effective first-mover advantage that “we are sure we can maintain. But the key is never to be complacent.” As well as the massive boost of an unbeatable distribution network, it seems likely that the Scotch brand will also benefit from a certain degree of patriotism. The acquisition gained major media attention in India – it was a “moment of pride for Indians”, says Gupta, underlining the fact that Indian businesses can be a leading force in the global economy. Establishing a direct link between this fact and sales would be impossible, but it was certainly a useful step in building brand awareness. There seems little doubt that Whyte & Mackay will be a rather stronger player in India than it is elsewhere. But there is still plenty of opportunity for other international brands to capitalise as the market opens up. “We’re in an excellent position,” says Gupta, “but India is a massive market – there’s room for everybody to take a piece of the pie.” |
Ignoring for a moment the gargantuan population and the rapid economic growth, there is a strong historical reason why India is particularly suited to consumption of Scotland’s most revered export. The close connection between India and the UK dates back to the days of the British Empire. Gin may be the first spirit that comes to mind when thinking about the Raj, but whisky also travelled to the colonial outpost. And, as Alok Gupta, head of branding and marketing for Whyte and Mackay, explains: “Ever since this time, whisky has had a halo round it – it’s seen as a sign of discernment and sophistication.”
The number of Indian emigrants living in the UK means there is a constant exchange of ideas and culture between the two nations, while there is also the little issue of taste profile. As Beam Global India and subcontinent managing director Harish Moolchandani explains: “It’s a traditional market because the taste suits the Indian palate.” While it may be quite a struggle to get many Asians, who traditionally prefer lighter spirits, to buy into whisky, Indians already have a strong thirst for brown spirits.
Then there’s the frankly mind-boggling numbers to consider. As the box on page 40 indicates, the size – and growth – of both the population and the economy give ample justification for the excitement among international brand owners. Diageo India managing director Asif Adil reflects the mood perfectly when he says: “With a total of one billion people, even 1% of the population is a significant number.” And this massive group of “global citizens” has a strong tendency towards international brands. The emerging middle class of “aspirational consumers is really embracing Western brands”.
The Indian market first opened up to outsiders in 1992, resulting in Diageo and Allied Domecq establishing operations in the country (the latter business being transferred to Beam Global following the acquisition). To overcome the massive import duties both companies shipped Scottish whisky in bulk, blending with local spirit and bottling at destination to produce Indian Made Foreign Liquor (IMFL), with brands such as Teacher’s, Vat 69 and 100 Pipers performing strongly. These brands still generate the vast majority of volume, so they will continue to be a significant focus – however, the international industry is aiming to grow sales of more premium products.
Overcoming hurdles
Given its massive geographical land mass it is unsurprising that India is divided into states that hold fairly significant legislative powers. Any company that thinks it can tackle India as a single entity is sorely mistaken: the fragmented nature of her 28 states means that – from a liquor supplier’s perspective – the most similar nation for comparison is the US. “It’s such a massive country and there’s incredible variation in local customs, culture and language,” says Chivas Brothers regional director Robin Johnston. As well as these cultural differences, Moolchandani points out that “each state has different policies governing the distribution system, and this must be respected”. As explained in the box on page 42, the abolition of the controversial discriminatory tax has led to more power over liquor legislation being ceded to the states. Gupta sums up the difficulties this entails when he says: “It’s like dealing with 28 different countries, you need a separate solution for each state. This can be very difficult and frustrating.”
To prosper in India it is therefore essential to have a strong distribution network, and in this area there is wide variation between the current position of the various suppliers. The company that is sitting pretty when it comes to the most developed route to market is undoubtedly Whyte & Mackay, utilising the incredible reach of new parent company UB Group (for further details, see box on page 39). In the past, Diageo operated a joint venture with UB in its “previous incarnation” in India, but since this was terminated in 1998, Adil explains that the priority has been to “control our own route to market” by building its own sales force and having “our own feet on the street”. Setting up an in-house sales force began two years ago and the project is progressing well – the total staff is “not quite in the thousands”, but is growing fast. “It’s critical to have a local team,” Adil comments, because in a fragmented market “local knowledge is the key”.
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INDIA IN NUMBERS The size of the Indian market is, frankly, mind-boggling. The country is home to the world’s second largest population and is also generating one of the quickest rates of economic growth of any developing nation. Given the following facts and figures, it’s scarcely surprising that international brands can barely contain their excitement about tapping into the market.
Source: Wikipedia; Trends in Indian Whisky, Sandeep Arora, Worldwide Whisky Conference, March 2007; www.indianchild.com
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Beam Global also has its own team in place, with a sales force numbering about 65. Chivas Brothers, meanwhile, is a little way behind its rivals in terms of building its local network. As a result of the high duties, the lion’s share of foreign liquor in India is illegally imported by bootleggers, with much of it coming through the Middle Eastern duty free markets. The unofficial boycott of the Seagram business in certain countries thus meant that when Pernod Ricard acquired Chivas it was already chasing the pack.
As a result, the current priorities of the various companies differ significantly. Johnston explains that Chivas is “looking at the major cities at the moment: Delhi, Mumbai and Bangalore”. Both Beam and Diageo, on the other hand, are at the next stage of covering the market. Moolchandani reports that “the priority is now to extend our distribution, getting into the tier two and three cities”, while Adil says that Diageo is “focusing on the top 20 urban centres, pushing into the heartland of India”. All three, however, have a long way to go before they can challenge the reach of UB.
Communication is another area where the foreigners are having to devise very different solutions from those they have successfully applied elsewhere in the world. There is a blanket ban on advertising alcoholic products, so brand owners have to be rather more creative when it comes to getting their names in front of consumers. The result of the ban is the growing trend towards “surrogate” activities to reach drinkers. Whether it’s a Chivas Regal fashion show or a Johnnie Walker musical event, Scotch brands are increasingly using high-profile event sponsorship to increase exposure – but it’s a notoriously difficult and expensive medium.
Then there’s the question of understanding consumers. Companies are researching feverishly to better understand the market, but compared to virtually every other market, much of India remains an unknown quantity – quite literally. The four leading Scotch whisky suppliers each cite a different figure for the total spirits consumption in India, ranging from 70m to 90m 9l cases. The odd discrepancy is understandable, but 20m cases represents a pretty significant miscount by somebody. This lack of credible market data is yet another hurdle that must be overcome.
The obstacles standing in the way of Scotch whiskies looking to ply their trade in India are significant. Unrealistic rates of duty, widespread proliferation of bootlegging and counterfeit goods, and the incomparable complexity of the country make it a truly unique challenge.
But for the brands that manage to successfully negotiate this most testing of markets the rewards will be truly massive, for at the end of the rockiest road lies the biggest pot of gold.
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POSITIVE DISCRIMINATION A decent start. That would probably be the most accurate way to assess the Indian government’s decision to scrap the discriminatory Additional Duty in July. It would be exaggerating the reality to suggest that the move had fully opened the door to the international spirits community – but it has at least removed some of the ramshackle stack of furniture piled up behind said door in order to keep out intruders. Under the previous regime, international brands often found themselves facing a duty burden of up to 550%. The tax was established in 2001 in a bid to support the domestic industry – a protectionist strategy that flew in the face of World Trade Organisation regulations. The WTO was thus petitioned by the EU – itself spurred on by the Scotch Whisky Association (SWA) – to sanction India, and this action ultimately resulted in July’s decision. (The news was announced just weeks after the long saga of UB Group’s pursuit of Whyte & Mackay eventually reached its conclusion, although this proximity must be viewed in purely circumstantial terms.) SWA chief executive Gavin Hewitt describes the move as a “significant step towards fair competition in an important emerging market”. But India remains a particularly expensive place for international drinks brands to do business. The Basic Customs Duty remains set at 150% (put in context, that figure is 10% and 20% for China and Brazil respectively). Each of India’s 28 states is now free to apply a “countervailing duty”, at their individual discretion, as long as it does not discriminate against imported liquor. SWA public affairs manager David Williamson explains that this development was “always expected”. The key now is to “watch the process very carefully to ensure that the states act in line with WTO rules. It would be regrettable if state-level actions brought India back before the WTO on spirits taxation issues.” According to Williamson, the SWA has a constructive relationship with the relevant ministers in India – but the association will still be watching closely to ensure that the rules aren’t broken. It was a disappointment, therefore, when the state of Maharashtra immediately introduced its new tax policy, jumping the gun before legislation had been ratified. In practice, this means that the state (which, rather importantly, includes Mumbai) is by no means a cheap place for Scotch brands to sell their product. Diageo India managing director Asif Adil reports that “after the new duty has been added, Johnnie Walker Black Label is actually more expensive”. The scrapping of the discriminatory tax definitely represents a step in the right direction. But before it becomes a truly open market, India – like Johnnie Walker’s famous striding man – still has many steps to take.
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© db September 2007