Corporate File

USL scotches mass brands

K. Giriprakash | Updated on February 28, 2021

Prestige at stake USL will move out of the popular segment, leaving the low-margin market to local players   -  coldsnowstorm

Why India’s biggest liquor company has decided to focus on high-end labels

Our Bengaluru Bureau

Global liquor companies have earlier found their pot of gold in premium brands and, therefore, been shedding low-margin popular drinks to local manufacturers.

Something similar is happening in India with the country’s biggest liquor company, United Spirits Ltd (USL), undertaking an exercise to either divest its popular brands or give them away to franchisees in return for a royalty fee.

While some analysts have said Diageo’s Indian subsidiary should have accelerated the move towards premiumisation — focusing on high-end brands — earlier, it was handicapped by legacy issues surrounding its brands which came into its portfolio in 2013 only after it bought United Spirits from the Vijay Mallya-owned UB Group. The rather slow progression towards premiumisation has left USL behind its competitor, Pernod Ricard, which is the country’s largest liquor company by value.

Taking a peg measure

USL notified the stock exchanges last fortnight that it planned to place half of the 30 brands in the popular category under strategic review. The initial move towards premiumisation of its liquor portfolio was, however, initiated a few years earlier. The company started off by giving away certain popular brands (mass-market brands) to franchisees in 2015-16. It tied up with local manufacturers for the production and distribution of the franchised brands under agreements ranging from three to five years. In return, USL earns a royalty fee from the franchising.

The popular category brands are those with low margins and little pricing power and branding capability. But the competition is high as there are several smaller alcohol companies competing in the same space. Some of the brands in the popular category are Bagpiper whiskey, Haywards whiskey and Blue Riband gin while the premium brands include McDowell’s whiskey, Signature and VAT 69.

USL’s MD & CEO Anand Kripalu, who is credited with launching the drive, said such an exercise allowed it to concentrate on premium brands. “It allows the management more time and resources to focus on our more premium brands. It also ensures the stability of margins, reduces working capital needs and enables the company to focus on higher-margin products,” he said.

The initial push for premiumisation resulted in an increase in the contribution of the segment called prestige and above from 53 per cent of net sales in FY 2016 to 63 per cent in FY 2018. In 2019-20, USL sold 80 million cases (a case consists of 12 bottles of 750 ml each). Of these, it sold 38.8 million cases of spirits in the popular category; its net sales were ₹9,091 crore, of which ₹2,760 crore came from popular brands.

Going where the growth is

One reasons for the more popular brands to have come under strategic review is USL’s faster-than-expected recovery — despite the closure of on-trade channels in the initial stages of the Covid-19 pandemic, higher taxation post the pandemic and a contraction in the business in a priority state, Andhra Pradesh. The recovery resulted in a higher growth for the premium segment as compared to the popular category. The quarterly results indicated that the company would have grown faster had it not been for the poor popular segment results. It also helped that the company had been able to correct price positioning in the market while there was a strong growth in the Scotch portfolio.

An ICICI Direct Research report said there were positive trends in the sector. “While in the short to medium term, uncertainty continues to remain over the evolving situation in the on-trade channels and pickup in the home consumption, the longer-term growth aspiration and continued premiumisation trends remain key positives for the liquor sector. USL continues to invest in increasing its brand strength and propel its Premium brands to a higher share of its revenues (currently at 70 per cent),” it said.

Clearly, premiumisation will see the liquor giant moving out of the popular segment, leaving the low-margin, high volume market to local players.

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Published on February 28, 2021
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