While premium brands provide profitability, the popular brands provide volumes. USL is
focusing on finding the right balance given the tough conditions prevailing in the market place.
The USL Diageo combine is the biggest alcobev company in India and they are making a strong emphasis to grow from strength to strength. While the popular brands continue to grow it is the premium brands that bring in the profits.
United Spirits Ltd (USL) will continue with the popular segment consisting of mass or value brands like Bagpiper, Director’s Special and Haywards whiskies using franchises for that business in some states to focus more on premium brands. Given the tough conditions in some states other companies too follow a similar strategy. Around 59% of volumes still come from the popular segment and franchising is a part of United Spirits’ strategy of selective participation.
Franchising helps extract the best value from popular brands and liberate the company’s management as much as possible so that they can focus on the bigger potential profit pools of the future, which
are in the prestige and above segment, Kripalu said.
USL’s popular segment consists of mass or value brands like Bagpiper, Director’s Special and Haywards whiskies.
Diageo is a global leader in beverage alcohol with an outstanding collection of brands across spirits and beer. These brands include Johnnie Walker, Crown Royal, J&B, Buchanan’s and Windsor whiskies, Smirnoff, Ketel One and Cîroc vodkas, Captain Morgan rum, Baileys liqueur, Don Julio tequila, Tanqueray gin and Guinness beer.
Two policy developments during the year – demonetisation and the judicial ban on the sale of alcohol along national and state highways – adding to the introduction of prohibition in the State of Bihar, created a volatile and tough environment for alcobev companies, including ours – but, I believe we have outperformed competition in this challenging environment, said Mahendra Kumar Sharma, Chairman, in a letter to shareholders. We have also performed favourably compared to most other fastmoving consumer goods (FMCG) peer companies. We will continue to build on this momentum.
For the year, while overall net sales grew by a modest 4%, the Company improved gross margins by 156 bps to 42.9% and profit after tax grew 39%, both aided by improved productivity and operational
efficiencies. The above, coupled with stringent corporate governance and compliance norms, the Company has adopted and adhered to, have led to a further upgradation of our long-term credit
rating to AA which will enable it to access more economical sources of debt. It will help to deleverage the balance sheet and reduce the level of overall debt, including through the disposal of noncore assets,
to further improve financial performance by optimising on total debt and financing costs.
In the last three years since Diageo took a controlling interest in United Spirits, the journey has been to transform the Company into a world-class organisation that is known and recognised for its performance, compliance culture, ethical values and transparency, thereby gaining the trust and respect of all stakeholders and society at large. We have made fair progress in the pursuit and achievement of
that vision leading to being accepted and acknowledged as a valuable and integral part of the Diageo group, says Sharma. On our part, over the last few years we have aligned and strengthened our business
strategy, brand portfolio and investments, compliance standards, governance and financial/operational control mechanisms, talent development, environmental footprint and sustainability efforts and much more, to those of Diageo’s standards globally, to pursue greater integration with the parent, in true spirit of interdependence. We now identify and adhere to the Diageo ethos more closely than ever before, even while we build on the positive aspects of our legacy, including our understanding of the Indian market, consumer franchise of our brands and wellestablished distribution network.
No stone has been left unturned, and no effort spared to examine every brand, every assumption, every process or control and much more, in our quest to become the best performing, most trusted and respected consumer products Company in India.
Said Anand Kripalu, Managing Director and CEO, I am very pleased with our performance delivery in the year gone by and how we’ve held up against what can be described as the single-most challenging
year from a regulatory perspective. Our results are commendable seeing as they come in the face of a very subdued economic environment and several regulatory changes. Beginning with the surprise announcement of total prohibition in Bihar, coping with the aftermath of demonetisation and culminating in the Supreme Court banning the sale of alcohol near national and state highways! Timely
interventions, out-of-the-bottle thinking and employees rallying together to mitigate these risks as quickly and effectively as possible have helped us survive and grow in this tumultuous year.
On the other hand, our industry fundamentals remain promising as demographic factors, increasing aspirations and changing attitudes to alcohol continue to fuel growth. We have significantly increased the quantum of investments behind our focus brands during the year, communicating more creatively with consumers, and at scale. Our strategy of premiumising offerings, refreshing and renovating brands as well as innovating with new consumption occasions, led to strong, ahead-of-industry, growth of our
Prestige and above segment, which grew net sales 14% during the year. Our renovated brands, McDowell’s No. 1 whisky net sales grew 8%, Royal Challenge grew 16% and Signature grew by 29% in this year, gaining market share as well. The Scotch category also grew net sales 32%, driven by Johnnie Walker, Black Dog, Black & White and VAT 69.
To stay focussed on the most profitable parts of our business viz. Prestige and above, we created a fit-for-purpose business model to selectively participate in the Popular segment in certain states. In others, we have begun franchising our MK Sharma Two policy developments during the year – demonetisation and the judicial ban on the sale of alcohol along national and state highways – adding to the ntroduction
of prohibition in the State of Bihar, created a volatile and tough environment for alcobev companies, including ours – but, I believe we have in this challenging environment, 6 AMBROSIA • July 2017
Popular brands to local partners to improve operational and cost efficiencies.
At Diageo, standards are everything. Our high-quality standards are manifest in every product in our portfolio and our state-of-the-art Technical Centre is the custodian of our valued portfolio. Our new
Packaging Centre at Kumbalgudu will more fully serve our innovation agenda, going forward, Kripalu added.
We only do business the right way. We strengthened our compliance and governance norms this year with the introduction of the Diageo Know Your Business Partner Programme, a more thorough due diligence of our business partners, he pointed out to shareholders.
We also restructured our organisation to fit our strategic objectives and ensure that we respond quickly to customer and consumer needs, making it leaner, flatter and more agile; roles and spans are bigger; decision making is faster; and accountability sharper. We firmly believe that when consumed responsibly, alcohol can be part of a balanced lifestyle and play a positive role in social occasions and
celebration, he continued.
On the company social responsiblility programme, Kripalu said, “We champion responsible drinking and support road safety programmes all over India. This year we extended our partnerships to other corporates such as Essar Oil to create awareness and drive behaviour change through their network of 3,200+ petrol pumps, many of which are situated along national highways. Over the last few years, we have transformed and aligned ourselves more closely to the Diageo value system which has begun to
underpin our entire business value chain, as well as our relationships with all our stakeholders, including our employees and the community at large.
Road safety and anti-drink driving are central to our strategy to address alcohol harm and promote responsible consumption. Our signature ‘Diageo Road to Safety’ programme, now in its third year, is executed in partnership with state governments and reputed not-for-profit organisations. In February this year, we were proud recipients of the ‘National CSR Excellence Award 2017’ for this campaign.
The USL-DIAGEO – ROAD TO SAFETY programme, together with the Institute of Road Traffic Education (IRTE), covered new ground, reaching 50 new cities in 15 states and trained over 3,900
traffic officials in road safety capacitybuilding, along with 6,000 commercial vehicle drivers.
FY16 reached 2.8 million citizens through its network of Radio, TV and Digital. Till date, the campaign has garnered over 3 million pledges in support against drunken driving. Citizens were encouraged to always have a ‘Designated Driver’ and to ‘Never Drink & Drive’. Campaign ambassador and youth icon, Virat Kohli together with leading celebrities Chris Gayle, Karisma Kapoor and Gul Panag amplified the message of never drinking and driving.
DIAGEO-ESSAR OIL (EOL) – ROAD TO SAFETY PARTNERSHIP, a first-of-its kind CSR partnership was launched in February this year. This Road Safety campaign aimed at educating the
commercial vehicle drivers is being rolled out across 3,200 Essar Oil’s retail outlets on the state and national highways.
Moving forward, I see these values-led and value-creating relationships propelling our growth even more appreciably forward. We are part of something bigger, and we are certainly proud to have become an integral and valuable part of Diageo.
Strong market share gains achieved during the year as a result of renovation of key brands – McDowell No. 1 Whisky, core variant renovated in November 2015 grew by 8%. Signature has grown almost 29% and Royal Challenge net sales grew 16% post renovation.
Our brand portfolio took a major leap with pioneering innovations to power future growth. We launched Silk, another landmark in McDowell’s No. 1 brand building journey and the first Indian
whisky with honey flavour, and also introduced our premium Captain Morgan Original Rum to meet the evolving desires of rum connoisseurs.
Introduced gifting and personalisation at the point of purchase for some of our premium whisky brands for special occasions, whether it is weddings or festivals like Holi and Diwali. Consumers loved these
gift packs, as evident in the fact that they were happy to pay the premium for the beautiful packaging that they were proud to gift to friends, family and business associates alike.
Simi Bartender is a chatbot – a conversational interface that helps consumers with cocktail recipes. Launched during the year, this innovative digital experience offers bartending solutions, with over
2,000 DIY cocktail recipes, to enthusiastic consumers ready to play host at parties.
Posted strong 43.5% volume share in the categories in which we operate (including wine and flavoured spirits). P&A represents 41.13% in volume and 60% of the overall business (net sales).
We are now fully aligned to Diageo’s commercial capability standards with an overall ‘stable’ rating and best practice showcase in certain criteria. This is a significant improvement from the past year. These standards help benchmark selling capabilities across the world, including Customer Planning and Performance Management, Outlet Execution Standards, Rewards & Recognition and Commercial Scorecards.
Deployed a fit-for-purpose model to optimise our Popular brands business. In certain states such as Andhra Pradesh, Puducherry, Goa, Andaman and Nicobar and Kerala, we believe that other local parties are better advantaged to maximise value of our popular brands and have appointed franchisees for these brands through a fixed fee model.
This will enable us to focus on the biggest growth opportunities. Partnered with innovative start-up ‘HipBar’, a cloud-based app catering to drinks connoisseurs. Customers can use their smartphone to buy their favourite spirits bottle through the HipBar app, which can be redeemed
by portion in any partner restaurant or hotel across the country.
It is our constant endeavour to bring cost and operational efficiencies into the system through
sustainable initiatives across the value chain of our business. These include creation of an
integrated supply team to boost collaboration and faster decision-making, besides greater
focus on productivity and savings. These initiatives led to ` 200 crore in cost savings during
FY17 – the highest ever till date.
During the year under review, your Company has achieved a sales volume of over 90 million cases and this resulted in decline of 3.2% compared to prior period (previous year 93 million cases, excluding royalty / franchise markets). Net sales/income from operations of the Company’s brands grew 3.6% in the financial year ended March 31, 2017 and stood at ` 85,476 million net of duties and taxes (previous
year ` 82,482 million). Sales volume of the Company’s brands in the ‘Prestige and Above’ segment grew 7.7% in the financial year ended March 31, 2017 and stood at 37 million cases (previous year 34 million cases). Net sales of the ’Prestige and Above’ segment grew 13% and stood at ` 49,660 million net of duties and taxes (previous year ` 46,013 million). The ’Prestige and Above’ segment represents 41% of total sales volumes and 58% of total net sales with 4 basis points and 5 basis points improvement respectively compared to previous year.
After a lackluster out turn in 2016, economic activity is projected to pick up pace in 2017 and 2018,
especially in emerging market and developing economies. However, there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications. The global economy remained on a subdued
growth path, estimated to growth at 3.1% in 2016 against 3.2% in 2015. With estimated growth of 6.3% in financial year (FY) 2016-17 (against 6.7% in the previous year), the emerging and developing Asian countries were the key contributors of the global growth, led by India and China.
Propelled by the central government’s demonetization reform, market interest rates and yields on
g-secs are expected to be lower in FY18 as compared to FY17, which is likely to provide a boost to the Indian economy. With fiscal gains resulting from demonetisation and implementation of GST also getting realized, India is likely to be the fastest growing major economy in the world during FY18. GDP is expected to grow to in the range of 6.75% to 7.50% against the
7.1% growth registered in FY17. (Source: Economic Survey 2016-17 dated Jan 17)
Driven by the rapid increase in the urban population,the Indian spirits is on a high. Further boosting the market growth is the increasing disposable income and growing preference for whiskies, coupled with changing demographics. With over half the country’s population (54%) above 25 years of age, and
the estimated median age of the country’s population pegged at 28 years, as of 2016, the growth metrics for the industry are quite favourable. A change in outlook towards social consumption of alcohol, improvement in life styles, increasing aspirations, growing prominence of ‘pub and cocktail culture’ in urban cities and emergence of novel Food & Beverage formats is further pushing demand for alcoholic beverages in the country. The per capita consumption of alcohol, however, was just above 2 litres of pure alcohol (lpa)/head in 2016. The Total Beverage Alcohol (TBA) market in India is pegged at ` 378347 millions, of this, Western style spirits accounts for over 52%,
The year gone by was challenging for the Alcobev industry. Industry growth was pulled down by several factors during the year under review, and as a result, liquor consumption remained by and large flat. Consumption of Whisky was estimated to grow at 1.15% for FY17 while Spirits remained flat. Bihar, the fourth largest state by population, went dry in April, impacting the overall growth for the year by ~1.5%. The supply in Punjab was disrupted for a month due to procedural technical issues. Significant rise in tax had put the burden of overall cost on states like Andhra Pradesh, Telangana, Karnataka and Maharashtra.
Demonetisation impacted businesses by knocking off about 15%-20% of sales in November and December, impacting the overall year by another 1.5%. With many more police checks taking place, there has also been increased clampdown on drink-driving. The market has also been severely affected
by the Apex Court’s ruling banning liquor vendors within 500 metres of a state or national highway, which has caused significant disruption as many license holders simply stopped buying stocks. Due to this, some believe that up to 15% of retail outlets will be lost forever, although most expect
that over time this supply will be replaced by alternatives.
India is one of the largest markets for spirits globally. Approximately 6% of the global alcohol beverage growth is driven by our country. Going ahead, almost 11% of the global spirits growth is expected to come from India. Despite being a country with a population of about 1.3 bn, of which about 58% lies in the age group of 25 years or above, India’s per-capita consumption of alcoholic beverages stands at approximately 4 litres per annum, which is quite low compared to various other developing countries where per capita consumption of alcohol exceeds 10 litre per annum.
Due to rising income levels, the pace of growth of consumption in Tier-2/3/4 cities as well as rural areas could outpace that in urban cities, going forward. Moreover, with the rise in disposable income, consumers would tend to upgrade their preferences, resulting in higher demand for prestige, premium
and luxury segments.
The Alcobev industry in India is witnessing significant changes influenced by western culture; thus a strong trend towards premiumisation is clearly visible. For the industry as a whole, the premium and above segment is expected to grow at a CAGR of 14% over 2016-2021, whereas the prestige segment is estimated to grow at 12% over the same period. Following the industry footprints, your Company
is also strategically focusing on Prestige and above brands. The Company is constantly working on renovation and innovation of its brands. To emphasize more on the same, the Company has chosen purpose-led marketing platforms and occasion driven special packs.
In India, the alcohol industry works in a highly regulated environment under both central and state governments. Additionally, national laws and regulatory bodies, such as the Food Safety and Standards Authority of India (FSSAI), also significantly impact the Alcobev industry. A spate of recent
regulations has further tightened the regulatory controls on the industry. Some of the recent regulatory changes in the industry include – 1) Reduction in distance limit for liquor vendors to 220
meters from 500 meters in areas with population up to 20,000; 2) Exemption to hill states of Sikkim and Meghalaya; and 3) Permission to liquor shops whose licenses had not expired
by April 1, 2017 to continue until their permits expire or until September 30, 2017.
As a result, nearly a third of liquor outlets will be impacted and migration of these could take time. The resultant disruption will impact the revenues of liquor firms. This ruling will lead to short-term disruptions as liquor vendors relocate, although it is unlikely to significantly impact medium to long term growth prospects for the industry.
Under the GST regime, liquor is excluded from the GST net. Undenatured ethyl alcohol, which is a key ingredient for the spirits industry, has been kept out of GST. GST rate on molasses has increased by 10% to 18%, whereas the rate on new packaging materials has increased by 6% to 18%. The general tax on services has increased by 3% to 18%. As a result of this new regime, the alcobev manufacturers will not get input credit on all input taxes in the supply chain. This is likely to have an unfavourable impact on margins. The Company will continue to work with the central government to mitigate this impact, and will approach the state governments for appropriate price increases.
Despite the rising cost of ethanol, one of the major raw materials used by the industry, aggressive productivity led initiatives enabled the Company to save ` 2000 million in material costs during the year. This compared quite favourably with the ` 1400 million savings secured during FY16. Integration with the Diageo supply chain is also creating some avenues for better pricing efficiencies in the system, which is also expected to gain from the Government of India’s efforts to source ethanol from lowcost
alternative sources such as bio-waste and feedstock (wheat, straw, corn straw, rice straw, etc). Realisation of these efforts would help improve availability of ethanol and stabilize prices.
The Company’s portfolio includes brands such as McDowell’s No.1, Royal Challenge, Signature, and Antiquity, among others. Your Company also imports Smirnoff and Ciroc in India.
The is a subsidiary of Diageo plc – a global leader in beverage alcohol with an outstanding portfolio of brands across spirits, beer and wine categories. Pursuant to its acquisitions in 2013 and 2014, Diageo plc has a 54.8% shareholding in your Company, making India one of its largest markets.
The Company has 18 brands in its portfolio which sell more than a million cases every year, of which 4 brands sell more than 10 million cases each annually. The Company exports to over 37 countries across the globe.
With its 60 manufacturing facilities spread across states and union territories in Indian and also its presence through franchisee partners in other parts of countries, the Company not only ensures faster turnaround of products but also minimizes risks related to local states’ policy changes.
Similarly, strong distribution ensures continuous supplies to all key markets, as well as reach to all of the 81,000 retail outlets.
The Company has set out a strategic road map which includes its five strategic pillars to steer its future growth trajectory. These are: 1. Strengthen and accelerate core brands. Transformation of its key brands to win greater market share is a major agenda for the Company. The main beneficiaries of this approach are Signature, McDowells, Royal Challenge, Black Dog among others. From renovating brands, diversification within the geographies and enhancing the customer reach, your Company has been
making significant strides in its journey of transformation. The Company has upgraded three of its key brands viz. (1) McDowell’s No. 1 whiskey, (2) Royal Challenge whiskey and (3) Signature whiskey and the Company’s innovation pipeline during the year has created new offering(s) in the segment with the launch of McDowell’s No.1 “Silk”, Royal Challenge “Bolt” and a new variant of Captain Morgan,
which will help attract new consumers and drive future growth. It has been the Company’s endeavour to strengthen and accelerate its core brands through continued investment, to win across each of the 3 India’s – Affluent, Middle and Aspiring. Renovation and rejuvenation of the existing brands is another key aspect of this strategy, which also involves innovation and introduction of new to market brands.
Evolve route to consumer; The Company’s focus in this area is on leveraging outlet as a media to build brand imagery in the luxury, premium core and prestige core categories, especially keeping in view
the prohibition on liquor advertising in India. Consumerwinning activations are used to create demand, with trade emerging as the ambassador for the Company’s business in these categories. In the popular category, the Company leverages scale to promote the route to consumer. The thrust on this front is on creation of a `sell-out’ culture, with 20% of the country’s alcobev stores being converted
into `Perfect Stores’.
3. Drive out costs to invest in growth: To mitigate pricing shortfall and improve margins,
the Company continues to strengthen its productivity programme, which was launched in
FY15. Procurement efficiencies are continuously boosted and network optimization is also enabled to
4. Corporate citizenship: As a responsible corporate citizen, the Company continues to influence public policy through innovative initiatives, along with programme activations to ensure road safety
and empower women.
5. Creating a future-ready organisation: To create a fit-for-purpose organization, the Company is
going in for right sizing, while bringing in new capabilities and creating a performance-led culture. Targeted improvement interventions to measure employee engagement are also undertaken on a regular basis. Having established a practice of following highest compliance and governance standards, the Company has also played leadership role in shaping the regulatory landscape in the industry. Your Company has added new capabilities in all business aspects, and has improved systems and key
processes thereby right sizing the Company for future growth.
Operating model changes through Franchising During the year under review, in line with the Company’s approach to selectively participate in the popular segment, the Company has entered into agreements to franchise selected, mainly Popular segment brands in Andhra Pradesh, Goa and has moved to a complete franchise agreement for all your Company brands in Kerala effective 1 January 2017.
The Company has entered into additional agreements to franchise popular segment brands in Union Territory of Puducherry, Union Territory of Andaman and Nicobar, Chandigarh and Rajasthan effective April 1, 2017, in Madhya Pradesh, Himachal Pradesh, Jammu and Kashmir and Delhi effective 1 May 2017 and in Sikkim and Uttar Pradesh effective from June 1, 2017.
The individual agreements are for between 3 to 5 years. The franchisees will be responsible for manufacturing and distribution of the franchised brands in their respective states on payment of an agreed royalty fee which will be accounted as part of net sales.
These changes will allow your Company to further improve it’s operating model and focus the business on the biggest profitable growth opportunities. Volume and net sales for these franchised brands accounted for 10.3 million cases and approximately ` 6,400 million net sales in the full year ended March 31, 2017.
The Company’s growth in the past few years has been encouraging and was supported by a strategic revenue mix, up gradation and strengthening of brands. With the Diageo brand portfolio integration, your Company is today a market leader by volume and value, and it also holds a place of pride
in the Indian alcobev industry, with an outstanding portfolio of reputed brands across key categories and multiple price points.
The Company has successfully improved both top line and operating profit in a highly regulated and competitive environment, while further strengthening its core brands to leadership position across all segments. The company’s performance in the popular segment reflects its prioritized geographical participation strategy, while its double digit net sales growth in the “Prestige and Above” segment clearly endorses the success of its premiumisation strategy.
During the year, the Company has achieved a sales volume of 90mn cases and net sales of ` 85,480 million in the financial year ended March 31, 2017. Overall volume declined 3% and net sales were up 4% impacted primarily by Bihar prohibition and one off impact of operating model changes. Excluding
the one-off impact volumes were up 1% with net sales up 8% despite a subdued economic environment mainly impacted by demonetisation and the run up to the highway ban.
The Prestige & Above segment represents 41% of total volumes and 58% of total net sales, up 4 ppts and 5 ppts respectively compared to last year. The Prestige and Above segment net sales were up 13% with 5ppts positive price/mix. Positive price/mix was driven by selective price increases in certain states and continued focus on premiumisation and brand renovation in the segment. Signature volume grew by 26% and grew net sales by 29% supported by successful renovation. McDowell’s No 1. whisky variants (excluding Platinum) volume grew by 7% and net sales grew by 8%.Royal Challenge volume grew by 15% and net sales grew by 16%. The scotch portfolio in the premium and luxury segment grew volume by 29% and net sales by 32% driven mainly by Johnnie Walker, Black Dog,
Black & White and VAT 69.
The Popular segment represents 59% of total volumes and 42% of total net sales, down 4ppts and 5ppts respectively compared to last year. The total Popular segment witnessed a decline of 10% in volumes and 9% in revenue during the year, impacted by Bihar prohibition and one off impact of
operating model changes. Excluding the Bihar prohibition and one off impact of the operating model changes, the popular segment declined volume 3% and net sales 2% in the full year. Priority states volume was flat and net sales grew 1% in the full year driven by Hayward’s, Bagpiper and Director’s
During the year the company utilized its cash from operations to repay its loans which has led to a reduction in net debt. This reduction in debt value together with renegotiation of borrowings and favourable mix of debt instruments reduced the total interest cost in the full year. Significant improvement in your Company’s overall financial flexibility, corporate governance and compliance framework has led to further improvement in our credit rating. During the year, ICRA Limited
upgraded the Long Term Rating from “A+” to “AA” with positive outlook, while the Short Term Rating was reaffirmed at “A1+” which is the highest rating. These improved ratings will enable the Company to access more economical sources of debt leading to lower interest cost and increased shareholder value.
The Company is the market leader in terms of value (with a market share of 44%) and the market dynamics are highly attractive, given the foray of global players in the Indian market, and a visible shift to premiumisation, as well as the shift to the franchisee model in some states. The Company enjoys a strong portfolio of brands (supported further by Diageo’s brands), and a focused strategy towards profitability by new management could lead to meaningful gains on the margin front from the current levels. Better pricing, strong cost optimization focus and a more rational competitive landscape (focus on profits vs volume) should lead to an overall higher industry profit pool. Strategic initiatives such as moving selectively to asset light/franchisee model and monetizing non-core assets would further help boost medium-term returns. GST-related concerns, however, will likely continue to weigh on the stock
performance over the short term. (Source: JP Morgan’s Report dated 03.04.17)
While Diageo has embarked on the right path to growth and profitability, an improved political and business environment, with a global recovery could see the company grow from strength to strength.