Diageo India posts 7 per cent decline in sales

MUMBAI: Diageo Plc, the world’s biggest distiller, may have elevated Indian-origin Ivan Menezes as its chief executive in July this year, but its Indian business isn’t exactly in high spirits.

According to the UK-based company’s latest annual report, the Indian unit posted a 7% decline in reported sales for the year ended June 2013 with a 5% volume dip due to ‘reduced stock in trade’. That’s the worst sales growth in at least six years, for a country that’s the third largest spirits market in the world.

“Despite these uncertainties depletions, growth for Johnnie Walker Black Label and Johnnie Walker Red Label was robust in the second half of the year. Smirnoff revenues grew 1% with a volume decline of 6%,” added the report. The global spokesperson of Diageo said: “The high stock in trade in the first quarter was the main driver for the 5% decline (in volume).”


Experts attribute the declining sales to Diageo’s over-dependence on Smirnoff Vodka and premium portfolio in a market where consumers are downtrading to midpremium brands or cutting back spends. “More than half of Diageo’s revenues come from Smirnoff vodka, a category that declined around 3% last year. Even the market for premium brands across categories is taking a hit,” said an industry official.

With 44% of Indian liquor sales consisting of Indian made foreign liquor (IMFL), this is a tricky market for an MNC. Imported spirits account for just 1% share. Diageo’s recent acquisition of United Spirits (USL), though, puts the global liquor giant in a more commanding position in a market that consumes nearly 250 million cases per year.

However, there are signs of a slowdown in Indian spirits consumption — which grew nearly 80% in the five years from 2006 to 2011. “Since the last five months, the overall market has grown just 3% by volume. The government has raised duty indiscriminately making the products beyond consumers’ reach,” said Deepak Roy, CEO at Allied Blenders & Distillers, which has grown by 23% since April this year.

Pernod Ricard SA, which has less than 15% of the market with local brands such as Royal Stag and Imperial, has also grown by around 15%.

Yet, Diageo is optimistic, especially after the USL deal. “This acquisition was about leading the Indian spirits market, a market which is premiumising with 4 million new consumers for western style spirits each year and United Spirits have the leading brands,” Ivan Menzes told analysts during an investor presentation last month.

The United Spirits acquisition is also expected to help Diageo to achieve its goal of generating 50% of revenues from emerging markets before the 2015 target it had established for itself. Its brands include Antiquity, Signature, Royal Challenge, McDowell’s No 1, Bagpiper, Bouvet Ladubay, Pinky Vodka, Romanov and White Mischief.

However, while USL has attained a dominant position in the Indian market, its sales are mainly in the lower priced segments of the market, and its profits lag the other major Indian spirits players. For example, USL’s sales volumes are roughly three times those of Pernod Ricard in India, but the two have nearly identical operating profits. And, Pernod Ricard’s margins are nearly three times higher than Diageo’s.