INDIA: THE LARGEST GLOBAL WHISKY MARKET

 BOTTLED IN UK AND BULK SCOTCH WHISKY COULD GET CHEAPER WITH INDIA-UK FTA

Scotch Prices May Drop by 20-25 Per Cent

Brexit came into effect on 31 January 2020. Post divorce from the European Union (EU), all governmental policies had to be reviewed and, where required, recast. As part of its new trade policy, the UK has been negotiating free trade agreements (FTA) with several countries on a war footing, even amidst the pandemic. An Indo-UK FTA was set in motion in January 2022. The India-UK FTA pact will be the most comprehensive trade agreement signed by India. Of the 26 voluminous chapters under consideration, in-principle agreement or broad consensus has been reached on 24 chapters. In an important chapter of the trade deal, the UK will be looking for tariffs to be cut on goods such as Scotch whisky. As it stands, the FTA on alcohol products is moving rather slowly.

With India becoming UK’s largest market for Scotch whisky, the makers of some of the finest distilled liquor in the world are gearing up to rake in the explosion in the Indian market by revving up sales and production cycles. In distilleries which dish out the premium brands that are now familiar to the Indian customer, there is palpable excitement about the need to rev up exports while maintaining their qualitative edge. For instance, Dalmunach, Glenlivet, and Strathisla distilleries are home to the spirits that have found their niche in the Indian market – Royal Salute, Glenlivet, and Chivas Regal. While the company simultaneously produces well-known vodka, gin, and wine brands, it is the whisky segment that is driving the Indian thirst for spirits.

India is the world’s largest whisky market by a large margin. Whisky is seen as a discerning person’s drink. So, every category of whisky has different associations. While the aspirational middle class in India is driving away the old taboos attached to alcohol and women have emerged as a big consumption cohort, with whisky, there are images of much more class and a lot more sophistication than any other drink. So, fundamentally India remains a whisky market. Within that, there are different segments where you would have the Indian Made Foreign Liquor (IMFL) association, the price-conscious and yet premium-seeking market that buys brands like Imperial Blue and Blenders Pride, where Scottish malts are blended with superior class Indian grain whisky. It must be noted that the Indian definition of whisky is far-removed from the stringent conditions imposed by the Scotch Whisky Association (SWA).

India’s maze of state-controlled alcohol laws means it is hard for Scotch brands to make their mark in the country as a whole. But a mooted free trade agreement could open up the territory to a whisky gold rush. Diageo is clearly the biggest player, with a foot in both camps, given its wide portfolio of Scotch brands and its 56 per cent stake in United Distillers, India’s leading whisky producer. Diageo CEO Ivan Menezes insisted the company was ready if and when tariffs come down. “For a product like Scotch whisky there’s nothing like more demand,” he said, adding, that if Diageo’s stocks do start to run out, “all we’ll do is make it more expensive.” “If you look at the Scotch whisky export stats from around about 2007, you can see that the upward trajectory steepened following that change.” Since 2010, the value of Scotch shipments to India has risen from £40.6 million to a peak of £166.2m in 2019. After collapsing in 2020 due to Covid-19, it recovered to £146.1m last year, putting the country eighth in the drink’s export charts by value.

By volume, India is huge, notwithstanding the tariffs. However, only a fifth was bottled in Scotland. Some brands are bottled in India, like Teachers, Passport and Vat 69, but the majority of what’s imported in bulk disappears into bottles of Indian whisky, a spoonful at a time. A comparison of an average NAS Blended Scotch brand bottled in the UK with that same brand bottled in India reveals tangible differences. Despite being the world’s second-biggest importer of Scotch, the category has a mere 02 per cent of the Indian whisky market, according to the SWA. If Scotch were to treble its share of the Indian market to 6 per cent, “It’s still going to be a niche”, says SWA’s Bell, even if that equates to a staggering 400m bottles. Back in Scotland, you wonder if there is enough whisky to supply such demand. “Potentially not,” says Russell, who feels producers will want to bottle as much as possible rather than export it as cheap bulk whisky if supplies run short.

WHAT IS INDIAN MADE FOREIGN LIQUOR?

IMFL encompasses a category of alcoholic beverages in India designed to emulate the styles and flavours of foreign liquors. These spirits are locally crafted using domestically sourced ingredients and adhere to specific techniques to achieve a taste profile like their foreign counterparts. Companies making IMFL beverages in the whisky domain are: United Spirits Limited (Signature, McDowell’s No.1), Radico Khaitan Limited (8 PM Whisky), Allied Blenders and Distillers Pvt. Ltd. (Officer’s Choice), Pernod Ricard India (Royal Stag), etc.

CURRENT STATUS

Currently, import duties on whisky stand at a spirit dampening 150 per cent. The UK body would like to see the duties whittled down to 30-50 per cent in five years, but are also amenable to keep the duty-reduction period phased over ten years, first being reduced to 75% in 2024. This will induce many distilleries to sell their wares in India. The Indian distillers of world-class single malts as well as the IMFL group counter this proposal and prefer an FTA where the 150 per cent duty whiskies may be brought down to 100 percent by 2024. This would establish a new pecking order, which could then see duty reduced to 50 per cent over ten years. Currently, only 20 of its 140-odd distilleries sell their brands in the largest whisky market globally. As a globally important market, India is still the sixth biggest global destination for Scotch whisky; the country imports 95 per cent of its domestic needs, according to International Wine & Spirit Research, a global agency tracking the alcohol market.

During 2022-23, bottled whisky imports from the UK more than doubled to $316 million from $152 million, while the value of bulk whisky shipments to India increased by over 40 percent to approximately $149 million during the same period, according to a report by the International Spirits & Wines Association of India (ISWAI).

Bulk whisky is the spirit entering the country in barrels or cases that typically operates on a business-to-business (B2B) model, where buyers may be wholesalers or distilleries looking to blend or age their own whisky. The FTA, when signed, is pegged to bring down the prices of whiskies entering the Indian markets while also increasing the choices for customers, as per ISWAI.

As divulged earlier re Duty-reduction time-frame, ISWAI has stated, “We have recommended that import duties should see an immediate rationalisation of 75 per cent from the current 150 per cent as soon as the FTA is signed. Furthermore, we have suggested the duties be reduced and brought down to anywhere between 30-50 percent over a period of time.” However, one concern that continues to trouble the industry is the fact that alcohol is a state subject in India, and any relief that may be available at the FTA level may get wiped out or diluted in different state tariffs. Currently, Haryana allows the sale of certain prominent Scotch Whisky brands at the lowest prices in the world, relying largely on bulk and economies of scale.

LEVEL PLAYING FIELD NEEDED: Chivas Brothers On India-UK FTA

Chivas Brothers, the Scotch whisky business of French distiller Pernod Ricard, said there should be a level playing field in the India-UK free trade agreement (FTA) that will not just result in higher Scotch consumption in India but also fuel surging demand for Indian whisky globally. But, of the two global leaders in the Scotch Market, Diageo and Pernod Ricard, the latter is hogging the news for the wrong reasons.

“Scotch whisky in India is very, very heavily taxed at 150%. On the contrary, Indian whisky in the UK is not taxed at all. So, I think it's a bit of an unbalanced situation between the two right now," said Global Chairman and CEO Jean-Etienne Gourgues, whose company sells the three prominent brands mentioned supra. Diageo owns 200 brands, with sales in over 180 countries, including the world’s best-selling Scotch whisky brand Johnnie Walker. One could expect to see other brands like Buchanan's 12 YO, Grand Old Parr 12 YO, Talisker, Lagavulin and more.

While demand for Scotch in India has doubled over the past two years, a higher portion of them is imported in bulk, used to make bottled-in-India scotch and premium Indian whisky brands. Export of single malt whisky and premium blended Scotch whisky (Age stated, usually 12 years old and older) is not permitted in any form other than bottled in Scotland, with such provenance clearly visible on the label and carton.

PERNOD'S PROBLEMS

From tax notices to allegations of illegally boosting market share, French liquor giant Pernod Ricard is facing several business and regulatory challenges in India, one of its key growth markets. The maker of Chivas Regal and Absolut vodka is the second-largest spirits company globally and in India. It accounts for 17% of the alcohol market by volume in India, where it competes with the likes of Diageo.

Pernod has since last year been under the scanner of India's Enforcement Directorate as part of an investigation into how retailers, manufacturers and politicians allegedly colluded to illegally profit from the 2021 auction of liquor retail licences in New Delhi.

The capital city's liquor policy prohibited manufacturers from participating in retail sales, directly or indirectly, but Pernod was "in contravention" as it effectively used bank guarantees to invest in retailers, the agency says. Pernod Ricard India said it strongly denies the allegations of the directorate, adding that it "will continue to fully cooperate with the Indian authorities in this matter."

On the tax front, the spirits giant is facing a near $250 million federal demand for allegedly undervaluing imports for over a decade to avoid full payment of duties. India's customs authority, in a court filing last year called the company a "habitual litigant" and accused it of a conspiracy "to defraud the Government of India of its legitimate revenue." Pernod, which challenged the demand, says it has "always endeavoured to act with full transparency and in compliance with customs and regulatory requirements."

Market Share Jumps: In exchange for financial support by Pernod, New Delhi retailers who received the loans "had to ensure" that 35% of the stocks in their shops would be Pernod products, the investigating agency said in its documents. It said its agents questioned HSBC and Pernod executives during the investigation. As select retailers got loans with Pernod's support and stocked more of its products, the liquor giant's market share rose from 15% to 35%, the agency said.

The arrangement "establishes a clear intention of Pernod Ricard to indulge in brand pushing and (to) gain illegitimate market share," said one of the agency's documents late last year. Pernod did not comment on these specific allegations.

The Response: Pernod says that since 1994, its tax disputes have made it tough to do business in the country. In a letter written to Prime Minister Narendra Modi in 2021, the company said that "ever-lasting litigation has been a big strain on our ease of doing business and has inhibited fresh investment by our group headquartered in Paris (France) for expansion of business in India." Pernod says it has been in dialogue with Indian authorities as it looks at finding a swift resolution to the matter. In July 2022, Pernod wrote a letter to the federal tax authority stating it was "facing significant business ccontinuity challenges" and that operational challenges were choking its supply chain.

HIGH IMPORT TAXES

India's alcohol market is heavily regulated and Pernod - like much of the industry - has been concerned about the 150% tax imposed on imported liquor. In April last year, the company urged the government to drop the tax it said poses a "large challenge" for Pernod Ricard and puts many of its drinks out of reach of consumers.

Pernod's revenue from operations in India stood at $2.4 billion in 2020-21, but taxes and duties - which includes federal, import and state levies - accounted for 79% of that. Its India net profit for the year stood at only $130 million, a relatively minuscule profit margin.

“We have a number of single malts in Scotland, but not all of them are present for the time being in India,” Jean-Etienne Gourgues, Chivas’ chairman and chief executive officer, said in an interview.  

The company’s Secret Speyside single malts, for instance, aren’t sold in India. “We have a number of single malts in Scotland, but not all of them are present for the time being in India,” Gourgues added. Gourgues, however, declined to share details on brands that might be introduced in the country. Glenlivet, in its many avatars, should soon be seen in India.

There is a noticeable trend even within the overwhelming growth in the whisky segment — scotch sales have shown a bigger jump in volumes even as the lower-end whisky brands show a consistent growth because of the already large base of sales. Overall, scotch whisky sales have nearly doubled in India, with the wealthier middle class shifting to pricier drinks.

Pernod Ricard’s premium segment, which includes high-end brands such as Chivas Regal, Glenlivet and Royal Salute, showed a 50 per cent growth in volumes between 2021 and 2022. Other origin whiskies, such as Jameson, showed a growth of 79 per cent in the same period, while the lower-end whisky admix premium grew at 21 per cent between 2021 and 2022.

PREVIOUS EXPERIENCE

Drawing from Australia’s experience with an interim FTA, where India reduced the customs duty on premium segments for wine, there is a push from the domestic industry for an MIP of US$5 for each 750 ml bottle. However, it is speculated that India might agree to an MIP of US$4 per bottle, which could lead to a potential influx of Scotch imports from the UK.

Domestic players are now concerned that such a move might have adverse effects, potentially leading to the displacement of several homegrown brands and IMFL products. There are some fears that foreign players with bottling units in India might not invest in fresh capacity and may even reduce existing capacity, negatively impacting employment in the industry.

In fact, analysts report that even a US$1 difference in MIP – from US$5 to US$4 – would see a significant increase in the shipment of popular whisky imports like Aberlour, Arran, Auchentoshan, Bladnoch, Brora, Deanston, Glen Garioch, Fettercairn, Glendronach, Glenmorangie, Glenfarclas, Highland Park, Tobermory, Tomatin, Springbank, Tamdhu, Tamnavulin and scores more.