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If, as seems likely, Diageo manages to gain a substantial stake in UB Group’s spirits arm, United Spirits, it will be an expensive way to make up for its strategic mistake a decade ago.
In 2002, as part of its retrenchment from Asia to focus more on its core North American and Western European markets, Diageo sold its Indian spirits operations. Prior to the sale, it was the leading international player in India ahead of its rival Pernod Ricard, who acquired Seagram’s Indian business in 2002.
Pernod Ricard continued to invest in developing its local Indian spirits brands, increasing its volumes 10 fold making it India’s second biggest spirits player in 2011.
Size and scale is vital in India due the poor infrastructure and very complex taxation system. While profits are relatively low compared to international spirits they offer a fantastic platform for when international spirits products, especially blended Scotch become more affordable to India consumers.
By getting a stake in India’s largest spirits producer, United Spirits, and the only one with a national distribution and production network, Diageo will be in a great position to exploit the large and fast growing Indian spirits markets.
Indians are huge spirits and in particular whisky consumers, with Indian whisky accounting for 1.3 billion of a 2.2 billion litre spirits market in 2011, and expecting to see a 9% and 10% CAGR between 2011 and 2016 respectively.
Blended Scotch in 2011, accounted for only 9 million litres, but with such a large apatite for whisky the growth potential is huge if, in conjunction with rising consumer income, taxation on imported spirits is reduced.
Realising its mistake, since 2006, Diageo has been making huge and unsuccessful efforts to get back into India. This has included a failed joint-venture with Radico Khaitan, the launch of its own premium Indian whiskey Rowson’s Reserve in late 2011 and previous negotiations with UB Group to buy a minority stake in the United Spirits operations. This broke down in 2009 over a difference in valuation.
Now that UB Group’s financial plight has weakened further, due to large debts caused by its troubled airline, Kingfisher and the large debt it took on in acquiring Whyte & Mackay, it would be a great surprise if Diageo does not tie up a deal. This will give it prime position from which to exploit the booming India spirits market and while it is reward for a sensible change in strategic thinking, it is nevertheless fortunate that this opportunity has become available, given previous failings.