Category Archives: popular-posts

Perhaps the only time India is not compared to China is the alcobev industry. The low taxes, easy accessibility with strict controls in place has made it the most favoured market for the industry. Chinese baiju sees big potential for exports while India’s Feni, probably one of India’s most potential exports simply lags behind.

United Spirits focus on profitability while maintaining growth

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.

BOX

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

enhance productivity.

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

Special.

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.

Total US Beverage Alcohol Consumption Drops by 3.8m Nine-Liter Cases in 2016

Beer, cider and mixed drinks drive decline, while wine and spirits post growth

Released today, the IWSR US Beverage Alcohol Review (US BAR) provides a complete picture of annual volume trends and underlying drivers in the US market. Results from 2016 data show a fast-evolving product marketplace where lower-priced brands struggle to capture consumer attention. The term ‘category blur’, which refers to consumers drinking products across all categories instead of just sticking to one type of product, has become more prevalent and made it difficult for marketers to predict – or rely on – a loyal customer.

Total beverage alcohol consumption in the US lost 3.5m nine-liter cases in 2016 to end the year with 3.39bn nine-liter cases. The segments in decline – beer, cider and mixed drinks (FABs, long drinks and pre-mixed cocktails) – posted a combined loss of 14m nine-liter cases, a total that was unable to be offset by the addition of 10.4m nine-liter cases from spirits and wine. In total, on-premise sales volumes decreased slightly last year, bringing share of beverage alcohol consumption down as more consumers chose to drink at home. Off-premise sales picked up last year, resulting in an increased share of the market overall.

Distilled spirits ended the year up by 2.6% at 220.8m nine-liter cases and, as a result, gained 0.2% share of total beverage alcohol. The wine industry increased for its 22nd consecutive year to end last year with a total of 358.3m nine-liter cases. The beer industry modestly decreased -0.2% to 241.3m hectoliters (hl) in 2016. The overall mixed drinks category decreased 3.2% in 2016 over the prior year, falling to 101.6m nine-liter cases. The cider category skyrocketed the past three years to reach an all-time high of 2.6m hl in 2015, only to fall by -15.1% last year to end 2016 with 2.2m hl.

Widely seen as the most accurate source of beverage alcohol consumption trends, the IWSR does however see a return to growth for total US beverage alcohol, with consumption forecasts to increase starting in 2018 and reaching a compound annual growth rate (CAGR) of 0.2% by 2021.

Key Category Insights

Whisky: Bourbon increased 6.4% last year to 15.9m nine-liter cases. Imported whisky grew 3.4% in 2016. Irish whiskey increased 17.6%, the highest rate in over a decade. Canadian whisky grew by 2.4%, driven by Crown Royal and Fireball. Scotch posted the lowest growth rate among all imported whisky categories with an increase of 0.5%.

Gin: The gin category finally made progress after consecutive years of decline, advancing by 1%. This was achieved from performance in the premium-and-above segments in addition to high-end imports.

Vodka: The vodka category grew 2.3% to 74.8m nine-liter cases, driven by domestic brands like Tito’s and New Amsterdam.

Rum: The rum category posted a decline of -1.2% as consumer interest has shifted to whisky and tequila.

Tequila: Tequila sales grew 7.4% in 2016, reaching an all-time high of 16.3m cases and achieving a 7.5% share of overall spirits.

Brandy/Cognac: The domestic brandy category (+4.1%) is being revitalized through high-quality offerings from small producers. Cognac increased 18.8% in 2016, with Hennessy standing out as the star performer.

Wine: Still wine increased 1.1% in 2016 on the strength of premium-and-above varietals such as pinot noir, rose, cabernet sauvignon, red blends and sauvignon blanc. Sparkling wine achieved one of its best performances in 2016 (+7.2%). Wines priced at or above $10.00 to experience the most growth in 2016 (+7.2%).

Beer: The current trend of premiumization and drinking less but better does not translate into volume gains for the beer category. The domestic beer category was down -1.5% in total. Removing craft volumes results in domestic beer down -2.8%. To put that loss into perspective, a decline of -2.7% in the domestic beer subcategory is equal to 4.9m hl. A volume loss of that magnitude is equivalent to one of the largest domestic craft brewers closing its doors. The imported beer segment increased by 6%, primarily led by Mexican imports.

Prepared Cocktails/Mixed Drinks: The mixed drinks category is predominately made up of malt-based FABs (flavored alcoholic beverages) which hold a 90.3% share of the category, with the remaining 9.7% attributed to pre-mixed cocktails and long drinks.

Uncorking the Armenian wines

Having rediscovered its wine, Armenia, once considered a cradle of winemaking, is again trying to gain popularity in the world of wine.

The story of Armenian wine began when Noah planted the first vineyard on Mt. Ararat and famously became drunk on his own wine, mentioned in Genesis 9:20. It is no coincidence that Armenia, known as the birthplace of wine, is also the site of the oldest known winemaking ruins, dating back to 6,200 years. Also, Herodotus, Greek historian, mentioned in his work ‘The Histories’ that merchants would carry wine down the Tigris and Euphrates to Babylon in barrels of palm tree wood during the fifth century. This is the first cited example in the recorded history about the use of barrels for wine storage.

Armenia has incredible amount of proven evidence that shows winemaking began 6,200 years ago. During a 2011 excavation, archaeologists announced the discovery of the world’s oldest wine production facility in Armenia. Located in the Areni cave complex, it consisted of a shallow basin for pressing grapes, a vat for storage, and fermentation jars. They also found grape seeds, remains of pressed grapes, and dozens of dried vines. James Owen from National Geographic wrote- “The site gives us a new insight into the earliest phase of horticulture—how they grew the first orchards and vineyards.”

Revival of Armenian Wines

The development of wines began in 2007 when new vineyards and organisations came in to existence. After building growth during 90s and early 2000, the wine sector is now one of the crucial segments for Armenia’s economic growth and employment. In the last five years wine production has increased exponentially. Government has taken several steps to promote the wine production in the country and established the Vine and Wine Foundation in 2016. It implements government policy and development projects in viticulture and wine making sector. The primary objective of the foundation is to preserve and develop the rich cultural and historical heritage of Armenian wine in Armenia as well as around the world.

According to 2014-2025 development policy of the government, the country seeks to develop several sectors that will contribute to economic growth and poverty reduction. Particularly 2010-2020 Sustainable Agricultural and Rural Development Policy prioritises high-value added processing industries, such as wine production. The industry has received large investments, mainly from foreign investors and local entrepreneurs, secured advanced technology and improvement of production processes.

Currently, there are more than 45 Armenian companies producing over 100 varieties of wines. Overall 83percent is produced in the Ararat Valley and Armavir region. The other four winemaking regions are Tavoush, Aragatzotn, Syunik, and Vayots Dzor.

Volumes of wine produced in Armenia have been showing a steady growth from 5.9 to 6.8 million litres in the last 5 years.

Given the favourable government policies for wine production and the number of newly established wineries, it will not be wrong to expect an increase in the wine production volume. During recent years wine exports as well as the local wine sales have noticeably increased. Armenia’s key markets include Russian followed by the USA and China. Armenian wine market has expanded and wines are exported to Italy, Lithuania, Canada, and Switzerland. Larger exports volumes in new markets were observed in France, Belgium. According to International Trade Centre, Lithuania, Poland and France are promising markets where an overall sale has a tendency to grow.

Terroir and Native Grapes

Armenia has an exceptional geographical and climatic condition for vine cultivation. Volcanic soils, harsh climate and high altitude create an interesting union of the terroir’s elements.

The complex interaction of natural conditions within the small territory of the country induced and affected the formation of quite a peculiar range of soil types, from the volcanic and semi-desert zone to the mountain meadow soils of alpine type. The climate is dry and continental due to mountains in most of the regions,” Syune Barseghyan of Armenia Wine Company (AWC) said.

Armenian grapes are distinguished by their aromas. Armenian ingenious grape varieties include Areni and Voskehat. Areni is the best known variety. It is thick-skinned and late-ripening grape, considered to be one of the finest varieties that produce fresh, bright red wines with soft, elegant red fruit flavours. Used for the production of dry wines, as well as sparkling and dessert ones, Voskehat, which means ‘golden berry’, is believed to have been cultivated about 3.5 thousand years ago.

An Icon of Modern Winemaking- Armenia Wine Company

A family-owned company, Armenia Wine Company is born out of the love the family has for its country. While vineyards plantation started in 2006, the company was established in 2008. Flaunting an array of award winning wines and state of the art winery, the AWC is the leader in local market as well as in exports in wine segment.

Even though Armenia has been producing wines for more than 6000 years, it was the Armenia Wine Company that raised the standard of the Armenian wine at international level. Armenia is a country with 1000m average altitude that produces natural high sugar concentration, aromatic and colourful grapes. The AWC is the first company to accomplish the perfect alchemy from Armenian high quality grapes to create international standard wines. “We are thankful to our French consultant, our ‘on-site’ French winemaker expertise and the state of the art European technology for making this possible,” Barseghyan said.

The company’s portfolio is represented by wines which display indigenous grapes and terroir diversity. Maintaining the diversity, the company is working in three main winemaking regions – Armavir, Aragatsotn and Vayots Dzor. “Vineyards located in Armavir region provide us the main white Kangun variety used for making still white and sparkling wines. French grape varieties Merlot, Cabernet Sauvignon and Cabernet Franc used as blends with Armenian grapes. Vayots Dzor region, known for the world oldest winery (6200 year old), provides us the iconic Areni grape used in our red wines,” informed Barseghyan.

Armenia Wine Company produces four ranges of wines- Armenia, Yerevan, Takar and Tariri. “We are producing wine for every taste and palate and our assortment includes classical red, white, rose, sparkling as well as dessert wines like Muscat and wines made from Pomegranate. Armenia and Yerevan are young, soft, fruity wines that show the unique characteristic of local grape varieties in their natural state. Takar and Tariri are premium wines, much more complex, aged in oak barrels. The price of our wines ranges from USD 3 to 23,” Barseghyan said.

The annual production capacity of the company is 4 million bottles of wine, 1 million bottles of sparkling wine and 3.5 million bottles of brandy. According to the company’s statistics, local consumption of AWC wine constituted about 44 percent of the still wine and 74 percent of the sparkling wine in 2016. This year, the numbers are significantly different due to large increase in exports. The export volume of still wine has reached to 72 percent and 61 percent for sparkling, whereas local sales have accordingly constituted 28 percent of still wine, and 39 percent of sparkling.

The ARC’s products are exported to more than 14 countries including USA, Canada, China, Mexico, Japan, Russia, Israel, France, Belgium, Czech Republic, Lithuania, Bulgaria and Belarus. This year, the company is planning to sell its wines in new markets such as UK, Poland, Finland and Kazakhstan.

Father-Daughter Duo Rocking the Wine Business-Van Ardi

Returning to his roots, both physically and metaphorically, founder and winemaker, Varuzhan Mouradian and his family moved from California to Armenia. Having fallen in love with wines, he knew he had developed a passion for making wine he couldn’t ignore. Van is the ancient capital of Armenia with rich winemaking history, where the family’s ancestors belonged. The winemaker and the family named the winery Van Ardi, meaning ‘Sun of Van’.

After scouting various winemaking areas in the country, Van Ardi settled on an exquisite plot in Ashtarak, also an ancient winemaking region of Armenia. The land was bare, and filled with stones and boulders, but its volcanic soil, slope, and position, created a tangible terroir that evoked a sense of promise. Today, the nine hectares of land is being used to plant five grape varieties.

The winery started producing wines in 2013 while the vineyards were planted in 2008. Van Ardi uses endemic Armenian varieties like Areni, Kakhet, Haghtanak, and Kangun besides Syrah. Selling more of red wines and rose, Van Ardi currently produces 50,000 bottles which is approximately 37,500 litres. Van Ardi plans to expand the winery to increase the production up to 130,000 bottles.

Van Ardi has been exporting wines since its first vintage. Initially it exported 40 percent to Russia and the rest was consumed locally. Now, 50 percent is consumed locally and the rest is exported to Russia, USA, France, United Kingdom, The Netherlands, Lithuania, Belgium, Sweden and Germany. Van Ardi’s wines range from USD 5.5- 10.5.

Describing the competition as ‘healthy’ in Armenia, Ani Mouradian, Director of Marketing and Communication at Van Ardi, said, “Most of the wineries have their own character and are different from each other in function and the kind of wines they produce. Given the number of wineries, competition has increased exponentially in the past three years. However, Van Ardi does not have any threats and we don’t see anyone pushing us off shelves. We are barely meeting our demand; if we had more wine out there, they would be consumed as well.”

Speaking about the competition it faces abroad, Mouradian said, “I feel the countries that have similar profiles in development (Moldova) or are nearby (Georgia) are our biggest competitors as they share/claim a similar history of winemaking. It is very difficult for Armenian wines to make it in foreign markets, because we can’t be price competitive.”

Steeped In Tradition- Voskevaz Winery

Combining the traditional art of winemaking and innovation, Voskevaz Winery produces high quality wines which are unique in their profile as they are produced via autochthonous style; it refers to the winemaking methods as well as to the use of only local grape varieties.

The winery was established in 1932. The renaissance of the winery began in 2004, after the establishment of Voskevaz Wine Cellar LLC. The winery is equipped with the latest Italian facilities to produce high quality wine. Today Voskevaz produces wine using both traditional old karases and modern wine-making technology. However, all of them, without exception, reflect the true nature of Armenia. The wines are produced only from local grape varieties and for wine aging rare high-quality Armenian oak barrels are used. Voskevaz Winery aims to revive the use of this ancient winemaking technology. These wines reflect the true nature of Armenian winemaking.

When it comes to the production of sweet wines in Armenia, Voskevaz Winery has pioneered the use of wine withering technology. Voskevaz products start from USD 5-52 and it sells 10 percent of the produce in Armenia. It mainly exports to Russian Federation, USA (Los Angeles for now), Lithuania, Netherlands, Great Britain and China.

Boasting of several medals at various prestigious local and international wine awards such as Mundus Vini Grand International Wine Award, Decanter World Wine Awards, Sommelier Wine Awards, Black Sea Wines and “Areni Wine Festival”, Voskevaz produces varieties of wines.

The Classic Wine line includes Voskevaz Red Dry, Voskevaz Red Semi-sweet wines (made from Kakhet and Haghtanak local grape varieties) and Voskevaz White Dry, Voskevaz White Semi-sweet wines (made from Voskehat (Kharji), Kangun Armenian grape varieties), Voskevaz Pomegranate fruit wine made from high quality Armenian pomegranate and Voskevaz Rose Dry (made from Areni variety). Vintage Line includes Areni Red Dry, Nuraz Red Dry, Voskepar White Dry, Urzana White Dry wines, Vanakan Red Non Vintage Dry wine made from Haghtanak and Kakhet grape varieties. Vintage liquor wine line includes Muscat Rozali white wine made from rare Muscat Vardabuyr grape variety and Katarine Red wine made from Kakhet variety. Voskevaz Karasi Collection includes three wines made from fine autochthonous Armenian grape varieties Areni Noir, Haghtanak and Voskehat. The wines are fermented in traditional karases (clay jars of 1000 litres) and aged in new Armenian oak barriques.

Voskevaz Karasi Collection, Areni Noir, is one of the rare wines that reflect the pure nature of Areni Noir variety with its terroir. This wine is made with preserved old vines from Vayots Dzor region vineyards at elevation of around 1600m above sea level. Two winemaking tools, 100 year-old Karas and Armenian oak barrel, are used to create this outstanding wine. In our opinion, this kind of harmonious combination of karas and barrel is perfect for the wine tasting and aroma evolution,” said Mary Hovhanisyan, Marketing Manager.

Also, two more wines made from local Voskehat and Haghtanak grape varieties are included in Voskevaz Karasi Collection. This is a stunning example of world-class wines that will be interesting both for the local and foreign consumer. In our opinion Armenian grape varieties are quite promising and have unique character and great potential,” said Hovhanisyan.

One of the Biggest Wineries- Karas Wines

Karas is a newly established winery in the West of Armavir Region. Located in Ararat Valley, between Mount Aragats and Mount Ararat, Armavir is the smallest and the most densely populated region in Armenia. The convenient location and the favourable climate have allowed this thriving region to become the epicenter of agricultural development.

In 2003 the pursuit for developing an inspiring project led Tierras de Armenia to discover these lands which are rich in minerals and suitable for high quality wine production. The innovation and technology were the key factors in achieving the company’s objective.

In 2010, the company had its first commercial production and defined a new way in the production of Armenian wines. In the period of six years the Karas Wines have grown from 50,000 bottles to 1, 300, 000 bottles and aims to produce 3,000, 000 bottles,” said Gabriel Rogel, Winemaker.

To achieve perfect quality, every element, as essential as the overall experience, is taken into account- the location of the vineyards, the window for perfect ripeness, the wine’s journey to its optimal maturity, the visual components, the length of flavours, the aromatic notes as well as the body of the wine. All of these components combine to not only measure the quality and sample of the wine, but more importantly, enhance the experience of the sample.”

Karas has more than 400 hectares of vineyards located at an average altitude of 1100 metres above sea level. The vineyards are part of Tierras de Armenia CJSC, a company that owns 2300 hectares of land in the west of the Armavir region. The soil characteristics are mainly volcanic and that rich loam also contains a stony texture spread with rocks of clay ideally suited for the production of highly concentrated wines rich in colour, aromas and flavours.

Both international and indigenous varieties are planted in the vineyards, including Chardonnay, Viognier, Kangun for white wines and Malbec, Tannat, Syrah, Merlot and Cabernet Franc for red ones. The vineyards are cultivated with modern techniques together with an individual approach for each varietal, aiming to develop the potential of each.

Karas Wines key markets are the USA and Russia. However, it exports to other countries like France, Germany, Chez Republic, Nederland, Estonia, China, Belgium, Canada and Argentina. The company gets maximum revenue from its premium wines with Karas Red Classic being the best seller,” said Rogel.

Talking about the competition, Rogel acknowledged the fact that Armenian wines are not so famous in the world. However, Armenian wines have something new to offer the world.

Reinvigorating Armenian Wines- ArmAs

Golden Grape ArmAs was founded in 2007 by Armenak Aslanian. Along with his daughters, he preserves an 80-year-old family tradition of wine, naming ArmAs in honour of his grandfather Armenak Aslanian Sr., the original winemaker in the family. He continues to develop ArmAs Estate with a vision to partake in upholding and revitalizing Armenia’s winemaking legacy, in the oldest known area for viticulture and oenology.

ArmAs creates elegant wines that stem from one of the country’s best natural resources, the idyllic terroir of the vine. ArmAs estate is a picturesque display of agricultural achievement, set against the backdrop of the inspiring Mount Ararat. The 180 hectares of previously desolate and disconnected rock-strewn countryside was diligently transformed into a stunning panorama including vineyards, orchards, and a world-class winery.

The ArmAs winery and distillery was completely designed and constructed by Italian architects, engineers, construction crews, and wine industry professionals. During a four year period, from concept, to completion, and utilisation, numerous teams of varied areas of expertise trained local specialists and exceptional students for continuing maintenance and management. The state of the art winery is held to the highest international standards and boasts the latest enological equipment, as well as French and Karabakh oak barrels used for traditional aging.

Only the free run, or the noble juice, of the harvested grapes is reserved for the wines, retaining its finest natural qualities. Indeed, the achievement and individual features that each of the finished wines have attained in the cellar is a testament both to the innate characteristics of the vines, as well as the nurture that these grapes received from the vineyards to the bottle.

When Tradition Meets Technology- Hin Areni

Hin Areni strives to ensure that Areni grape is given the chance to show its beauty and that Armenian winemaking can duly pride itself with quality. The winery combines traditions of winemaking with state-of-the-art modern equipment. A renowned winery design expert from Argentina – Mario Japaz, has designed the winery.

The winery is equipped with modern technology. The grapes are picked and selected by hand, then they undergo gentle pressing in a pneumatic press. The storage is done with T control in SSA tanks. The wines are aged in barrels made from oak grown on the lush slopes of Artskah. The winery has the capacity to process over 250 tonnes of grapes.

The vineyards are situated at an elevation of 1215-1250 meters above the sea level, in and around Areni, namely in Tapq, Getap and Ishkatap. Hin Areni has a total of 32 hectares of vineyards. The sedimentary and rich volcanic soil, coupled with high elevation climate of Areni gives the wines a bold structure and expressive aromatic bouquet.

Hin Areni’s Voskehat is a finely crafted wine, made from grapes harvested in the historic village of Areni, known for its millennial wine making traditions. Supple and elegant, floral to the nose, this wine boasts rich aromas of honey and hints of apricot; it is pleasantly tart and crisp to the finish. While Areni wine is complex yet delicate, slightly peppery to the nose, this wine boasts rich aromas of red berries and is pleasantly tart and crisp to the finish.

Enhancing the Quality of Wines- MAP Company

The Wine Brandy Factory of Hoktemberian was founded in 1944 in the village of Lenughi. After privatisation in 1995 it was renamed- MAP CJSC. Now, the factory is well equipped with modern winemaking machinery. Due to all this, MAP Company has become one of the leading companies in Armenia that can produce up to 14 million litres of first-class alcohol drink annually. The entire cycle of wine and brandy production (receiving grapes, processing, ethyl alcohol distillation, ageing in oak casks in wine-cellars, brandy blending and bottling) is carried out by a classic technology.

Famous for its cognacs, currently, the factory produces wine, fruit wine and cognac (brandy). A variety of red and white wine is produced by the MAP winery. The Aramé brand includes red and white semi-sweet vintage wine as well as wine derived from the Muscat, Saperavi and Areni grapes. The Aramé Grand Reserve is a special edition of red and white dry aged wine. The winery also produces Tigran red dry wine, and Hasmik red semi-sweet wine. Nowadays, MAP products can be found not only in Armenia, but also abroad mainly in Russian Federation, several countries of Europe, and the US.

Vineyards of MAP Company are located in the Ararat valley, which is considered one of the most favourable places in the country for grape growing. The total vineyard area is 114 hectares. More than 10 varieties of grapes are grown; the main ones are Karmrayut, Nerkeni, Tigrani, Kakheti, Haghtanak, Kangun, Rkatsiteli, Saperavi, and Muscat.

Toprit Saifi

Threats to companies from Highway Ban

While retail vendors, hotels restaurants try to change their location to circumvent the ban, liquor companies will have to bear the losses or change their strategies to cut losses.

Supreme court had on March 31 refused to relax its December 2016 order banning liquor outlets along 500 metres distance of national and state highways.

The court modified the order slightly to reduce the distance to 220 meters for municipality areas with population of under 20,000. It also exempted Sikkim and Meghalaya from this 500 metre limit. Further, it allowed the licences issued before December 15, 2016, and valid beyond April 2017 to continue until the licence expires, or September 30, 2017, whichever is earlier. Licences would remain valid till end of September for Telangana and end of June for Andhra Pradesh.

As India’s recent ban on liquor stores along highways displaces outlets, the nation’s distillers are bracing for a drop in sales of as much as 8 percent this year, biting into the country’s $31 billion spirits market, according to a local maker of whiskey, vodka and rum.

USL says that the Supreme Court ban on alcohol sales near highways will have a short-term impact on its sales.

Anand Kripalu, Chief Executive Officer of the Diageo plc-owned USL, said the company “expects the impact to be mitigated eventually and where it doesn’t get mitigated the consumption will shift to other outlets”.

Following the ban, USL shares took a 15 per cent slide but after assurance from its CEO, the shares recovered to a healthy ₹1,961, up nearly 3.5 per cent. The company said it will grow topline by double digit and improve operating margin to mid-high teens.

Industrywide sales would drop by as much as 15 percent in the next three months as about 40,000 outlets, including retail shops and restaurants, stopped selling spirits, wine and beer after the ban took effect April 1, Deepak Roy, executive vice chairman of Allied Blenders and Distillers Ltd., said in an interview. ABD sells around 36 million cases.

India is largely a whiskey and spirits dominated market and per capita consumption of beer in India is about 2 litres per person a year, minuscule compared to the global average of about 30 litres.

The top three companies USL, Pernod Ricard and ABD which account for 60 per cent of sales have seen zero per cent growth.

Guillaume Girard-Reydet, managing director, Pernod Ricard India, is of the view that several adverse regulatory changes and trade bans in recent months have posed difficult growth environment for the spirits industry.

In the past, Pernod Ricard India has demonstrated good resilience. But, going forward, it will be challenging for the industry as a whole to continue with the same level of performance in the short term, Guillaume pointed out.

Roshini Jaiswal’s first venture was a lounge bar called 180 Proof in Bengaluru. Bars, lounges and pubs are a tough business. With the Supreme Court ruling of not permiting bars, restaurants, liquor vends 500 kms away from highways, her liquor business if feeling the heat. Demonetization qffected the business by 25 per cent and with 25 per cent of the vends along the highway this could impact the business in the short term. The ban does not address the problem of drunken driving. By restricting sale it does not mean consumers cannot get their drinks. Drunken driving is best stopped by creating highway patrols even to the tune of 100,000 by hiring people who can revoke licenses of people who break the law of drunken driving, she advocates.

Carlsberg saw Indian volume decline almost 20%, a steep fall from about 15-20% growth it has been posting for nearly a decade. Excluding Bihar, a state where liquor was banned last April, Carslberg India’s volume declined 15% in the first quarter.

After the Supreme Court’s mid-December judgement, several companies chose channel de-stocking as there wasn’t enough clarity on the implementation, which in turn hurt their January-March sales even as nearly 30,000 shops were shut in April.

Carlsberg India chief executive officer Michael Jensen said last year that India was the most difficult market in the world, referring at that time to Bihar’s imposition of prohibition after he invested $25 million to set up a plant near the state capital Patna in 2014. “It is very detrimental for investor confidence,” Jensen had said.

India’s beer sales fell 2% in the year to March 2017. Yet, the industry expects to grow 5-7% during the fiscal on the back of new launches.

Experts say the impact on retail outlets will be transitionary as they move away from highways in due course of time. Retail consumer demand would shift to shops, which are away from highways.

Heineken, Anheuser-Busch InBev, and Carlsberg — which together control about 90% of India’s beer market — are introducing about a dozen new beer brands to fend off sales bans in a few states, shrinking store networks and stagnant demand in a warm, tropical country with promising demographics and increasing affluence.

ProWein Business Report assesses the International Wine Markets

The future of wine

In cooperation with Geisenheim University ProWein polled almost 1,500 wine sector experts from 46 countries on international wine markets, marketing trends and the development of wine sales channels. Those polled included wine producers (large and small wine-growing estates, wineries, cooperatives) as well as marketers (speciality retailers, wholesalers, importers/exporters, hotels and gastronomy). The combination of different perspectives of the producers on the one hand and the marketers on the other constitutes a unique barometer of opinions for the sector.

How does the sector view its economic situation?

The survey primarily polled sectoral leaders. These rate their current and future economic situation as satisfactory to good. It is interesting to observe that wine producers generally look to the future more optimistically than wine marketers who are in direct contact with end users. While export-oriented producers can try their luck on new export markets marketers have less opportunity to escape the structural changes of wine sales and increasing competition on their domestic markets.

On the producer side independent winemakers look to the future with more optimism than cooperatives and large wineries that find themselves amidst a strong process of concentration.

International and German specialty retailers focused on wine are the least satisfied and look to the future with less optimism than other marketers. This is primarily the expression of on-going structural change affecting wine sales channels where food retail and online channels are gaining importance internationally.

The results also reflect significant differences in mentality among countries of origin. German wine producers and marketers generally look to the future more negatively while producers primarily from Spain and Italy have very positive expectations about the future. Alongside real economic reasons these differences in expectations are sure to also reflect typical “German caution” and “Mediterranean optimism”.

What wine markets are attractive for wine producers now and in future?

The producers polled count more than 40 markets as their top 5 sales markets. Here Germany, the USA, Great Britain, Belgium and Switzerland are most frequently named as the most important sales countries. Currently rated as the most attractive sales markets among producers are Hong Kong, Switzerland, South Korea and the Scandinavian countries. Italy, France, Great Britain, Russia and Brazil are currently perceived as less attractive from the wine producers’ perspective.

What sales markets do producers expect to undergo the greatest rise in economic attractiveness?

The countries primarily named here are Russia, Hong Kong, Poland, South Korea, Brazil and China. In these assessments it becomes clear that export markets outside the traditional European wine countries will in future be of greater importance for wine producers. In addition to geographic distance producers must also overcome the cultural distance to countries that traditionally consume little or no wine and whose marketing structure often differs fundamentally from previous markets.

The lowest improvements are expected for Great Britain, France, Austria, Italy and Belgium. In France and Italy per capita wine consumption is still on a slight decline and on both markets predominantly domestic wine is drunk, which means fewer sales options for wine exporters. The forthcoming Brexit and constant rise in the tax on wine are the main reasons why wine producers rate Great Britain very low in terms of market attractiveness.

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Changes in the future are always accompanied by risk. Producers see the greatest risk in market development for Russia, Brazil, China, Great Britain and Hong Kong. The growing levels of wine consumption expected for the Asian and South American markets are accompanied by a series of uncertainties. In addition to possible trade restrictions (Russia) and countries’ different sales structures, it is primarily the uncertainty about economic and legal development that will play a role in the years ahead. For Great Britain the risk primarily concerns the question of whether and how wine imports will be affected by import duties after Brexit and what countries of origin will sign trade deals with Great Britain.

The current and future attractiveness of a market was summarised in the form of a market barometer. By juxtaposing the market barometer and the risk four different market types can be identified (see table). The markets with high attractiveness and low risk in the lower right-hand box include Poland, Australia, Japan, Canada and the Scandinavian countries. These are countries where wine consumption has risen lately or where a coherent local trading structure exists with the monopolies. High attractiveness alongside high risk is the case for Russia, Brazil, China and Hong Kong in the upper right-hand box. Markets with low attractiveness and high risk are Great Britain and Italy.

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What new markets do firms want to enter by 2020?

Nine out of ten leading international wine producers plan to extend their exports to new markets by 2020. Among wine exporters from the large European producer countries Italy, Spain and France this proportion stands at almost 100% and in Germany, which exports less, it stands at 55%.

Those countries which producers most often say they wish to extend exports to are the USA, Germany, Great Britain and China (see chart). It is predominantly China, Hong Kong, Russia, Japan, Australia, South Korea and Brazil that are named as new export destinations with the most disproportionate frequency relative to their currently low importance. For European wine producers successfully operating on these geographically and culturally distant markets in Asia and Oceania represents a great challenge over the next few years.

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Which wine origins are in demand from marketers?

Two-thirds of international marketers attending ProWein wish to include wines from new countries of origin in their product range. Among German marketers the figure is only one third. Amongst other things this is because the wine range in Germany is already extremely international.

International marketers are most interested in including in their portfolio wines from Germany, Spain, Italy, Portugal and France (see chart). On the other hand, German marketers show the greatest interest in the countries of origin Austria, Portugal, Italy and Germany followed by France, Spain and South Africa. What is surprising here is that Austria and Portugal rank at the top of the list which might reveal some new market trends. Interest in Italy, France and Spain is less surprising as these are the main import countries on the German wine market.

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What are the purchasing and sourcing channels of the future?

For marketers’ purchasing channels there is a clear trend towards shortening wine procurement channels. Marketers are clearly striving to increasingly source their wine direct from a small wine-growing estate or to a lesser extent directly from a large winery (see chart). By comparison, procurement via sales agents (importers, distributors, wholesalers or wine agencies) will decline considerably among marketers by 2020. This means for sales agents more difficult times lie ahead, which are in part already being indicated in their somewhat less optimistic outlook on the future. Small wine-growing estates, on the other hand, will need to rise to new challenges of coping, administratively and logistically, with the increasing direct enquiries from marketers.

Via what sales channels will wine reach end consumers in future?

Producers whose main sales market is Germany currently value speciality wine retail, gastronomy and ex-cellar sales as their most important sales channels. For the future, departing from the current low basis, a strong increase in online sales via wineries’ own online stores and external online retailers as well as food retailers is expected. For speciality wine retail, on the other hand, another stronger decline is expected which is less pronounced for gastronomy (see chart).

In the USA very similar trends can be observed concerning increased wine sales online and via food retailers and a decline in wine merchants/speciality wine retail. Unlike in Germany, where ex-cellar sales from small wine-growing estates are considered stable, this trend is anticipated to rise strongly in the US. This specific development reflects two current trends in the US: the number of small wine-growing estates is currently growing at a rate of 4% and “direct-to-consumer” sales from winemakers to end consumers is booming with double-digit growth rates.

How will wine be successfully marketed in future?

In the wine world competition between marketing via a wine’s origin (also terroir) or its brand has taken off. Who will be seen as the winner in future? The majority of both marketers and producers agree that in future wine will be marketed most successfully via its origin.

Surprisingly, the significance of the brand will in future be greater from the producers’ perspective than it is from the marketer’s. Among wine producers there are great differences. Firstly, the Mediterranean countries France, Italy and Spain focus much more on origin while in Germany the personality of the winemaker plays a greater role in marketing. Secondly, it is not surprising that winemakers focus more strongly on personality than cooperatives or large wineries.

Verdict

The verdict we can draw is that the wine sector is facing changes that are also reflected in the different future outlooks of the various market participants. Producers are increasingly looking to new distant wine markets and marketers are facing structural changes in the sale of wine where primarily sales via traditional wine merchants will decline. By contrast, purchasing wine via food retail and online will continue to rise. The wine trade between producers and marketers will change and supply chains will become even shorter as wine will be ordered direct from the producer. It will be interesting to see how this development unfolds over the next few years.

The study was conducted on behalf of ProWein by Geisenheim University’s Department of Business Administration and Market Research headed by Prof. Dr. Simone Loose and Heinz Küsters, Director of Market Research at Messe Düsseldorf, and their teams. ProWein and Geisenheim University also look forward to successfully continuing the ProWein Business Report in the coming years. This will provide the opportunity to check whether current expectations prove correct in future and see what currently unexpected changes will arise. In addition to providing long-term analysis of an international trend barometer, special interesting annual themes will be incorporated into the survey questionnaires. We thank survey participants and hope to also see continued avid participation among wine producers and marketers.

VINEXPO CONFRONTS THE CHALLENGES OF BREXIT

With UK elections around the corner, BREXIT once again becomes the hot topic of discussion.

On the eve of the historic triggering of Brexit negotiations, VINEXPO has pinpointed five key issues facing the wine and spirits industries which it will seek answers to at the June exhibition. The issues will be confronted at a conference in Bordeaux’s Parc des Expositions on Tuesday, June 20 at 4.00 pm.

The five topics identify key challenges for the UK and world wine and spirit industries: Trade agreement update; Main challenges for the W&S industry: The impact on the UK market in terms of duties; Consumer prices, category management and distribution; Whether the UK will lose its leading position for re-export?; Duty Free/Travel Retail opportunities; and Protection of designation of origin areas.

The conference opens with a review of the current EU trade agreement regarding wine and spirits

imports, exports and tariffs.

Upwards of 48,000 wine producers and buyers from 150 countries are expected to attend VINEXPO in

a climate this year of intense questioning about the impact on Brexit of trading conditions, prices and

sources of supply.

Jane Anson, wine writer who will moderate the conference during Vinexpo says, “Because the UK is

the world’s second largest imported wine market and a major spirits exporter, the Brexit challenge is

as acute for the UK as it is for wine producers in France, Italy and Spain and elsewhere in the world.”

Guillaume Deglise, CEO of VINEXPO added, “In a wider context, among our 48,000 attendees there will be producers and buyers currently excluded from the EU favourable tariff zone who see Brexit as an opportunity to penetrate the UK wine and spirits market.”

The value of UK wine imports is running at circa £28 billion according to VINEXPO/IWSR data for 2015. Volume imports are forecast to slow over the next five years.

Exports of all spirits from the UK reached £4.9 billion in 2016, according to the Wine & Spirit Trade

Association, the major part lead by Scotch whisky exports.

The line up of speakers will be announced in the coming weeks.

India Witnesses Beer Growth

With the beer consumption increasing in the country, industry experts say that Indians are fast catching up in their beer consumption as can be seen by the figures released by research agencies. India’s beer market is expected to reach volumes of nearly 470bn litters by the end of this year-a near thousand fold increase since 2011, read Food Navigator-Asia’s website.

The beer market is rapidly expanding and is expected to reach $9billion in 2018. It is the third largest market in the Indian alcoholic beverages industry. The size of the beer market has virtually doubled every five-and-a-half years. Beer market has been segmented into strong beer and mild beer on the basis of their alcohol content.

The country has 85 large breweries and a heavily centralised market, with just four large global players controlling 86 per cent of the market. With Heineken, Budweiser, SABMiller and Carlsberg enjoying brewing hegemony, India now ranks among the top five markets in Asia-Pacific in terms of volume, stated Food Navigator-Asia’s website.

According to ‘Outlook for India’s beer market’ report, beer sales in India are expected to see an annual growth of 7.5 per cent over the next five years despite regulatory hurdles, as rising disposable incomes in the hands of middle class will lead to higher spending.

“We believe India holds significant long-term growth potential as a beer-drinking culture is growing in momentum. We expect to see increasing levels of investment into the market from both local and global players over our forecast period,” the report said.

It further stated, “While spirits will continue to dominate India’s alcoholic drinks market, we expect to see strong growth in beer consumption over our forecast period. In volume terms, beer sales will rise at CAGR of 7.5 per cent between 2017 and 2021.”

Beer continues to be readily accepted, especially amongst the youth. In addition, prolonged periods of hot weather have a positive impact on the performance of beer in both on-trade and off-trade. Furthermore, the proportion of beer consumption is not skewed towards weekends as much as spirits, thus considerably increasing the occasions for beer consumption. Beer being a low alcohol by volume (ABV) beverage has also increased its proposition as a refreshment/entry level drink, especially amongst the youth, which currently is the biggest demographic segment in India. Also growing popularity of micro-breweries has promoted awareness and indirectly demand for off-trade beer sales

Craft beers and microbreweries are niche concepts in India which have been growing for past few years and are beginning to take shape now. They are mushrooming in many parts of the country. This is an emerging trend that is certainly attracting middle class Indians, particularly in urban areas. The craft beer market in India is pegged at Rs. 280 crore and may grow to Rs. 4,400 crore by 2020.

Beer in India is dominated by the off-trade channel which accounts for 79% of volume sales. 97% of the off-trade sales are through the food/drink/tobacco specialist channel. These are stores that are called ‘wine shops’ and are present in every city across India. However, companies are focusing on increasing their sales through the on-trade channel. Oktoberfests or beer festivals are organised in cities like Bangalore which is famous for its pub culture.

Indian drinking trends

India is known to be a whisky drinking country. With changing demographics, liquor bans, demonetization, non inclusion in GST and prohibition could change that perception. A report.
According to brokerage Emkay Research, 62 percent of the liquor is consumed in southern India, while northern India consumes only 18 percent of the industry volumes. The eastern region consumes 8 percent and western India consumes 9 percent.
 Five states account for 61 percent of the industry volumes. Tamil Nadu is the largest consumer of liquor accounting 18 percent, followed by Karnataka at 17 percent.
According to NSSO, an average person in rural India consumes 220 ml of alcohol in a week, or nearly 11 litres in a year, spending Rs 18.47 a month on intoxicants. Urban Indians consume much less — 96 ml of alcohol a week or 5 litres a year — spending Rs 16.77 on intoxicants in a month.
While whiskey remains a favourite, wine, which entered Indian markets in the ’90s, is still not the first choice for many, say experts. “Indian wine industry is very young, barely 40 years old. India traditionally does not have a wine drinking culture; it was considered a luxury. In the past 10 years, and specifically in the past five years, there has been substantial growth — 10 to 15 per cent — compared to Europe, where growth has stagnated.
The Supreme Court ban on liquor vends within 500 m of highways comes amid a growing clamour for prohibition. But from toddy to whiskey, country liquor to IMFL and beer to, more recently, wine — we are knocking it all down.
It was only in the ’90s, after liberalisation, that alcohol entered our drawing rooms. The recent Supreme Court decision to ban liquor vends within 500 metres of national and state highways, with the bench expressing concern over nearly 1.5 lakh deaths every year in road mishaps, has come amid a growing clamour for prohibition across the country. But away from the government orders and crackdowns, across India, alcohol consumption is still showing a steady increase.
According to the 68th report of the National Sample Survey Office (NSSO) on Household Consumption of Various Goods and Services in India, in 2011-12 (the last year for which the data is available), per capita alcohol consumption in rural India increased by nearly 28 per cent, while that of urban India rose by nearly 14 per cent.
Three states in the southern part of the country — Andhra Pradesh, Tamil Nadu and Kerala — along with Arunachal Pradesh and Assam make frequent appearances in the NSSO data on states that consume the maximum amount of toddy, beer, foreign liquor and wine across rural and urban centres.
Arunachal Pradesh tops both beer and country liquor categories in rural and urban areas. Among urban areas consuming foreign liquor/wine, Arunachal tops with 213 ml per capita per week, while at 93 ml, Sikkim is the top consumer in this category in rural areas. According to Arunachal’s excise figures, the state downed 1.93 crore litres of IMFL and nearly 5 lakh litres of beer in 2015-16.
Contrary to popular perception, it is not Kerala but Andhra Pradesh that has the highest intake of toddy both in rural and urban centres — 793 ml and 69 ml respectively — over a 30-day period.
More recently, 2015-16 excise department figures for Telangana and Andhra Pradesh show 303 lakh cases of IMFL (one case has 12 bottles, each of 750 ml capacity) and 189 lakh cases of beer were sold in Andhra Pradesh in 2015-16; in Telangana, 238.62 lakh cases of IMFL and 334.56 lakh cases of beer were sold over the same period.
“The entry of IT companies, especially in Hyderabad, has contributed to the rising sales. In the past 2-3 years alone, 60-80 new pubs have opened in Hyderabad,” says Gopal Singh Thakur, general manager at Spoil bar in Hyderabad. “When I started out, 100 Pipers and Blender’s Pride were big brands. Today it is all about imported liquor and single malts.” The hospitality professional, who has been working in the city for 13 years, says the rise in beer sales can also be attributed to the many breweries that have come up in Telangana the past year.
While alcohol sales earned the Kerala government Rs 10,012 crore in 2014-15, the Tamil Nadu government clocked up to Rs 26,188 crore in revenues through its outlets of the Tamil Nadu State Marketing Corporation (TASMAC), which has near-complete monopoly over wholesale and retail vending of alcohol in the state. Of the Rs 1.48 lakh crore state revenue in 2015-16, 33 per cent came from TASMAC.
Nearly 70 lakh people visit TASMAC shops on any given day in Tamil Nadu and the state revenue growth from liquor sale is around 11 per cent annually. Figures show that over the years the state has largely stuck to brandy — 85 per cent of the total alcohol sales — followed by rum, vodka, gin, whiskey and wine.
Country liquor, however, has managed to hold its own in several parts of the country. Himachal Pradesh, which hosts around 1.5 crore tourists every year, still records at least 90-95 per cent more sales of country liquor — which is said to be preferred by locals — than IMFL. In 2016, the state sold 29.55 lakh boxes (each with 12 bottles) of IMFL, while local country liquor brands such as Una No 1, pulled off nearly double the number in sales.
In UP, Punjab and Haryana too, residents prefer country liquor over foreign liquor and beer. In neighbouring Punjab, country liquor brands such as Khasa Mota Santra are known to do brisk business, selling over 26.92 crore bottles in 2016-17. IMFL and beer brands follow in at second and third place, with sales of 12.61 crore bottles and 5 crore bottles respectively. In Jharkhand, however, the scales are tipped in favour of beer, which sold 2.74 crore litres in 2015-16. IMFL stood a distant second, recording 1.58 crore litre in sales.
Enjoying a drink is not such a big thing anymore,” says Adarsh Shetty, president of the Indian Hotel and Restaurant Association of Maharashtra. His state recorded an annual consumption of 3,228.28 lakh bulk litres of country liquor in 2016, the most preferred alcoholic drink in the state.
According to the NSSO data, Karnataka consumes 101 ml of foreign liquor/wine over 30 days while neighbouring Maharashtra drank a mere 10 ml over the same period.
 After reporting sluggish sales growth of just 0.2% in 2015, the slowest rate in a decade, the market for alcoholic beverages struggled with even more hurdles in 2016. Though company results are not yet out, prohibition in Bihar, Supreme Court barring liquor shops from opening up across the country’s highways, starting from April 1, 2017 creating another roadblock for liquor companies, taxes on alcohol increased in 2016, forcing companies to pass on higher costs to consumers, beer makers saw the market stagnant as higher raw-material costs and increased taxes stalled growth, demonetisation was the final nail in the coffin.

Beauty lies in the spirit of packaging

Beauty lies in the spirit of packaging It was the first Packaging News Live Spirits Summit in Edinburgh on a cold and frosty morning but nonetheless the issue of packaging was on the front burner. “As well as a full programme of speakers, the Summit also had an exhibitors’ room which included our Scotch Whisky Association stand.  Although, in contrast to other exhibitors, we didn’t have an array of luxury spirits packaging to display, we attracted a constant stream of visitors to our stand wanting to hear more about our Association and how we help our members”, stated Morag Garden, head of environment and sustainability at the SWA.