ABOUT LIQUOR INDUSTRY IN INDIA

OVERVIEW

* Indian Made Foreign Liquor (IMFL)

Negative perceptions about alcoholic beverages widely prevalent This is a regulated industry - movement, prices of intermediate goods (molasses, alcohol) tightly controlled - state governments exert considerable influence Yet, this is a well developed - Rs 8,200 crores (US $ 1907 million) - industry in India Major players in the alcoholic beverages market - United Breweries (UB) Group( Bangalore), Shaw Wallace (Calcutta), Jagajit Industries (Kapurthala, Punjab), Mohan Meakins(Solan, Himachal Pradesh), Associated Breweries & Distilleries (Mumbai) Per capita beer consumption in India - 0.5 litres; as against 20 litres in China, 100 litres each in USA & Germany , annually

BEER : MARKET

Market Size A 70 million cases market Market growing at 10-12 % per annum South and west zones account for bulk (> 75 %) of this market

Major beer consuming centres - Maharashtra (Mumbai) Karnataka (Bangalore); Tamilnadu (Chennai) Industry Structure Minimum economic size : 5000 kilo litres; 15000 kilo liters for NRI proposals Around 40 units in organised sector, mostly regional players 4 large breweries have 84% of the market Major beer brands (manufacturers) - King Fisher, Kalyani Black Label (UB Group), Golden Eagle (Mohan Meakins), Haywards (Shaw Wallace), London Pilsner (Associated Breweries and Distilleries) Foreign brands - Strohs, Fosters Licensing required except for smaller units employing under 50 persons or not using power Cap on additional capacities (frequently circumvented under pretext of modernisation) Installed Capacities, Production In Hecta litres Beer 6,750,000 Installed Capacities HL (1997-98) 4,352,570 Production (1998-99) HL Duties Import duty on beer - 100 % basic; 10 % surcharge; SAD : 4 % Sales taxes - 45% , 5% cess (State subject). Excise Duty - Rs. 4/ Bulk litre in Karnataka (State subject)

BEER MARKET : FEATURES Market Characteristics Beer packed in 650,750 & 1000 ml glass bottles; usage of (330 ml) cans minimal Preference in the Indian market for strong beer Promotions and sponsorships Trade States prohibition policies govern trade sales for beer Multi layer trade channel structure Beer sold through the same outlets as IMFL

(sports, musical events) to promote brands

Institutional sales of beer to star hotels, large restaurants, bars/ pubs

Regulations Subject to licensing under Industrial (Development and Regulation) Act, 1956 Cap on licensed capacity; special license for expansion Beer policy; announced in 1994 to augment industry growth Plethora of duties and taxes from bottling to sales stage; varying from state to state.

LIQUOR : MARKET Market Size o Market : 58 million cases o Past growth 15 % CAGR per annum o Brown spirits - particularly whisky, rum & brandy account for over 75 % of this market o South and North share 60% of market Industry Structure

o Industry in the organised sector - an industrial license is required to start manufacture o Major brands (manufacturers) : Signature, Blue Riband (UB Group), Aristocrat (Jagajit Industries), Smirnoff, Gilbeys Green Label, Malibu, Archers Peach Schnapps(International Distilleries India), Passport (Seagrams), VAT 69, Black & White, Black Dog (United Distillers India) Installed Capacities, Production In Hecta litres IMFL Production (1998-99) 5,16,600 HL

LIQUOR MARKET : FEATURES

Market Characteristics

Preference for brown spirits (molasses flavour) in Indian market Liquor packed in 180, 375, 500, 750 and 1000 ML bottles glass and plastic bottles. 180 ML and 750 ML are fast moving Guala caps on bottles to prevent bootlegging Brand building very important Yet avenues limited - advertising of liquor banned in most media Promotions,sponsorships,surrogate advertising (sometimes) done to build brands Open market : Maharashtra, J&K, Goa, Orissa Auction market : Uttar Pradesh, Rajasthan, Madhya Pradesh, Bihar, Punjab, Chandigarh Government Controlled : Tamilnadu, Karnataka, Delhi, Kerala Prohibition States : Gujarat, Manipur, Mizoram, Nagaland There are over 22000 liquor retail outlets spread across the country Movement of IMFL products regulated across states Entire process of manufacturing to distribution and sales attracts taxes a plenty. Sales tax (ad valorem), Bottling Fee, Litre Fee, Vend Fee, Gallonage Fee, Privilege Fee, Import/ export Pass duty etc.are some of them. In Karnataka some of the taxes levied are : Excise Duty : Liquor from spirits - Rs. 45/bulk litre; Premium Malt Whisky - Rs. 60/- bulk/ litre; Litre Fee - Rs. 20/- bulk litre; Sales tax : 60%; cess 5% Import duty on whisky, rum, gin & vodka, liqueur - 230 % + SAD : 4 %

Trade Regulations

Duties & Taxes

Liquor companies Name :

Amrut Distilleries - Supplier of dark rum, brandy and whisky Champagne Indage - Producers of still & sparkling wine Chateau Indage - Sparkling wines manufacturer Cobra - Beer manufacturer Dajeeba Vineyards - Red and white wine manufacturer

Liquors India - Manufacturer of liquor ND Wines - Red, white and appetizer wines producer Radico Khaitan, Rampur - Liquor manufacturer Shaw Wallace - Producers of spirits and beer United Breweries - Kingfisher - A leading brand of Indian beer from the UB group Vinbros & Co - Manufacturer of whisky, vodka, brandy, rum & gin

Indian liquor market in a tizzy

Priya Mutalik-Desai DESPITE AN unfavourable policy environment, multinational companies remain optimistic and continue to bring in new brands to the Indian liquor market. If Bacardi Martini has decided to make India the manufacturing base for its rum to cater to overseas markets through its joint venture (74 per cent equity) with the Karnataka-based Jemini Distilleries, it is not without reason. And if Brown and Forman, i n a 50:50 joint venture with Jagatjit industries, has launched its bourbon at every price point in India, it has its rationale. If Pernod Ricard, Europe's largest liquor manufacturer with a turnover of $3.5 billions, has acquired a 74 per cent stake in U nited Agencies, a distillery in Maharashtra and set seven years to break even, there is a plan. What is common to the three is the conviction that there is huge market potential, the long-term vision to exploit it and a strategy for the Indian liquor mar ket. Of the few industries that have seen a no-bars-hold entry of MNCs, alcoholic beverages perhaps top the list. Most global liquor majors have set up shop in India over the past five years, and actively pursued market opportunities despite debilitating cons traints. This is because the liquor industry, witnessing a declining trend worldwide, has shown robust growth in India, bucking the recessionary trends in the economy and the antigrowth liquor industry policy. Potential It is India's potential for whisky -- it accounts for about 60 per cent of the Indian Made Foreign Liquor (IMFL) market -- and other spirits such as rum and vodka that is attracting the MNCs to India. They reckon that India is a big and growing mark et with a weakness for spirits,

especially whisky. This is not surprising considering that in the wake of the reforms, as the social transformation gathered momentum and global consumption patterns get increasingly assimilated, the country's moral fabric is loosening. Drinking liquor has rapidly gained acceptance and is no more taboo -- even among the conservative middle-class but whose attitudes have changed with improved standard of living has improved. Liquor companies have been quick to latch on to this trend. Groupe Pernod Ricard, th e world's fifth largest producer of alcoholic beverages, will be introducing new brands for the growing middle-class market. In fact, the youth, women and middle-class -- overlapping segments -- are being targeted by the liquor companies looking for growth. A good example of this potential is the per capita beer consumption placed at half-a-litre for India, in contrast to the Czech Republic's consumption of half-a-litre a day. It is also hardly comparable to the very high levels of per capita beer consumpti on in the developed and some of the developing countries. But the emerging trends are interesting. Strong beer (alcohol content in excess of 5 per cent), a category non-existent in developed countries, has been growing at about 15 per cent in India for t he last two years, and already accounts for 55 per cent of beer consumption. This trend is slated to continue. Thus, there is significant latent demand and vast scope for growth in liquor consumption, both in the urban and prosperous rural areas, once th e regulatory environment is relaxed. A little noticed factor pertains to the gradual, but pronounced, shift of liquor consumers to the organised sector. The Indian market has traditionally been inclined towards the unorganised sector, which accounts for twothirds of the liquor consumption in India. However, maturing tastes and preferences are making the Indian liquor market more brand-led. This should promote growth in the organised sector. Struggling MNCs This high and growing demand potential has eluded the MNCs, which are struggling to wrestle market share from the local liquor majors. There are two reasons for this: First, many MNCs had a disappointing start because they misjudged the unique character of the regulated liquor

market. A number of operational restrictions has made the market very complex. Liquor, including beer, is a sector that contributes Rs. 18,000 crores as government revenues. The excise duty structure is irrational, and the policy generally anti-growth, with loud social connotations. As each State has its own excise duty structure, import and export levies, and other regulations regarding licens ing fees and sales of new brands, India virtually represents 27 small nations rather than one country for a liquor manufacturer. MNCs new to the Indian market have felt hampered by the regulatory framework and the lack of distributed manufacturing facilities, which are crucial given the high export and import fees for the movement of liquor across the States. As all of them bottle the scotch and, a few like IDI and Seagram have entered the IMFL segment, they are mostly restricted to the premium segment which is still small. Restrictions on advertising and promotional activities further constrain the companies. Second, the MNCs have to slug it out with the local barons, which lead the industry. Established local companies, such as United Breweries (UB group), and Shaw Wallace Company (SWC), have aggressively launched new initiatives to protect their turf. The five Indian whisky brands -- SWC's Director's Special; Herbertsons' Bagpiper, Jagatjit Industries' Aristocrat, McDowell Company's McDowell No. 1 and Diplomat -are among the 110 top selling millionaire spirits in the world. These five have grown 4 8 per cent during 199397, while 47 leading international brands have reported a sharp downturn in sales and another 16 have recorded stagnant growth. Director's Special enjoys the distinction of being the fastest growing brand in the world, wi th 98.2 per cent growth during the quinquennium. Indian MNCs? McDowell & Co., a 100-year-old company in the liquor business and a part of the UB group, together with sister company, Herbertsons, commands 34 per cent of the liquor market. The local brands have a wide reach too and are focussing on strengthening the network and logistics to minimise costs. McDowell brands are available in 90 per cent of the retail outlets in the country, and the company is setting up dedicated and model retail outlets to take advantage of the unrestricted point-of-purchase advertisi ng. It plans to spend Rs. 18 crores on brand relaunches. This is

expected to further boost brand growth. In 1998-99, the company's brands, six of which are millionaire brands, grew 24 per cent to 14.5 million cases. Most Indian companies effectively meet competition from the MNCs by restructuring and upgrading products, processes and practices to international standards. In recent years, there has been a spate of product launches and relaunches to improve perceived value through the upgradation of physical appearance, perception of blend and investment in brand-building. UB has considered all the elements of the product -- the carton, the bottle, the cap, and the label -- for a revamp. In their efforts to imp art an international look to their products, local companies are sharpening their focus on the personality and imagery of their brands with the help of international agencies. Yet, the MNCs have slowly gained a 10 per cent share in the whisky market. What is not revealed is the MNCs success in carving out higher shares of about 55-60 per cent and 30 per cent in the super-premium and premium segments respectively. Thus, Seagram 's Royal Stag and Oaken Glow, and Brown and Forman's Southern Comfort have overtaken Royal Challenge (SWC), Peter Scot (Khoday) and McDowell Premium. MNCs are able to leverage the price-quality relationship and the intensive investment in brand-building through advertising and sampling better than local companies. The local firms appear to exploit the distribution dynamics more. However, it cannot be overlooked that the local Scotch industry is small, and both bottled-inIndia Scotch and duty-free Scotch account for about one lakh cases each. Thus, to grow in value and volume, the MNCs will have to enter the regular segment which accounts for over 40 per cent of the total market and also contain the forays of local majors into the premium segment. IDI, a 60:40 joint venture between the International Distillers and Vintners (IDV) and Polychem Distilleries, has introduced Gilbey's Green Label whisky in the regular segment. On the other hand, SWC, which did not have a significant presence in the delu xe whisky segment, launched a DSP Black Whisky to fill this gap. It is reported to be growing in market share. MNCs will come under increasing competitive pressures and have to be alert.

Fetters MNCs face numerous hurdles. Being licensed to produce only grain-based liquor -- the exception being International Distillers India -- which is about four times costlier than molasses-based liquor produced by Indian companies, the MNCs are confined to the premium segment and denied a level playing field. The Foreign Investment Promotion Board (FIPB) subjects the MNCs to a capacity ceiling of 10,000 kl (kilolitres) which some companies, like the IDI, have cleverly sidestepped by con tract manufacture from across the country since there is no ban on outsourcing. IDI's smooth entry into India and its success as a profit-making venture, unlike many other MNCs, can be partially attributed to these advantages. MNCs also face the problem of unfulfilled export obligations arising from the imposition of the foreign exchange neutrality norm at the time of the FIPB approval and are lobbying for the relaxation of this condition. Under the norms, the MNCs are require d to counter the imports of alcoholic concentrates and export liquor products in equal amounts. They maintain that the ``Made in India'' tag of their export consignments acts as a barrier. Has it discouraged MNCs that entered India later? Not really. It has been a valuable experience for them. Fosters from Australia, which launched its beer in 1998, had sales exceeding expectations in a low growth market right from the start. It is conside ring an expansion. The beer market, estimated at around 67 million cases, is growing at 8-9 per cent. In the last four years, the strong beer (alcohol content over 5 per cent) market has been growing at 15 per cent, while that of lager beer has been slu ggish at 5-6 per cent. Local and foreign companies have lost no time in adjusting to this change in the consumption pattern. Strong beer is becoming popular due to its value for money. Wait and watch With liquor makers, both local and foreign, becoming active, competition is intense. UB-Carlsberg, South African Breweries and some others are awaiting clearance following government stalemate on account of the Supreme Court judgment of January 1997. The judgment has created confusion over whether the proposals related to FDIs and the issuing of licences for the liquor industry will be addressed by the Central or

the State governments. Meanwhile, demand creation and proactiveness are the buzzwords for the existing players. While an industry shake-out cannot be ruled out, as mergers and acquisitions in the international arena begin to impact the joint ventures, foreign players have adop ted a waitand-watch policy and long-term strategies with their feet firmly in the Indian market. The opening up of the market and a drastic reduction in the high import duties under the WTO dispensation during the next three-four years is likely to open the floodgates of the liquor industry. How UB faces the competition AAim to be a least-cost producer to increase competitive advantage Total business process re-engineering, possibly resulting in Rs. 30 crore savings. Identification of three key areas for generating cash flow -- sourcing, brand portfolio, and the sales and distribution-cum-manufacturing process. Achieve Rs. 6 crores annual savings by concentrating on 12 core brands in spirits, and one in beer which generates 70 per cent of the volumes. Acquisition of relevant brands to strengthen pre-eminent position. Realignment of sourcing and supply pattern by implementing a linear programming model saving more than a crore of rupees every month. Introducing change agents by establishing a system that will constantly refresh brands, upgrade processes and improve profits. An overhaul of the brands portfolio, and jettisoning more than six brands. Merging and revamping the sales force, and the setting up of UB's first market research unit. Revamp of organisational structure to make it more responsive and responsible in high salience (in value and volume) areas. Splitting marketing and sales function in to two distinct

departments. Investment in a new marketing tool -- the media business. (The author is a Mumbai-based consulting economist.) Related links: