BENGALURU -- British distiller Diageo, maker of Johnnie Walker scotch, will launch more global brands together with new local offerings in India, the world's largest whiskey market where the race to corner market share with premium liquor is heating up, despite growing inflation and widening economic disparity.
Selling premium brands, in line with its strategy to pursue "value over volume," is the way forward for Diageo in India, Hina Nagarajan, managing director and chief executive officer of Diageo India, said in an interview with Nikkei Asia.
Diageo already sells scotch such as Johnnie Walker and Talisker in India, along with gin and Guinness beer. The spirits maker, with a market capitalization of $98 billion, also owns homegrown money spinners such as Black Dog scotch and the McDowell's, Royal Challenge and Signature whiskies after it bought a controlling stake in Indian liquor baron Vijay Mallya's United Spirits.
Nagarajan believes that Indians will shell out a premium for a good tipple. She cites Diageo's performance in India over the years as a case in point.
In the financial year ended March 2022, sales of its premium offerings surged 23.6% year on year, accounting for 72% of net sales of 93.82 billion rupees ($1.2 billion). Sales from its mass brands, however, grew 8% year on year to 24.58 billion rupees. For premium brands, it was a sharp spike from fiscal 2016, when they brought in about half the annual sales of 90.91 billion rupees.
"In India, the premiumization trend has gained momentum over the past few years with the normalization of alcohol consumption at home," said Nagarajan. "We will continue to bring in more brands from the global portfolio, as well as launch new products as and when opportunities present themselves."
A "new, changing and vibrant India" presents an opportunity to "shape a new Diageo India for the future, with premiumization at the core."
Premium brands typically cost north of 1,000 rupees for a 750 ml bottle, with the low end of the premium segment costing at least three times more than mass-market brands.
A bar in a luxury hotel in Mumbai. Demand for fine liquor is increasing, not only in bars but also for consumption at home. © Reuters Diageo India has swiftly acted to ensure it does not stray from its premium pursuit. Last month, it sold 32 mass-market brands that brought in about 13.5 billion rupees in the financial year ended March 2022 to Singapore-headquartered Inbrew for 8.2 billion rupees. It franchised 11 more brands to Inbrew for five years, after which Inbrew could buy them for 13.31 billion rupees.
Trimming the India portfolio was in line with Diageo's global playbook. In 2018, Diageo sold 19 brands to American distiller Sazerac for $550 million.
Apart from this, Diageo bought a 22.5% stake in Indian craft gin maker Nao Spirits for 310 million rupees. It also launched Epitome Reserve, a craft rice whiskey, and Godawan, a single malt.
The quest to tap into the country's affluent with pricey offerings is not confined to Diageo. Its archrival in India, French distiller Pernod Ricard, has taken a similar route. So has Japan's Suntory, Scottish distiller William Grant and homegrown spirits makers such as Amrut and John Distilleries. Indian companies such as Allied Blenders and Radico Khaitan, which have thrived in the mass market, are also eyeing premium offerings.
Diageo and Pernod Ricard, which owns Chivas Regal, Royal Salute, Glenlivet, Jameson and Absolut, are clear leaders in the premium segment. Pernod Ricard claims about 45% market share. Some of its best sellers in India such as Royal Stag, Blenders Pride and Imperial Blue whiskies came from Seagram's, which Pernod jointly bought with Diageo at the turn of the millennium.
Pernod Ricard identifies India and China as key markets. Takeshi Niinami, chief executive officer at Suntory, told Nikkei Asia in a December interview that the company's sales in India tripled year on year in 2021 to half a million cases.
The rush to grab a slice of the premium market in India, where distillers have gone to launching smaller measures in tetra packs to keep prices low, comes at a time when COVID and the subsequent slowing of the economy have laid bare the economic divide between the country's rich and poor.
According to government estimates, India's per capita income stood at 91,481 rupees for the fiscal year ended March 2022 -- lower than the 94,270 rupees of two years earlier, when COVID struck. Further, the World Inequality Report 2022 estimates that the top 10% of India's adult population held 57% of total national income, while the share of the bottom half fell 13%. The report pegs the average annual income of India's adult population at 200,000 rupees, with the bottom 50% earning 53,610 rupees and the top 10% 1.1 million rupees. "India stands out as a poor and very unequal country, with an affluent elite," it notes.
"India is not just about low-end consumption, and different strata of the population have different per capita income, which makes premiumization a strong theme in the liquor industry," said Abneesh Roy, executive director at Edelweiss Financial Services. "We see consumers in the middle and higher income groups upgrading, while the lower end consumers are down trading."
The distillers are hoping to piggyback on affluent Indians. "Post COVID, we see premium segments growing much faster than the value segments in the market," said Nagarajan. "This is reflective of both the inflationary pressures [that] consumers at the lower end are facing and the trend of wanting to drink better, not more, at the higher-price segment level."
While she concurs that the time is ripe to accelerate sale of premium products, Nagarajan is cognizant of the challenges, particularly the "inflationary pressures on consumers" along with a surge in prices of extra neutral alcohol -- the primary raw material for making alcoholic beverages -- and glass.
While spirits makers are free to fix prices in India, they need approval from each state. On top of it, alcohol taxes vary by state. India also levies a 150% tariff on imported liquor, which makes premium variants such as scotches prohibitive for the less affluent.
Spirits makers, including Diageo, are pinning their hopes on the proposed Free Trade Agreement between India and the U.K., which would moot the high tariff on imported liquor among others, to make premium brands relatively affordable.
"In liquor, the pricing power is a bit limited. With inflation input materials, the profits in the mass brands are wafer-thin," said Roy of Edelweiss. "The viable business is the premium part of the portfolio."