INDIA: A long summer

As India’s drinking culture evolves, its enormous potential becomes ever more apparent. Spiros Malandrakis of Euromonitor International looks at the opportunities – as well as the pitfalls – faced by the alcoholic drinks industry there.

The alcoholic drinks market in India continues to be plagued by a labyrinthine regulatory framework and an entrenched conservatism that treat the industry like an “untouchable”.

Nevertheless, the country’s defiant performance in the face of global recessionary headwinds, the demonstrated buoyancy of the indigenous middle-classes, its favourable demographics and the steady embrace of Western drinking habits are all creating a boisterous cocktail that is paving the way for a long Indian summer.

Recession-proof

The traumatic terrorist attacks in Mumbai in 2008, combined with retrenchment in the IT and banking industries, massive share-trading losses and general economic uncertainty led to a sharp drop in consumer confidence in the country. This caused consumers to rein in their spending until the third quarter of 2009, which in turn adversely affected demand for higher-end alcoholic drinks, while dampening on-trade sales.

Nevertheless, even as the reverberations of such gloomy circumstances echoed around the globe, the slowdown in India was comparatively minute, with overall alcoholic drinks posting an overly upbeat 12% total volume rise in 2009, marginally lower than the 2004-2009 review period volume CAGR of 13%. Trading down surfaced as an immediate knee-jerk reaction for cash-strapped and concerned consumers around the country, becoming more pronounced within the dominant spirits sector.

However, while beer and spirits managed to successfully navigate the blip by leveraging their comparatively loyal consumer base and economy offerings, wine paid the price for its sophisticated positioning and appeal to upwardly mobile urbanites, which were forced to temporarily make cut-backs.

Furthermore, unlike beer and spirits, which have a large and resilient base of lower-middle class consumers, wine proved to still be dependent on sales at festive and celebratory occasions, which are discretionary and were thus more profoundly affected by the fall in consumer confidence.

The economic uncertainty in late 2008 to mid-2009 interrupted the trend of stratospheric year-on-year volume expansion that wine had previously enjoyed. Still, bearing in mind the catastrophic implications of the slowdown in mature markets, wine’s slowdown to a relatively solid 14% total volume growth for 2009, down from the dizzy heights of a 25% volume CAGR over 2004-2009, can be described as anything but disappointing.

On the other hand, according to Euromonitor International, beer and spirits largely retained their seemingly unstoppable momentum to surface almost without a dent on the other side of the recessionary maelstrom.

Total beer volume growth was only two percentage points lower than the CAGR for 2004-2009, with a solid 13% for 2009 on the back of aggressive promotional activities as well as a flurry of new product launches.

While the long summer of 2009 buoyed the beer market in the north and west of India, sales growth in the key southern states, such as Karnataka, Andhra Pradesh and Tamil Nadu, were adversely affected due to taxation-related price rises in Karnataka and the withdrawal of United Breweries and SABMiller India’s brands from Andhra Pradesh in the first half of 2009.

Although the global economic recession did not severely or directly impact the vast majority of Indian consumers, economic uncertainty and declining on-trade footfall negatively affected expenditure on premium spirits by affluent urban Indians in 2009.

This was compounded by a rise in prices of imported products, such as super-premium whisk(e)y and vodka, in key cities like Mumbai and Delhi. However, with much of the volume growth in major categories, such as “other” whisk(e)y, coming from the unsaturated markets in smaller cities and towns at the tail-end of the review period, the overall trend of robust double-digit growth continued in 2009.

Within this context, the 2009 volume growth for spirits of 11% was on a par with the CAGR of 2004-2009. While several high-growth categories, including “other” blended Scotch whisky and vodka, saw significantly slower growth in 2009 compared to 2008 due to the economic slowdown, “other” whisk(e)y, the largest category, continued to benefit from consumers trading up from unbranded products to economy and standard Indian whisky brands, such as Original Choice from John Distilleries and Old Tavern from United Spirits.

Traditional spirits, such as feni (cashew spirit) and toddy (palm wine) are niche regional specialities popular in Goa and southern India and are classified as “country liquor”, which is a largely unregulated and commoditised product category in the country.

With rising purchasing power and awareness of the health risks posed by country liquor, consumers have increasingly upgraded from local/traditional spirits to branded economy spirits, such as “other” whisk(e)y, brandy, gin and rum, a fact that explains the increased velocity of the drop of the other spirits category, which saw volumes collapse by more than 9% in 2009.

While the bulk of consumers of brandy and dark rum are not witching back to other spirits, the fast-growing young consumer base, consisting of first-time or inexperienced drinkers, is moving away from brown spirits to white spirits, especially vodka. Brown spirits – particularly whisk(e)y – are increasingly seen by young people as an outdated relic appealing only to their parents’ generation.

A cautionary tale

According to Euromonitor International, alcoholic drinks per capita consumption in India was merely 2.8 litres in 2009, a drop in the ocean compared to the global average of 34.6 litres. This figure in itself vividly highlights the massive potential for growth in the country where total alcoholic drinks sales are expected to post an enviable 11% volume CAGR over 2009-2014.

As Western consumption habits are steadily establishing a foothold in the country, centuries-old taboos and embedded cultural traits are being left behind at the same rate as modern wineries and clubs are popping up throughout metropolitan areas.

While economic growth will continue to spill over from the cities into the neighbouring smaller towns, the alcoholic drinks industry will continue to receive a boost. Less developed states, such as Orissa, Bihar and Madhya Pradesh, will play an increasingly important role while the chaotic distribution and legislative environments that still plague the domestic market are issues that will have to be addressed sooner rather than later.

However, manufacturers and distributors are expected to increasingly take remedial measures, such as setting up wineries within individual states and importing products such as wine and Scotch whisky in bulk for bottling in domestic bottling plants.

Samant Soma Wines has already started developing wineries outside of Maharashtra, while United Spirits is bottling its Whyte & Mackay Scotch whisky locally. Operational sharing will also be on the cards and A-B InBev and Carlsberg A/S are already discussing the possibility of an alliance centred around the sharing of production and distribution platforms in the country.

On the other hand, the recent fall from grace for the previously bullish Indage Vintners could also serve as a parable or cautionary tale for India’s ascent into the pantheon of the global alcoholic drinks market. Indage, boasting more than 40 brands, 2,500 hectares of vineyards and credited as the company that took Indian wine global for the first time, is now facing the threat of bankruptcy after apparently overstretching its finances and proving to be overconfident.

Ambition can be a great driving force, but realism is essential.

• Spiros Malandrakis is an alcoholic drinks analyst at Euromonitor International

db, May 2010