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After nearly six years of trying to build a strong market for Diageo in India, Ivan Menezes is perhaps now making his biggest bet on the country's drinkers. On Wednesday, the chief executive of the UK-based liquor giant unveiled an almost Rs 11,500-crore offer for an additional 26 per cent stake to gain control of Bangalore-based United Spirits.
Having been at it from the time he was the chief operating officer of Diageo's Asia-Pacific business in 2008, this time round Menezes is leaving nothing to chance. The company's first offer in 2012 failed to enthuse United Spirits shareholders because it was below the share price at the time. Now, Diageo, which already owns close to 29 per cent stake in the Indian company, has nearly doubled its offer.
There are several reasons why Menezes, who was born in India and went to St Stephen's College in Delhi, besides the Indian Institute of Management in Ahmedabad, wants the deal to happen. Weak global demand has shifted the Diageo's focus to fast-growing regions like India. For the nine months ended March 31, 2014, global sales grew by only 0.3 per cent, while Asia-Pacific sales fell almost 9.5 per cent. The only exceptions were India, West Asia and Korea.
India becomes especially important in Menezes's scheme of things because of its huge potential in the whisky market. The country currently consumes about half of the whiskey sold worldwide, and that share is expected to rise to roughly 70 per cent by 2017, according to Euromonitor International.
For Menezes, who became the CEO of Diageo in July last year, the deal is also important to bolster the company's top line growth. "Consistent delivery of top quartile top line growth is not something Diageo has achieved. In fact, we have averaged middle of the pack. And while we had delivered very good margin expansion in the last three years, long term margin expansion wasn't part of our DNA. It is now our ambition," Menezes had told investors soon after taking over.
United Spirits with its annual sales of 130 million cases and growing at 6 per cent each year could prove to be a powerful growth engine. His plan is to take the Indian company up the value chain in the liquor market for better returns. "Our strategy for long-term value creation remains unchanged from the future. The consumer in India is trading up, and United Spirits has the brand portfolio to capitalise on this trend. In the medium term, we may have to increase marketing behind the premium brands, but I'm confident that we can deliver the right return from any upgrading," Menezes has been quoted as saying.
While there remains several challenges to Menezes's growth ambitions in India-a stigma against alcohol consumption and a common problem of counterfeit liquors-increasingly disposable income and a growing population of the middle class make the country and exciting prospect for Diageo. The open offer for the deal is expected to begin in June, and it remains to be seen whether the deal will work this time round.
