In the midst of a partnership churn in India, Diageo, the world's largest liquor company, known for premium brands, is thirsting for new markets in Tier II and III cities.
In these turbulent times, Diageo India managing director Asif Adil is a picture of calm. Perhaps he believes that his company, the Indian arm of the world’s largest liquor company, is nearly recession-proof. He does not say it in so many words, but a word here, a phrase there, say it all.
What Adil, who makes it a point to spend time at the bar every evening after his 12-hour work day, does say is that even with the market in funk, Johnny Walker scotch and Smirnoff vodka, two of Diageo’s best-known brands, will be insulated from the vagaries of consumer spending patterns. And, when the market recovers, more consumers may be ready to move up to premium brands.
The company’s India growth rate of 40 per cent bears out the belief. Still, in terms of sales, the liquor giant does not make the list of the top five spirits companies in India. In fact, the top three are all Indian: United Spirits Ltd (USL), Mohan Meakin, and Radico Khaitan. None of the other international players — Anheuser-Busch, Pernod Ricard and SABMiller — have been able to make much of a mark either.
Blame it on customs duties. At present, the basic duty payable on import of liquor is 150 per cent ad valorem. On top of that, there is a host of state taxes and value-added taxes, making it in excess of 350 per cent.
In India alcohol is a state subject, not national. Each state levies taxes and excise duties on alcohol at its own determined rates, and controls distribution channels in its own way. “India is 28 countries in the context of one,” says Adil.
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He is however confident of meeting his target of £500 million (Rs 4,154.9 crore) in India revenue in the next three years, his calculations relying heavily on anticipated rise in incomes and changes in drinking habits. “People are increasingly demanding more sophistication. This bodes well for us,” he says.
Big or best?
By this time, you may have begun to form the impression that Adil is resting on his oars, reconciled to the vicissitudes of the duty structure and content in Diageo’s premium pricing. Nothing could be farther from the truth.
Adil became Diageo India’s managing director in 2006, after successful stints in Shaw Wallace and as a partner with McKinsey & Co. He co-founded the successful Kaya Skin Clinic chain with friend Harsh Mariwala of Marico, but sold his 26 per cent equity holding in 2004 as the business needed more money than he had.
Living up to his background, Adil has devised a strategy for Diageo, which is just as well, because the company is undergoing significant changes in India. Nearly everyone believes that its joint venture with Radico Khaitan has ended. The venture was set up to create a number of brands; it created just one, Masterstroke whisky, which will come to Diageo.
The joint venture, apparently, was behind schedule. It had a fairly high-profile beginning, roping in actor Shah Rukh Khan to endorse Masterstroke, but the contract was not renewed. Reluctant to comment on the issue, Adil would only say: “Right now, we’ll be taking over the marketing of masterstroke.”
The joint venture was meant to be a way around the high import duty obstacle. Indian-made-foreign liquor, or IMFL, is similar to foreign brands, but does not entail payment of customs duties because it is not imported.
Now that the future of the joint venture is uncertain, Diageo is believed to be in talks to acquire 14.99 per cent equity in USL, in addition to forging a distribution partnership with it for the Indian market. “We are in discussions. Whether anything materialises is for the world to watch,” says Adil.
This is another matter in which clarity is yet to emerge. “Diageo can confirm that it is reviewing a possible collaboration with USL. However, there is no certainty at this stage that these discussions will result in a transaction,” says a spokesperson for Diageo International.According to a JP Morgan report, “Diageo is the most likely contender to take a stake in USL, which would boost critical mass in India.”
The developments add interesting new dimensions to Diageo in India. Masterstroke is a mid-segment brand. “That (adding a mid-segment brand) is a good strategy. Hedging is a great strategy in India. Downgrading always works. It gives people an option,” says brand consultant Harish Bijoor.
However, it will also require fresh thinking in Diageo. The company has so far stuck fiercely to its premium positioning, which translates into high prices and wide profit margins. “It was a tossup between being big and being the best. We chose the latter. Johnny Walker sells at Rs 3,600 a bottle while Bagpiper (a whisky brand from USL) is priced at Rs 400. Imagine how many Bagpipers need to be sold to make up for the sale of one Johnny Walker,” says Adil.
But Indian consumers still think of premium as someone else’s thing. Imports make up for a paltry 1 per cent of the 130 million-cases-a-year spirits market.
However, India has a long tradition of luxury. Its Maharajas of yore made it a big market for large Rolls Royce and Chevrolet sedans. But, with the onset of a socialist era, money making and spending came to be looked down upon. Diageo would be hoping to rekindle the past.
The potential is there. According to the World Wealth Report 2008 by Merrill Lynch and Capgemini, India led the world in the population growth of high net worth individuals with 22.7 per cent. It’s reflected in Diageo’s sales. Johnnie Walker and Smirnoff together have nearly 90 per cent share of the premium segment of the scotch and vodka market. At Dragonfly, an upmarket bar in Mumbai, imported liquor sales account for 60 per cent of the total, that too when one small peg of Johnny Walker costs Rs 400, excluding taxes, while USL’s Antiquity sells at Rs 200, excluding taxes.
The buzz is that in the one year that Diageo’s wine, Nilaya, has been in the market, it sold nearly three times what its largest competitor disposed of. “In one year we’ve got the brand going. We survived the first year. Normally it takes any brand three years to get to where we are in the first year,” says Adil.
Diageo India has strengthened its relationship with duty-free operators, which comprise a channel to reach out to the consumer at more affordable prices. With privatisation of airports, the travel retail business has transformed itself. No longer is the duty-free shop a small store tucked away in an obscure corner of the airport. More and more international airports, like the ones in Bangalore, Hyderabad and Mumbai, offer their consumers world-class shopping experience with clearly demarcated areas for core categories like liquor, tobacco, confectionery, perfumes, cosmetics and electronics. In some of these duty-free outlets, Diageo occupies 60 per cent shelf-space.
The company has been organising a host of events, such as, the Johnnie Walker One Tree Music Festival, Johnnie Walker Live with Ray Charles, Johnnie Walker Classic golf tournament, Johnnie Walker Race Day, and Polo Day with Tarun Tahiliani Equestrian Fashion. “The idea behind this strategy was to provide consumers with holistic aspirational experiences,” says Adil.
Changing stripes
Curiously for a brand that intends to stick to its premium guns, Diageo is swiftly moving into Tier II and Tier III cities. “On Saturday night, I was in Lucknow and was blown away by the level of aspiration and sophistication there. In fact, it is so much more palpable there than it is in Mumbai,” says Adil.
In north India, Diageo will pay attention to Ludhiana and Chandigarh. Bellary and Kolhapur will be on the company’s radar in the south and west, respectively.
The journey outside the big cities is adding myriad nuances to Diageo’s strategic thinking. It is not merely a question of devising a new strategy for small cities; it is about devising different strategies for different cities.
For instance, the company believes that in a city like Ujjain, Red label would be aspirational; in Lucknow it would be Black Label; and in Delhi it is Gold Label. Accordingly, Adil and team use their discretion. Mumbai gets McLaren’s champion Formula 1 driver Mika Hakkinen to promote Johnnie Walker Black Label Scotch Whisky; Lucknow gets a fashion show with a stationary Formula 1 car.
Additionally, Diageo has identified women drinkers as an important avenue for growth. First it launched Nilaya, the wine, and then stepped up the distribution of its liqueur brand, Baileys. “Why, women are even drinking our malts,” says Adil.
Is this varied approach imperative? “There is a method to the madness. An integrated approach is a surefire way to failure. Everyone and everything is different. If I took an average of different things, I would get nothing. This is the age of specialisation, not generalisation,” says Adil.
That said, Diageo India’s branding remains global, it’s merely the activation that is local. A case in point is its campaign that uses Formula 1 to connote personal progress: “Keep walking.”