No hics in the business

THE WINE CLUB

Ever since Vijay Mallya took over the French wine company Bouvet-Ladubay last month, the Indian media has been agog with stories about how the "...wine industry has arrived" with the entry of the UB Group, which is also said to be setting up a spanking new winery in India.

This is events coming full circle. One of the first winemakers in modern India was the late Vittal Mallya, who in the 1970s had teamed up with Dr Rossi, Sharad Pawar and sundry grape farmers to set up a winery at Baramati in Maharashtra.

Since there were no wine grapes available at that time, the winery used Bangalore Blue and Bangalore Purple grapes to make wine in epoxy-lined concrete fermentation vats.

As the resulting wine had a "foxy" flavour, they chose to mask this by adding herbs and spices to produce a range of fortified or aromatised wines in the Italian style, under the Bosca brand name.

Of course, the venture was years ahead of its time and never really took off. Subsequently the effort was eclipsed by the emergence of Indage, which in 1986 launched Marquise de Pompadour ("Indian Champagne") and Riviera still wines.

We are now told that "wines are the next big thing in India" "" Citigroup said as much in its weekly brief of November 2005, while Business 2.0, a magazine from the Times-Warner Group, says that setting up a business for wine imports could cost less than $100,000.

Since there's a basic contradiction there (how can a "big thing" have such a low capital cost?), it would be useful to clear up a few points about wine in India:

Making good wine in India is easy. Good wine requires good grapes "" which are relatively easy to grow in the key grape-growing areas of Nashik, Satara-Sangli and Bangalore. Since our ripening months of November-December-January are free of the weather hazards of temperate climates (frost, hail, sleet), every year is a "vintage" year.

Marketing wine is difficult. Since alcoholic beverages are a state subject in India, it is like operating in 34 different countries as each state has its own rules and regulations, duties and taxes, and moving alcoholic beverages (including wines) between states is a major logistics exercise.

There is intense competition in the trade channel for shelf space and listings "" and a small standalone wine business gets outspent by the big boys.

The industry is small, but growing rapidly. Total sales of wine were about 0.75 million cases last year "" against 125 million cases of spirits and 90 million cases of beer. However, sales have increased by over 25 per cent annually in the last few years, and are expected to grow at least 10 times in 10 years.

The wine business has high capital costs. Starting a winery or an import business is costly, and a wine business would break even in between three and five years "" provided it does things right.

The investment in one full container (1,000 cases) of imported wine sold at retail is about Rs 1 crore "" including marketing and overheads. Setting up a 75-acre vineyard and a winery to produce the wine (about 4,00,000 bottles at full capacity) would cost about Rs 9 crore today, and marketing and overheads at least another Rs 4.5 crore over the next three years.

However, it's early days as yet. Wine consumption in India is only about 6 ml (one teaspoon) per capita, so there's immense scope to grow ("Nobody wears shoes!").

If all state governments (not just Maharashtra) were to relax controls by making it easier and cheaper to produce and market wines, volumes could grow a hundred-fold in the next 20 years.

The conclusion: Yes, wine is a long-term promise market in India, but price-sensitivity and government controls will continue to make this less commercially attractive than many other sectors.

I frequently advise my clients to enter this business only if they have any one of the following attributes: (a) You are already in alcoholic beverages, and so know how to deal with the environment; or (b) you are already in wines overseas, and so have domain knowledge; or (c) you are passionate about the subject and don't care how long it takes to make the business a going concern. Cheers!

(al_chandra@vsnl.net)