Diageo pauses some whiskey sales in India to push price hikes

By Chris Kay

One of Hina Nagarajan’s first moves at the helm of liquor giant Diageo Plc’s Indian arm is a standoff with government officials over price caps that have already cost the company almost $9 million in sales, and some say might backfire.

United Spirits Ltd. has paused whiskey sales in a number of states yet to budge on price caps despite rising inflation. The move to stop sales rather than see margins continue to erode is a risky bet, analysts at Mumbai-based Dolat Capital wrote last month, that could complicate the firm’s pivot to premium products. It also means a mounting loss of revenue across its portfolio while costs rise at a double-digit pace.

“I didn’t realize how difficult it is,” 57-year-old Nagarajan said, referring to the maze of red tape that spans 36 states and union territories in a country where alcohol is still sometimes seen as forbidden.

“In the short term there will be some impact on market share,” she said in an interview in the southern city of Bengaluru, adding that she hopes pricing issues will be resolved by the end of September. “If we look at the longer term perspective, I think it is the right thing to do for the business and I think our investors, stakeholders, recognize that.”

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Discussions are “going well” with up to five states, she said. Others such as Haryana, Rajasthan, West Bengal and Uttar Pradesh, have already implemented hikes.

“We are not taking a belligerent sort of move with any of the governments,” Nagarajan said. “We are working through with them and we are showing them the data, showing them the right facts.”

Diageo’s difficulties are emblematic of a market where a high potential for growth for alcohol makers is complicated by tradition and taboo. Mahatma Gandhi wanted to rid the country of liquor and some states, such as Bihar and Gujarat, do ban alcohol. But a growing class of urbanist India drinkers, seeking out new tastes and craft beverages, are also a profitable opportunity.

Complex Relationship

Diageo -- which owns brands including Johnnie Walker and Smirnoff -- needs about 200,000 permits each year to navigate rules that often change at little notice. That includes in the capital, New Delhi, where more than 100 liquor shops have closed this month after the local government rolled back licensing introduced last year to liberalize alcohol sales.

Currently, each state sets its own alcohol prices. Nagarajan said Diageo is lobbying for a mechanism to allow pricing to rise with inflation, which the company expects to remain heightened for the next two quarters, as well as inclusion in India’s nationally applied goods-and-service-tax. The latter would help streamline the process, though she said it might be a long way off, with states unwilling to relinquish control over a lucrative revenue source.

Beyond bureaucratic battles, Nagarajan’s first year as CEO -- she’s the first woman to head a major alcoholic beverage firm in India -- has been focused on revamping the booze titan’s local portfolio after the purchase of United Spirits a decade ago from liquor and airline tycoon Vijay Mallya, an embattled former billionaire currently facing extradition from the UK to India after failing to repay bank debt.

Premium Pivot

Diageo is looking to tap a growing class of urbanite Indian drinkers. The volume of Indian produced premium spirits is expected to more than double between 2021 to 2026 at a rate of 18% annually, according to IWSR Drinks Market Analysis, an industry researcher.

This year Diageo invested Rs 31.5 crore ($4 million) for a minority stake in Indian distiller Nao Spirits -- the maker of Greater Than and Hapusa gins -- and launched its own artisan whiskey Godawan. The company is also piloting its Guinness stout beer across a handful of states and Nagarajan said she is “on the lookout” for further acquisitions to enhance its premium roster.

Nagarajan has also shepherded the sale of 32 lower-market brands to Indian beermaker Inbrew Beverages Pvt Ltd. for Rs 820 crore, as well as franchising 11 others in a five-year deal between the two companies.

Investors have so far backed those plans, with United Spirits up 22 per cent since Nagarajan’s appointment in July 2021, compared with the 12 per cent gain of India’s benchmark S&P BSE Sensex. Coming out of disruption caused by the Covid-19 pandemic, the company reported its net income rose threefold on an annual basis in the last quarter, beating analyst estimates, even as costs jumped 12 per cent.

Growing Acceptance

Nagarajan’s own rise, after running Diageo’s emerging markets business in Africa, is also a sign of tentative social acceptance toward alcohol consumption in parts of India.

Born and brought up in New Delhi by middle-class parents who had fled Pakistan during the bloody partition of British India in 1947, Nagarajan credits her “progressive” late mother for advocating her education. After graduating from one of India’s top universities, she forged a career across global consumer goods companies, including at Nestle SA and Reckitt Benckiser Group Plc, working in countries from China, Malaysia and Singapore.

Kiran Mazumdar-Shaw, the executive chairperson of Indian drugmaker Biocon Ltd. who found her own attempts to enter India’s brewing industry in the late 1970s stymied by “huge stigma,” said she felt “quite encouraged” when Nagarajan was selected to head the country’s largest alcohol company.

“But you know, I don’t think much has changed,” Mazumdar-Shaw said in an interview. “When you go to a liquor store you don’t see women.”

Nagarajan, whose favorite tipple is a Tanqueray 10 gin and tonic, said that while more women are entering the industry, cultural acceptance is mostly clustered in larger and more socially liberal cities. “Is it evenly spread across India? I would say not yet,” she said. “I don’t think we’ve got to where we should be.”