India set to be 2nd largest market for Diageo after US

India is a pretty tough market to operate if you are in the alcohol beverages space with different regulations in all 28 states, a brokerage firm asserted

Diageo India, which has been a marginal player in the 260 million strong spirits market dominated by Indian Made Foriegn Liquor (IMFL) brands led by United Spirits, will get one of the best entrenched on the ground network after it acquires a significant 53.4% stake in United Spirits.

In India, Diageo sells globally renowned brands such as Johnnie Walker Scotch whisky, Smirnoff vodka among others and has also developed an IMFL brand Rowsons Reserve. According to Diageo officials, the volumes in the Indian market grew by 24% led by good sales in vodka. Prior to this deal with United Spirits, Diageo had an equal joint venture with Radico Khaitan to tap the IMFL market, but had to call off that venture after not much progress in building and developing brands.

"India is a pretty tough market to operate if you are in the alcohol beverages space. Each of the 28 states have different regulations for this segment and it is as though, one has to operate in 28 different countries," said a  analyst at a global brokerage. United Spirits, with its three decades of presence in this market has entrenched itself with a strangle-hold over distribution. Diageo will get to ride on this," he added.

Ivan M. Menezes, Chief Operating Officer - Diageo PLC said that they haven't thought about whether they will be integrating their Indian operations with United Spirits and they would also not want to take United Spirits private. "We run a clutch of companies in the public space across the world and United Spirits will continue like that. We will be integrating their balance sheet into our global numbers. What we are getting is a strong distribution network and point of sale coverage, with sales offices in key Indian state capitals and established manufacturing and bottling plants in all major Indian states," Menezes said.

United Spirits brands are represented in 64,000 outlets across India (close to 100% of on- and off-premises network) with an agile pan-India footprint and with more than 80 manufacturing facilities owned and contracted in India.

"It is a dream combination that we have come together. This transaction will enhance Diageo's position in the growing premiumising local spirits category. It is a transformational investment which is EPS accretive in the second year and economic profit positive in the sixth year," Menezes said.