London-based Diageo has decided to put the focus back on higher margins and better return on capital for its Indian subsidiary United Spirits, which has been witnessing a poor run in the past few quarters.

According to sources in United Spirits, the company has adopted a two-pronged strategy to achieve this.

In markets where margins are low, it has opted for the franchise route and will hive off some of the distilleries. In markets where profitability is good, it will operate its own distilleries for the prestige segment and above.

United Spirits, which leads the liquor market in the country with nearly 50 per cent share, has already announced its plans to hive off the Malkajgiri bottling unit (in Andhra Pradesh) and the Palakkad bottling unit (in Kerala). The Kerala market contributes less than 5 per cent of United Spirits’ volumes, while distilleries in Andhra Pradesh producing regular and lesser category brands may also be hived off.

This strategy will help the company to optimise its spending in the markets which are profitable, a liquor analyst said in a note to the investors. This will also ensure fixed margins and improve working capital, especially in low-margin markets.

Abneesh Roy, Associate Director, wholesale capital markets, Edelweiss Financial Services, said corporate governance is another reason to opt for the franchisee route. “It is always a challenge to carry out business in some of the markets which is controlled by the local government,” he pointed out.

Volumes segment

Sources said that earlier, Diageo wanted USL to exit most of the low-margin markets even at the cost of volumes taking a hit, just as Pernod Ricard had done.

In terms of value, Pernod Ricard, which owns the Chivas Regal and Ballantine brands, is the leading liquor company in the country.

But this new measure allows USL to have a foot in the volumes segment and ensures that it continues to be the largest volume player in the market.

An analyst with a brokerage firm said United Spirits has historically never compromised on margins but over the past few years, it has allowed the margins to decline for higher volumes.

“Now, the new model has become an operational necessity though it won’t shake up the overall structure,” he said.

An USL spokesperson did not share details of how the franchisee model will work and whether the company will charge a fee from the franchisees on a per-case basis.

For the July-September quarter, USL’s volumes grew to 29.7 million cases which were higher by 5.8 per cent over the same period last year.

United Spirits’ stock closed at ₹2,764.95 on Wednesday.

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