Diageo bets on USL to take on French rival in the Indian market

With United Spirits Ltd (USL) in its fold, UK-based Diageo Plc is set to take on its French competitor, Pernod Ricard SA, with a series of new initiatives to close the gap between the two.

Pernod Ricard, which owns brands such as Absolut Vodka and Chivas Regal Scotch whisky, is India’s largest player in value terms with sales of about 29 million cases. USL is the leader in volume terms with sales of 129 million cases.

But with both global giants focusing on premiumisation of their brands, which basically means establishing quality and uniqueness, Diageo is expected to do the same in the case of USL. For starters, it has decided to make certain structural changes in the Indian subsidiary, which will help it focus on upscaling its brands and probably shed a few others for higher margin, sources in the company said.

Margin focus An analyst with Axis Capital said volume growth in the premium segment will be on the fast track from the current fiscal, which will lead to margin expansion. At present, USL’s margin is between 14 and 15 per cent, while that of Pernod Ricard is about 22 per cent. The average price per case for USL ranges from ₹600 to ₹650, while that of Pernod Ricard is between ₹1,200 and ₹1,250. “Therefore, there is a huge room for Diageo to improve on various parameters,” said Sandeep Raina, an analyst with Edelweiss Capital.

He said the company could add more brands and with brands from Diageo’s stable, consumers will have a wider choice of premium products. A Diageo spokesperson said the company’s entire 150-strong sales team has already been integrated into USL and the team will primarily focus on marketing brands such as Johnnie Walker Scotch whisky and the others from the stable.

Sales promotion USL, as reported last year, is the sales promotion agency for all of Diageo’s brands. According to this arrangement, USL has been providing sales promotion services to Diageo India for all Diageo brands manufactured and/or imported and sold in India. The services include calling on and covering on-trade and off-trade outlets to promote the sale of Diageo products, merchandising activities and sales activation for Diageo products.

However, sources said the premiumisation drive will be cost-led and not consumption-led. So, there is a possibility of certain brands of USL being priced higher.

In a note to its clients, Kotak Securities said there is a likelihood of price increases being effected by liquor companies. “Premiumisation efforts would accelerate further to offset likely higher ENA (extra-neutral alcohol) prices due to increased blending targets approved by the government,” Kotak said.