Idis Heady Cocktail Of Luck And Strategy

A lot of people are out to get us, says Deepak Roy, denying reports that his companys liquor licence might be revoked due to unauthorised production. Roy has some reason to be paranoid: After all, weve got a 5 per cent share of the Indian liquor market today far ahead of any other multinational.

But the 46-year-old managing director of International Distillers India (IDI, a joint venture between International Distillers & Vintners and Polychem) is not looking tense in fact hes sitting back with a comfortable smile in his bright Mumbai office. Considering that the combined market share of the 11 other multinationals in the Indian liquor market is a mere three per cent, thats little wonder. However, Roy is careful to add, with a liquor market growth of 12 to 15 per cent per annum, no major Indian company has suffered. True enough, UB and Shaw Wallace are still the market leaders, with 37 per cent and 15 per cent market share respectively but if IDI continues its fast rise, they wont be sitting pretty for much longer.

 

Luck, as much as hard work, has helped IDI spurt ahead of the competition. Its one of the only two MNCs allowed to make molasses-based liquor in India (the other is McDonald Meakin, not a big player yet). Most other MNCs are specifically required to make grain-based liquor, which is four-times more costly. This provision has allowed IDI to penetrate the regular whisky segment, which accounts for over 50 per cent of the Indian liquor market, rather than being confined to the grain-based premium whisky segment comprising a mere 10 per cent.

The MNC has also managed to retain management control of IDIs operations without interference from Polychem, the Indian partner. With a respective 60:40 per cent holding between International Distillers & Vintners and the Kilachands Polychem, IDI has managed to launch 13 brands in the last three years, without a whimper of protest from the latter. In fact, Polychem was happy to cede its own brands Alcazar vodka and Mens Club whisky to IDIs portfolio, since both products were in lower price segments than IDIs brands. If anything, Polychems brands have benefited by the upmarket image gained through the tie-up with IDVI.

To add to this, IDI has neatly side-stepped the capacity ceiling of 10,000 kilolitres set on liquor production by the FIPB; the company contract-manufactures its liquor from distillers across the country in Punjab, Daman, West Bengal and Uttar Pradesh. As of now, IDI is the only MNC which needs to employ this strategy since the others are still far from hitting their production ceilings. For IDI, this also cleverly cuts the cost of state levies on cross-border movement of liquor. We are completely within the law, since the FIPB approval only puts a ceiling on the amount of liquor we can produce through the joint venture, not through out-sourcing, explains Roy.

IDI has made pre-tax profits of Rs 9.8 crore for the year ending September 1997, on a turnover of Rs 170 crore. The turnover does not include the products which are contract manufactured, which account for roughly Rs 110 crore more. IDIs average annual growth in sales volume has been about 32 per cent since the companys launch in 1994. With an initial investment of Rs 75 crore (Rs 20 crore through equity, and Rs 55 crore through commercial borrowings), Roy states that IDI broke even in the middle of last year something most liquor MNCs here are still dreaming of.

Roy puts up IDIs star performing brands Gilbeys Green Label Whisky and Smirnoff Vodka as the reasons for its success. According to IDIs market research, Green Label is the worlds fastest growing brand, having already crossed the 2-million case sales mark in just three years of its launch; this gives it a 14 per cent market share of the massive regular whisky segment in India. Herbertsons Bagpiper, which has had a two-decade headstart, is still the market leader with a 30 per cent share.

Smirnoff Vodka is the only international brand in the premium vodka segment in India to date, and has already captured about 35 per cent market share of the whole category. In monetary terms, Gilbeys Green Label alone contributed a whopping 64 per cent of IDIs total sales turnover last year, while Smirnoff Vodka contributed about 4 per cent.

Roy savours talking about Gilbeys Green Label, as the whisky was specially developed for the Indian market there was no such thing as Gilbeys Green Label whisky before this. Says Roy: The unique thing about IDVs international product development strategy is that it is highly consumer-focused. We actually had the product development team from the UK come down at the same time that market research was underway, so that the two teams worked hand in hand. Of course, the pricing of the brand played a major part in its acceptance by the Indian consumer. Launched at the same price point as Indian regular whisky brands like Bagpiper and Officers Choice, Green Label quickly established the image of giving more value for money. Being molasses-based helped keep production costs as low as that of the Indian competitors.

However, industry analysts say that the driving force behind the success of IDI in India cannot be simply its brands. There are many internationally renowned liquor brands launched here which are still struggling to make their mark. Instead, analysts point to two factors the timing of IDIs entry and the liquor savvy of Deepak Roy as the trump cards in IDIs pack. With a decades experience in UB as a senior manager, Roy certainly knew the ins and outs of the convoluted Indian liquor market, and more important, of the complex government administration. He could thus facilitate IDIs smooth entry into India.

Perhaps this is why IDIs approval document from the FIPB in August 1993 contains no clause stating that the MNC should produce only grain-based liquor products. I think they came in at a time when they were able to secure this licence and they do have a cost advantage, remarks Brian Senior, India head of Allied Domecq. Jolly Bhargava, managing director of Whyte and Mackay, comments: They managed to get permission to make molasses-based liquor because their collaboration was approved with a party which only had capacity to make molasses-based liquor.

Even if the missing clause was merely an oversight of the Ministry of Industry, IDI certainly showed much resourcefulness in its response to a letter from the same ministry a year later, stating that you shall not use molasses or molasses-based potable alcohol for the manufacture of alcoholic beverages. It took just one week for IDI to get the decision reversed in Delhi, with a letter stating, In supercession of this Ministrys letter dated 13th May 1994... all other terms and conditions of the approval letter shall remain unchanged.

Analysts say that IDI has thus saved a whopping Rs 10 crore annually, due to its continued ability to use molasses-based alcohol. Whyte and Mackays Bhargava protests: Its not fair on other companies because it is not a level-playing field. But adds: It wouldnt be fair to say that the cost advantage is the only reason for IDIs success in the market. They got here first, were the first to make Indian Made Foreign Liquor (IMFL) and used effective marketing to sell their brands.

Though its not the only reason for their success, IDIs deftness with the complex liquor laws hasnt diminished. Asked whether all the distillers that IDI contract manufactures from are endorsed with proper licences from the central government, Roy states: Well, the one in Khasa (Punjab) is still awaiting endorsement, but he quickly adds: Now that the Supreme Court has ruled that potable liquor is wholly a state subject, its not really an issue whether theres a central government endorsement or not.

Now theres the prospect of a merger between IDI and United Distillers India to look forward to, due to the UK merger of their parent companies Guinness and GrandMet. Roy comments: Though its still premature to say when itll happen, a merger would certainly be beneficial since the product portfolios of both companies are complementary, not competitive. Thats specially true for UDs coveted scotch whisky brands Black and White, Vat 69 and Black Dog. The scotch segment is one area in which IDI has not made its mark yet. Of course, IDI might have to wait a while yet for the merger UD is working out the logistics of exiting from its joint venture with UB; they will have to write off UDs cumulative losses of Rs 7.6 crore first. But were not in a big hurry, assures Roy, we have enough successful brands to count on till then.