Diageo to double its share of spirits market with United Spirits buyout

Written by Ajay Sukumaran | Bangalore | Updated: Nov 12 2012, 07:26am hrs
Diageo is poised to raise its share of the global spirits markets to over 9% with the acquisition of a majority stake in Vijay Mallyas United Spirits (USL), according to Jeremy Cunnington, senior alcoholic drinks analyst at London-based Euromonitor International. A year ago, a Euromonitor report had estimated Diageos share at 4.6% of the estimated 20.2 billion litre spirits market.

It will be bigger than the next four international companies combined (Pernod Ricard, Beam, Brown-Forman and Campari) in volume terms, said Cunnington in his blog, adding that the deal also showed Diageo's tactical acumen despite its historic strategic shortcomings that made it exit India in 2002 when it was the leading international player ahead of Pernod Ricard. It showed the ability to play the tactical long game, and rather than strike a deal three years ago, wait until UB Groups and United Spirits debts became too much of a burden, he said.

India whose beverage alcohol market is pegged at $6 billion growing 15% annually will become Diageo's second largest market by net sales after the stake sale. This is a strategic move that makes our strong business even stronger globally.

The acquisition of the shareholding in USL is a significant milestone in Diageo's strategy to build our presence in the world's fastest growing market. This move enhances our position as the world's leading premium drinks company, Diageo's chief operating officer Ivan Menezes had said while announcing the deal on Friday. This transaction will transform Diageo's position in India, he said.

It (the Diageo-USL deal) is a global story rather than a local story, said Santosh Kanekar, a former Diageo India marketing head who now runs an advisory for hedge funds. Now, Diageo has opened up a very big space between them and Pernod Ricard. I can't imagine them catching up for the next 10 years.

Exports of Scotch whisky to India saw an increase of 28% to GBP 28 million between January and June this year, according to the Scotch Whisky Association which is hopeful that a conclusion on the Free Trade Agreement (FTA) between India and the European Union will be reached by the year-end. The FTA would see a gradual reduction of the onerous 150% tariff on imported spirits. Reduction in that tariff would allow India to fulfill its potential to be one of the biggest markets for Scotch, the association said in a recent release.

Diageo's CEO Paul Walsh told analysts in August that he was not expecting any fundamental change for the India market in the near term, though he said a material tariff change would likely see some acceleration in Scotch whisky growth.

Scotch represented 23% of Diageos volume and 27% of its net sales in the financial year 2011 and the company in June announced a GBP 1 billion investment in Scotch whisky production over the next five years to meet growing global demand.