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Diageo set to win reprieve in great Indian spirits game?

By Ben Bouckley , 04-Oct-2012
Last updated the 04-Oct-2012 at 14:23 GMT

After 'huge and unsuccessful efforts' to re-enter India after it made the strategic mistake of exiting the market in 2002, Diageo's near deal with United Spirits would win it a reprieve, according to a top alcoholic drinks analyst.

Jeremy Cunnington, senior alcoholic drinks analyst at Euromonitor International, said that if Diageo won a substantial stake in UB Group's spirits arm it would be an expensive way to make up for mistakes made a decade ago. 

Nonetheless, like the character Kim in Rudyard Kipling's novel of the same name, Diageo is keen to take part in India's new 'Great Game'.

In a joint statement on September 25, Diageo announced discussions with United Breweries and United Spirits, and said it hoped to acquire a stake in the latter, "although there is no certainty that these discussions will lead to a transaction".

Diageo retreated from Asia in 2002 to focus more on its core North American and Western European markets, selling its Indian spirits operations.

But Cunnington said that, prior to the sale, the UK-based firm was the leading global player in India ahead of rival Pernod Ricard, which acquired Seagram’s Indian business in 2002.

The rest is history: as Pernod Ricard continued to invest in local spirits brands, it grew volumes tenfold to become the nation's second-biggest spirits player last year.

Complex infrastructure, taxation

Due to poor infrastructure and complex taxation rules, size and scale were vital in India, Cunnington said, with alcoholic drinks profits relatively low relative to other world markets. Nonetheless, spirits offered strong prospects as products such as blended Scotch rose in popularity, while taxes could also fall.

A stake in United Spirits (India's largest spirits proucer - the only one with national distribution and production networks) Diageo was in a strong position to exploit predictions of 9-10% CAGR from 2011 to 2016, the analyst said.

Diageo had strived to get back into India since 2006, Cunnington said, noting a failed JV with Radico Khaitan, the launch of its premium Indian whiskey brand Rowson’s Reserve in late 2011, and previous, failed negotiations with UB Group to buy a minority stake in United Spirits in 2009.

"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," Cunnington said.

"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," he added.