‘Partnership with United Spirits has transformed Diageo’s position in India’

With the acquisition of the country’s largest liquor company United Spirits, the UK-based Diageo has finally found a strong platform to fast forward its own growth here. In an e-mail interview, Abanti Sankaranarayanan, Managing Director of Diageo India, shares the company’s progress so far and how it plans to increase its presence in one of the fastest growing markets in the world.

The last two years have been busy for Diageo in India while it went about acquiring United Spirits. Can you run us through how Diageo’s Indian operations fared during this period?

It has been an exciting ride. With Diageo plc’s acquisition of a 54.8 per cent shareholding in United Spirits, its investment and commitment to India has multiplied manifold, and we are learning and adapting fast to the opportunities the new scenario presents.

In October last year, Diageo appointed United Spirits (USL) as its sales promotion agent. USL’s strong route-to-market, combined with Diageo’s investments in its brands, have given a fillip to our brands in India which have seen a 22 per cent growth in volumes while parallelly delivering over 40 per cent growth to our top line. Strong performance by Johnnie Walker Black Label, VAT 69 and Black & White drove most of the growth in Scotch, and our share in Scotch increased 1.9 per centage points. Smirnoff too returned to high single digit growth. The two organisations have been exploring synergies, sharing best practices and combining our respective strengths. As the results show, it’s been working well for us.

One of your competitors in India has become the leading liquor maker in the country in value terms. What plans does Diageo have to create a bigger share for itself in the next few years?

First, our partnership with USL has clearly transformed Diageo’s position in India. Our ambition now is to deliver scale and sustainable growth for the long-term. There are three areas we will clearly invest in — our talent, our brands and our facilities. We are lucky to have iconic brands such as Johnnie Walker, VAT 69 and Smirnoff — we will further build brand equity and loyalty through our global marketing expertise and give consumers opportunities to trade up and premiumize by offering them more choices.

Have you identified any brands as part of power brands. How do you plan to drive their growth?

Among the many international brands in our portfolio, we are focused on a set of core brands; so our marketing strategy is geared towards these power brands. These include our Scotch whisky brands such as Johnnie Walker, VAT 69 and our single malt The Singleton. In the vodka category, we are focused on growing share for Smirnoff in the premium vodka segment and CIROC in the luxury vodka segment. Our super deluxe Johnnie Walker Blue Label is another big growth driver for Diageo. Investments have been deployed in each of these brands by way of offering new leading edge experiences, relevant brand associations, as well as the launch of new variants all aimed at driving growth and recruiting consumers into our brand fold.

What are the new brands that you plan to bring into India?

We have just launched Smirnoff Black, an unconventional product that signifies a shift from the existing offerings in the portfolio. With clutter breaking packaging and a unique bold flavour, our aim is to redefine the vodka category in India with Smirnoff Black. We recently introduced Smirnoff Black in Maharashtra and in a couple of days it will be available in Karnataka. Over the next few months, we will launch Smirnoff Black in other States as well.

Do you believe that inclusion of alcohol in the Goods and Services Tax will help the industry?

GST is aimed at removing cascading of taxes and creating a common national market for goods and services. Ideally, a landmark legislation like GST should be comprehensive and all-encompassing. Exclusion of any sector or service would be a dilution of the objectives of GST and lead to revenue leakage and stranded input costs. Second, the denial of GST-input tax credits will have cascading effects of tax on tax. Third, excluding alcohol will also greatly complicate administration and compliance (because of the need to allocate input GST between exempt and taxable transactions). These issues will have an adverse impact on volumes, prices and the growth of the sector, leading to a reduction in overall tax revenue. For an enlightened government, including alcohol in the GST regime would represent a bold step towards aligning the Indian tax system to international best practices with manifold benefits to both government and industry and a potential reduction in overall GST rate.

How do you think inclusion of the liquor industry in GST will help the State governments, who are otherwise opposing its inclusion?

According to the estimates of Satya Poddar of consultancy firm Ernst & Young, an international expert on GST, the States would stand to gain around ₹10,000 crore by applying GST at 10 per cent to alcoholic beverages. There would be an additional gain in State revenues through better control of undeclared movement of alcohol. Even though this will translate to an additional ₹10,000-crore tax burden to the alcoholic beverage industry, a GST audit trail will provide greater exposure of unreported activities, which could otherwise pose significant public health concerns.

Will exclusion of the liquor industry from GST impact any other sector or services?

Most certainly. Besides potential compliance breaches by input service providers to unrecorded alcohol, the exclusion of alcohol from the GST regime will also have far reaching impact on trade partners, government agencies and other industries. States which are currently under a VAT regime will be forced to change their taxation systems resulting in an increase in consumer prices. Multiple tax regimes will be created where an assessee would have to file special tax returns for excluded products. In contrast to GST products, the documentary trail will be lost after goods leave the manufacturer, creating a loophole for possible tax evasion. Valuation issues will arise, leading to increased litigation by all assessees including consumption points such as hotels and restaurants.

What according to you is the biggest challenge foreign companies like yours face in India today?

The most critical issue is the current deadlock on account of the Food Safety and Standards Regulations (FSSAI). Since February, imported alcohol stocks (like many other consumer goods) are being rejected at ports across India on the basis that the manufacturer’s address and ingredients are not listed on the label according to the “mandatory labelling requirements” of the FSSAI. The health and well being of our consumers is a primary concern for us — and we are absolutely prepared to abide by the labelling requirements of the government. However, since the alcohol beverage industry is governed by State Governments, any labelling changes demanded must be synchronised with the annual state excise label registration cycle, or they will be logistically impossible. We need a minimum of six months in order to introduce the changes during the next label registration cycle.

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