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India has always been a complicated market for the alcobev industry to operate in, but with hurdles only increasing over time, the difficulty is likely to begin showing in the numbers for United Spirits, India's largest spirits company now controlled by global spirits major Diageo.
The company is likely to witness a 5-7% drop in volumes in the first half of current fiscal as political and regulatory hurdles continue to plague in the South, against a backdrop of a general slowdown in the growth of spirits consumption.
While the market had been expecting a growth of 2-4% in volumes in the second quarter of fiscal 2014, analysts now see the target as an “ambitious one”.
“I would not be surprised to see a contraction in volumes,” says an industry analyst.
The company had clocked sales volumes of 60 million cases in the first half of last fiscal. Publicly held United Spirits, in which Diageo has a strategic 25.02% stake, will be reporting its second quarter earnings on Friday and it will be the first quarter after Diageo took the driver seat in Vijay Mallya-owned flagship.
Senior UB Group officials said that they will be able to discuss in detail on the volumes on the day of the earnings, but indicated that there may be small dip in volumes.
The growth in the consumption in spirits has generally been on a decline across the country as consumers cut back on discretionary spending and the growth from conversion to IMFLs from country liquor is almost complete.
Industry research firm IWSR expects India's consumption of spirits in the calendar 2013 to grow by merely 3% to about 310 million nine-liter cases in 2013 from 301.5 million cases in 2012.
Besides three key states in South India - Kerala Tamil Nadu and Andhra Pradesh - may be the biggest cause of this decline as they are also the top liquor markets in the country. United Spirits gets about 50% of its volumes from the southern states.
"Over dependency on key southern markets and slow industry growth could result in murky market share gain strategy by companies," analysts with Espirito Santo Securities said.
It is understood that United Spirits is vacating most of its brands in the economy segment in Kerala as the company has not succeeded in pushing price hikes to its consumers.
The Kerala State Beverages Corporation (Bevco), a monopoly of the Kerala Government, has only allowed two price hikes in the last ten years and the rising input costs for manufacturers is making it difficult to sell brands in sub-premium categories.
While it is not clear which brands have been moved out of the state where per capita consumption is the highest in the country, it must be noted that the company has achieved much of its sales growth from its low-priced brands.
The crisis faced by the company in Tamil Nadu is showing no signs of resolution either. The company has an upper limit on the volumes it can sell in the state and even its production capacity in the state has been curtailed.
In the second quarter of fiscal 2013, the start of the problem in Tamil Nadu had led to a 1% drop in the company’s all-India sales volumes. The state bifurcation issue in Andhra Pradesh has presented another major hurdle as the political disturbance in the state and widespread protests have led to weeks of protests and shutdowns that have taken a toll on volumes.
With Diageo’s entry into the company, there is said to be a increased focus on premiumisation, compliance and a clampdown on all costs that seem redundant.
Even marketing spends is said to be focused on only those brands that rake in the moolah. Industry analysts however indicated that while the sudden shift in premiumisation will have a toll on USL, the shift to completely move away from the mass-segment will have a critical blow on the overhead costs of USL, which will have to be balanced delicately.
