Alcohol maker Diageo halts some whiskey sales to push for price increases

One of Hina Nagarajan’s first moves at the helm of the Indian arm of spirits giant Diageo Plc is a showdown with government officials over price caps that have already cost the company nearly $9 million in sales, and some say it could backfire.

United Spirits Ltd. has halted whiskey sales in several states yet to ease on price caps despite rising inflation. The move to halt sales rather than see margins continue to erode is a long shot, analysts at Mumbai-based Dolat Capital wrote last month, one that could complicate the company’s pivot to premium products. It also means a growing loss of revenue across your entire portfolio, while costs rise at a double-digit rate.

“I didn’t realize how difficult it is,” said Nagarajan, 57, referring to the maze of red tape that stretches across 36 states and union territories in a country where alcohol is still sometimes considered prohibited.

“In the short term, there will be some impact on market share,” he said in an interview in the southern city of Bangalore, adding that he expects the pricing issues to be resolved by the end of September. “If we look at the longer term perspective, I think it’s the right thing to do for the business and I think our investors, the stakeholders, recognize that.”

Discussions are “going well” with up to five states, he said. Others, such as Haryana, Rajasthan, West Bengal and Uttar Pradesh, have already implemented hikes.

“We are not taking a belligerent move with any of the governments,” Nagarajan said. “We are working with them and we are showing them the data, showing them the correct facts.”

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Diageo’s difficulties are emblematic of a market in which tradition and taboo complicate the high growth potential of alcohol manufacturers. Mahatma Gandhi wanted to rid the country of liquor and some states, such as Bihar and Gujarat, ban alcohol. But a growing class of urban drinkers in India, seeking new flavors and craft drinks, are also a profitable opportunity.

complex relationship

Diageo, which owns brands like Johnnie Walker and Smirnoff, needs around 200,000 permits each year to navigate rules that often change without warning. That includes the capital New Delhi, where more than 100 liquor stores closed this month after the local government reversed licenses introduced last year to liberalize alcohol sales.

Currently, each state sets its own alcohol prices. Nagarajan said Diageo is pushing for a mechanism that would allow prices to rise with inflation, which the company expects to remain high for the next two quarters, as well as inclusion in India’s nationwide goods and services tax. The latter would help speed up the process, though he said it could be a long way off as states are unwilling to relinquish control over a lucrative source of revenue.

Beyond the bureaucratic battles, Nagarajan’s first year as CEO (she is the first woman to lead a major spirits company in India) has focused on revamping the spirits titan’s local portfolio after the bought United Spirits a decade ago from the alcohol and airline tycoon. Vijay Mallya, a beleaguered former billionaire currently facing extradition from the UK to India after failing to pay off bank debt.

Premium Pivot

Diageo is looking to tap into a growing class of urban Indian drinkers. The volume of premium spirits produced in India is expected to more than double between 2021 and 2026 at a rate of 18% per year, according to IWSR Drinks Market Analysis, an industry researcher.

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This year, Diageo invested 315 million rupees ($4 million) in a minority stake in India’s Nao Spirits distillery, the maker of Greater Than and Hapusa gins, and launched its own Godawan craft whisky. The company is also testing its Guinness stout in a handful of states, and Nagarajan said he is “looking” for new acquisitions to enhance its premium roster.

Nagarajan also led the sale of 32 lower-market brands to Indian brewer Inbrew Beverages Pvt Ltd. for Rs 8.2 billion, as well as franchising a further 11 in a five-year deal between the two companies.

Investors have so far backed those plans, with United Spirits up 22% since Nagarajan’s appointment in July 2021, compared with a 12% rise in India’s benchmark S&P BSE Sensex index. Emerging from the disruption caused by the Covid-19 pandemic, the company reported that its net income tripled annually in the latest quarter, beating analyst estimates, even as costs rose 12%.

growing acceptance

Nagarajan’s own rise, after running Diageo’s emerging markets business in Africa, is also a sign of tentative social acceptance of alcohol consumption in parts of India.

Born and raised in New Delhi by middle-class parents who had fled Pakistan during the bloody partition of British India in 1947, Nagarajan credits her late “progressive” mother for championing her education. After graduating from one of India’s top universities, she forged a career in global consumer goods companies, including Nestlé SA and Reckitt Benckiser Group Plc, working in countries across China, Malaysia and Singapore.

Kiran Mazumdar-Shaw, CEO of Indian drugmaker Biocon Ltd., who found her own attempts to break into India’s brewing industry in the late 1970s hampered by “enormous stigma,” said she she was “quite encouraged” when Nagarajan was selected to head the country’s brewing industry. largest alcoholic beverage company

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“But you know, I don’t think much has changed,” Mazumdar-Shaw said in an interview. “When you go to a liquor store you don’t see women.”

Nagarajan, whose favorite drink is a Tanqueray 10 gin and tonic, said that as more women enter the industry, cultural acceptance is mostly concentrated in larger, more socially liberal cities. “Is it evenly distributed throughout India? I would say not yet,” she said. “I don’t think we’ve gotten to where we should be.”