Economic Times: July, 2016
Mumbai: Diageo Plc, the world's largest spirits company, has picked India as one of its three focus areas that will drive growth in fiscal 2017.
The maker of Johnnie Walker Scotch and Smirnoff vodka said a stepped-up focus on US spirits, scotch and India, will lead to a further improvement in performance.
Diageo's confidence that focus on these three can boost performance underpins the guidance it has given for mid-single digit top line growth and 100 bps of margin improvement for the three years ending fiscal 2019.
"Our third area of focus for fiscal '17 is India where consumer dynamics are fuelling premiumisation. In fact, we view the market as three Indias with consumers across all income levels on a journey through our brands," Ivan Menezes, chief executive at Diageo, said on Thursday during an investor presentation.
Brands of United SpiritsBSE -0.58 % that Diageo acquired three years ago now account for almost 40 per cent of the parent's sales volume and 9 per cent of net sales.
"India is nearly a tenth of our sales. Category growth is strong and USL is now a business in good shape to grow share," Menezes said.
India is among the most important top-line growth drivers for both Diageo and French beverages rival Pernod Ricard, contributing 25-35 per cent of total growth for these firms in the next three years. Pernod Ricard's portfolio is exclusively focused on the more profitable premium Indian whiskies, dominating the segment with about 48 per cent market share.
USL has historically been incentivised on volume growth with nearly 150 brands. Despite overall market dominance, it has fallen behind Pernod Ricard in the premium segment.
However, USL's mix has improved significantly as premium segment revenue and volume share has risen to over 50 per cent, from 38 per cent in FY13. It has relaunched core brands McDowell's No 1, Bagpiper and Signature, which compete with Pernod's Royal Stag, Imperial Blue and Blenders Pride.
"Royal Challenge volumes are up over 60 per cent after this intervention and Royal Challenge and McDowell's No. 1 are already gaining share," Menezes said. Despite some disruption in certain states, sales grew 5 per cent for year ended June 2016, driven by premiumisation strategy with gross margin improvement of 99 basis points.
In 60 per cent of India, pricing is controlled by state governments but the industry outlook is improving after almost two years without any increases in rates, analysts said.
For instance, USL raised prices in Karnataka — largest market, contributing 25 per cent of volume — in July. It hopes to do the same in a few other territories. Further, Uttar Pradesh recently dropped alcohol taxes by 20 per cent due to falling revenues. "Combined with premiumisation and productivity measures, this should support margin expansion (for USL)," said a recent Credit Suisse report.