Diageo-USL deal good for sector, say experts

Written by Ajay Sukumaran | Updated: Nov 12 2012, 02:27am hrs
India's $6 billion beverage alcohol market looks headed for another round of consolidation and a key focus on profitability, with the world's biggest liquor firm Diageo in control of Vijay Mallyas United Spirits Ltd (USL). The UK-based companywhose share in India's branded liquor market of 295 million-cases is currently minusculeis also expected to bring in a more professional approach to an industry where majority of players are family-run businesses. Industry experts say the immediate challenge of unlocking value from USL, India's biggest drinks company, isnt going to be easy for Diageo, which is practically making its third fresh start in India.

I think there is some consolidation that will happen over the next few years. The industry is going through a rough time in terms of profitability as it is not able to pass on input price hikes to consumers. All that would have to change in the next two to three years, said Deepak Roy, executive vice-chairman and CEO of Allied Blenders and Distillers (ABD) which now becomes Indias largest domestic spirits company after Mallya's stake sale to Diageo on Friday. It is not that we don't have the marketing experience. Its just the mindset of owners was not geared towards investing in big brands, said Roy, adding that it was not easy to invest when profit margins were under pressure. To be sure, global firms will now be calling the shots in India's liquor industry with Diageo-USL enjoying over 45% marketshare followed by its global rival Pernod Ricard with 9%.

Diageo first exited its India business in 2002 by selling Gilbeys, a whisky brand launched in the mid-90s by International Distillers and Vintners, to focus on other global markets. Diageo then formed a joint venture with Delhi-based liquor company Radico Khaitan to produce a local whisky brand called Masterstroke which proved to be unsuccessful. Now, it gets control of USL's 140 brands and its network of 64,000 outlets across the country. The noughties (2000s) marked the shift to profitability. Only if Diageo rationalises USLs portfolio will it be able to unlock value from this deal, said Santosh Kanekar, a former marketing head at Diageo India who now runs an advisory for hedge funds. The industry is going through consolidation, but it is at a nascent stage in terms of consumer behaviour and retail and distribution is still opening up.

USL would not have been able to compete on its own over the long term, said Nikhil Vora, managing director and head of research at IDFC. Its extremely positive for all stakeholders. He (Mallya) gets a partner who can bring value for him over the long term. Over time, Mallya could perhaps even see himself as the largest shareholder in the spirits arm. It's a very natural progression for a promoter to take, said Vora.