Apeg of Johnnie Walker Black Label with soda has been his favourite after a hard day’s work. Anand Kripalu, Managing Director and CEO, Diageo India, proudly calls himself a Black Label loyalist. “If you go to a bar anywhere in the world and you hear someone ordering a Black Label and soda, it has to be an Indian. I am a proud Indian who is a diehard Black Label and soda fan.”

At his sprawling apartment in South Mumbai, he effortlessly puts together a colourful whisky-based cocktail, Manhattan. “Earlier, if someone suggested a whisky cocktail, I would tell them not to spoil the whisky by adding other ingredients. The last seven years has enabled me to look at the world of spirits through a new lens,” he says. Not only has Kripalu’s perspective of alcohol consumption changed, the 62-year-old has been instrumental in bringing about an attitudinal change in India’s Rs 40,000-crore alcohol beverage industry.

In an industry known for unscrupulous methods of doing business and lack of corporate governance, Kripalu’s mandate when he took over in 2014 was to ensure business was done the ‘right way’. State governments control alcohol sales in over 70 per cent of the states and greasing palms of government officials was the norm. “The toughest battle was doing business the right way,” says Kripalu. “We have walked out of many states, saying we will do business only the right way. In one state from being a market leader, we got wiped out to zero. They told us you either do it or you don’t and we said we will not. There was no other way of saying we have zero tolerance,” he adds. Some of the states, which earlier were not willing to relent to Diageo’s compliance norms, eventually turned around and have started doing business with them.

Suresh Menon, Secretary-general, International Spirits & Wines Association of India (ISWAI), agrees Diageo and other multinational liquor companies such as Pernod Ricard and Bacardi did play an important role in transforming compliance mechanisms. “In the initial years there was a feeling that Diageo would blink. In the interest of business, it would succumb to industry overtures. Diageo didn’t do that, which is laudable. Even at the cost of business, they stood their ground and didn’t compromise on compliance agenda.”

Kripalu admits he was sceptical being part of an industry that was known for all the wrong reasons. “When I started talking to Diageo’s global team, I realised I may have an opportunity to leave a legacy behind. Therefore, I decided to take the plunge.”

When Kripalu took over, Diageo had just announced the acquisition of Vijay Mallya’s United Spirits (USL). Though this acquisition gave the British alcohol major the much-needed scale, it came with debts of Rs 5,000 crore. The company’s losses were at Rs 5,103 crore and Kripalu had the onerous task of turning around a business in an inclement business environment. In an industry where pricing is controlled by state governments and excise duties are upwards of 40-50 per cent, profitability seemed a distant dream.

However, USL’s sheer scale and its national footprint did put its new owner at an advantage. On the back of a premiumisation strategy and adoption of a stringent cost-efficiency model, which involved shutting down unviable manufacturing facilities and franchising some mass brands, Diageo has not just more than halved its debt burden, it has been profitable since 2016/17. “We have been judicious in where to invest. It’s not a story of cutting costs, it’s about productivity to fuel growth and invest in the right parts of the business. The shape of the P&L also validates that,” explains Abanti Sankaranarayanan, Chief Strategy and Corporate Affairs Officer, Diageo India.

USL Acquisition

Though Diageo formally took controlling stake in USL in 2013/14, its association with the then Vijay Mallya-owned company dates back to the early ’90s, when it partnered with USL to bottle Scotch whisky brands Black & White and VAT 69. “In 2006/07 Diageo had expressed interest in forming a joint venture with USL, but citing pricing considerations Dr Mallya didn’t agree to the proposal. A few years later Diageo came back with the idea of buying out Mallya, by which time the latter had been plagued with problems of Kingfisher Airlines and decided to exit the spirits business,” remembers Menon of ISWAI. Today, Diageo owns 56 per cent of USL, while the rest is with financial institutions and the public.

The USL acquisition gave scale to Diageo India. While USL sold 120 million cases a year in 2013/14, Diageo India sold just 1.25 million cases. USL had 94 manufacturing facilities. Assam itself had five factories, while Nagpur had three. Being closer to market was important for an alcohol company to avoid taxation imposed by each state. For a Rs 100 product, an alcohol company generally ends up paying Rs 75 as taxes. What makes it even more unviable is that it has to pay an export pass fee to the state where it manufactures, and an import tax fee in the state where it sells. That’s not all, it also has to pay a transit fee to states through which its trucks pass.

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Therefore, producing and selling closer to market is a far more viable option. The USL acquisition helped Diageo piggyback on popular USL brands such as Mc Dowell’s No.1, Royal Challenge and Black Dog. It also helped Diageo significantly improve distribution might. “Earlier Diageo would supply to Nagpur from its facility and paid 15 per cent octroi. Now, it was possible to make it locally or bring it into a warehouse and supply, which meant they paid 15 per cent on far lesser value,” explains ISWAI’s Menon.

Since operating 94 factories did not make business sense to Diageo India, it has over the last seven years halved manufacturing facilities to 47. “We cut down where we felt there were opportunities for rationalisation. We also invested in quality manufacturing, and added automatic lines,” points out Sankaranarayanan.

Being Compliant

Diageo India, says Kripalu, is obsessed about selling rightly and ethically. “In 2014, I would have spent more time on compliance and the past than I spent on the future of the company. Till we fixed that, there was no future,” he says. “People told me dhandha band ho jayega (business will shut down) if I held on to my stand. I told them that was absolutely fine, but I will not budge.”

The company tried to do away with USL’s push-sales method. In the alcohol industry, where only surrogate advertising is allowed, brand loyalty often becomes a challenge. “USL paid more to distributors and retailers in terms of margins to ensure its brands were sold. A branded liquor company will typically spend a lot on product innovation and promotion. There is a pull from consumers, he/she asks for a brand and doesn’t buy what the shopkeeper pushes,” explains Abneesh Roy, Executive Vice president, Research, Edelweiss Securities.

In fact, this push-sales strategy is a major cause of compliance lapses. Close to 70 per cent of Indian states either manage liquor distribution or retail sales, and compliance norms of most multinationals doesn’t allow them to give incentives to government employees. “The retail store manager or distributor expects us to give them incentives to sell our products and our hands are tied. They, therefore, prioritise local brands, which are not bound by compliance issues and give them what they want,” points out the CEO of a leading multinational alcohol beverage company.

In Andhra Pradesh, Tamil Nadu, Kerala and Delhi, the government owns both wholesale and retail channels. In Madhya Pradesh and Chhattisgarh, the state government owns retail stores, while in Karnataka the state partly owns the retail network. An alcoholic beverage company requires almost 2,00,000 permissions annually to manufacture its brands in India. On an average every unit requires around 11,000 permissions, approvals and licences every month to do business. This explains the bureaucratic interference companies have to undergo. In addition, the nature of taxation and duties varies in each state.

Sankaranarayanan claims Diageo has been managing the non-harmonised regulatory environment with data and evidence-based advocacy, strong argumentation, and by putting forward win-win arguments for the industry, consumers and state governments. “We share best practices not just from other countries, but also from other states within the country. By telling State A that State B is doing this and that is resulting in more excise revenue or a better market structure through premiumisation, we are helping provide data and evidence-based arguments to shape policymakers thinking. We are no longer just reacting or fire-fighting, but actively shaping the environment.”

These conversations have indeed helped in changing the complexion of the industry, agrees ISWAI’s Menon. “When there is advocacy at the government official’s level, it has now been taken to a much higher level, it is no longer a case of begging. People are willing to listen if you have a logical argument, are willing to concede.”

Kedar Ulman, Chief Supply Chain Officer, Diageo India, points out that a key ingredient of compliance also includes tightening systems and processes. “We used to have 40-45 days of stock with the distributor; now we have reduced it to 15 days. Since fiscal prudence was not tight earlier, working capital was not as tightly governed. There were no questions asked why we had 45 days of stock with distributors. Now, if I increase my stock from 15 to 17 days, I am asked questions. We have systems in place and we can’t push stocks.”

Premiumisation In Focus

When Diageo took over USL, there was a mindset change among upwardly mobile Indians. Having travelled across the globe, Indians wanted to ‘drink better’ and were not apologetic to spend a premium for a good drink. The willingness to spend created an opportunity for value growth, which Diageo India capitalised upon. India for the longest time was the world’s largest whisky market by volume, but the lowest per capita consumption in value terms.

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The taboo against liquor consumption was gradually fading away too. “Earlier, you couldn’t drink with your father, today you can drink with your grandmother too. This attitudinal change actually lowers barriers to ensure increased consumption,” explains Kripalu.

Diageo, in fact, was a late mover in premium spirits. Global competitor, Pernod Ricard by virtue of having the first-mover advantage had covered considerable ground. “We focused on key brands we believed would help drive profitable growth through premiumisation. We did whatever we needed to do as marketers and sales people to make those brands more relevant and bring those brands alive in the retail store,” says Kripalu.

The company strengthened its focus on Johnnie Walker, Black & White, Black Dog, VAT 69, McDowell and Royal Challenge. Since only surrogate advertising of alcohol brands is allowed, retail stores are their television screen. Diageo spent a fortune on packaging and brand visibility. The focus moved from brand-push to brand-pull. “We stepped up investment behind our brands. If you look at our A&P (advertising and promotions) spends, for example, we have increased or maintained it to NSV (net sales value) ratio,” says Sankaranarayanan.

Over 65 per cent of Diageo’s portfolio today consists of premium brands (priced above Rs 800). “In the prestige and above segment, you have a fair degree of pricing power. If a particular state takes up excise by 25 per cent, the commensurate increase can be taken much more easily than the popular segment. In the popular segment the more the excise duty increases, the less profitable the segment becomes,” explains Krishnan Sambamoorty, Vice president, Research, Motilal Oswal Financial Services.

The company also invested in superior liquids for brands such as McDowell’s No. 1 and Royal Challenge. McDowell’s No.1 has been ruling the hearts of Indian whisky drinkers for over seven decades. Its strong after-taste stood out and consumers loved drinking McDowell’s as it gave them a hit. However, the brand was losing its popularity among millennials.

“Younger consumers were not adopting the brand as they found the taste too strong. We were not recruiting people into brand franchise. At the same time, we didn’t want to completely change the product as we had loyalists,” explains Deepika Warrier, Chief Marketing Officer, Diageo India. With alterations in the liquid, Warrier claims McDowell’s is among the fastest-growing brands in the Diageo portfolio. The company also invested in better-looking packs to give it a more contemporary look.

The Diageo team is particularly proud of its most recent launch Hipsters, which are sleek 180-ml bottles of its premium brands Johnnie Walker, Black & White and VAT 69, priced at Rs 250-600. “Scotch is the aspirational drink in India. But it isn’t really affordable for a top-end consumer. We realised that a lot of consumers who wanted to drink better wanted to drink more often. In the brands that we launched Hipster, its almost 10 per cent of the brand mix,” says Warrier.

Alcohol buying is often a considered purchase and not impulse driven unlike many other FMCG categories. Kripalu, who was earlier, heading Mondelez India, often told his team, “Somebody has to make a conscious choice not to buy a Cadbury chocolate when they walk into a store. It has to be so visible and impactful that somebody has to say, I have seen it, I love it, but I am not going to buy. Our Hipster pack of Scotch whisky has been entirely implemented in front of store, it shouts out, pick me up, therefore, a bit of impulse is playing over there.”

Alongside its premiumisation strategy, Diageo, franchised its economy brands such as Bagpiper, Old Tavern and Haywards, which did give the company large volumes but were negligible in terms of value. “The franchisee manufactures, sells, markets and pays us a royalty,” explains Warrier.

Roy of Edelweiss lauds Diageo’s premiumisation and franchising strategies, but at the same time he also feels that the company, despite its scale hasn’t been able to eat into the share of Pernod Ricard in the premium market. “It usually takes three-four years to address merger-related issues. But even after seven years, Pernod Ricard is still growing faster,” points out Roy.

Cultural Shift

Joining the alcohol industry, says Kripalu, was like checking into Hotel California. “One can check in any time, but can never leave. Once in the alcohol industry, you are stuck there forever. When I spoke to FMCG folks, they would tell me, Anand, if you are there maybe I will take that risk, but the impression was that they would never be able to sell toothpaste or food products.”

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When Kripalu told people in FMCG circles about his vision to create the best-performing, most trusted and respected consumer products’ company, they would laugh at him. “People said it is almost a stupid vision. I told them I am not sure if we will ever get there as a business. But that’s the North Star as a business.”

Kripalu says he was determined to build an institution and not merely grow the organisation. The erstwhile USL was a hugely hierarchical and promoter-centric organisation. “We had to change that, as our culture is not about being hierarchical. It’s about being more transparent, where meritocracy and loyalty are a virtue. We are far more performance driven. I believe that culture drives performance,” explains Kripalu.

Over the next few years, Diageo India evolved into a far more non-hierarchical, open organisation. The company, says Aarif Aziz, Chief Human Resources Officer, Diageo India, tried to break down all bastions of hierarchy. It even got rid of designated car parks for senior management. “We realised if we want a non-hierarchical culture, we need to make sure that we communicate that as you are higher in the roles, you may have more compensation or benefits, but not more privileges. The moment you have privileges, you are creating a sense of hierarchy. So, we got rid of senior management perks such as dedicated car parking.”

“Leaders who were sitting in cabins let go of their offices. The moment we made these changes, we gave a clear message that leaders are role-models,” adds Aziz. This helped the company attract good talent from outside the alcohol industry as well. In order to take the business to the next level, diverse thoughts and ideas were the need of the hour.

Diversity included not just talent from diverse industries, but also gender diversity. In 2013/14, women comprised 7 per cent of Diageo’s workforce; today it is 22 per cent. There are three women in Kripalu’s eight-member core team and a third of the company’s senior leaders are women. The alcohol industry has traditionally been male-dominated. Alcohol consumption in India has always been associated with men and that reflects in the workforce too.

The alcohol major, says Warrier, is working over-time to break stereotypes. On International Women’s Day, the company released a video showing three women having brunch over a glass of Black & White, one of Diageo’s fastest-growing Scotch whisky brands. “We have changed the conversation. It’s not that women don’t drink whisky,” says Warrier. Also on the cards are innovations such as lighter variants of whisky targeted at women, but in the interim the company would have more women in the narratives of their existing brands.

Opportunities Galore

Building a profitable business in Indian alcohol is certainly an uphill task, thanks to innumerable taxes. Gross margins of an alcohol company are in the region of 30 per cent and operating margins are around 13-14 per cent. Operating margins of most FMCG companies are in the region of 20 per cent, while gross margins are upwards of 45 per cent.

“Despite a heavily controlled environment, Diageo India has made significant progress on improving profitability due to improving gross margins, enabled by premiumisation and productivity across all lines of the business,” explains Ulman.

Despite regulatory challenges, industry incumbents are confident their business would grow on the back of scale. “Profitability in India will come with scale. With consumers getting more globalised, there is huge scope for better brands,” says the CEO of a leading alcoholic beverage company.

Kripalu says the changes currently are only in the fringes and there is a lot more that is waiting to unfold. “Consumers want to flirt with options. You must have seen the advent of craft beer. There are so many flavours. The same thing is happening in single malts and whiskies too. People are asking for smoky, sweet or floral whiskies. There is an opportunity to make the category much more exciting.”

Kripalu sees a huge opportunity in getting more women into consuming whisky. “I think creating serves which are compelling to women is an absolutely large opportunity, probably bigger than the opportunity to grow consumption among men. But much depends on sanitising the image of this category. The day you start changing the narrative of alcohol in India, the flow-on effects will be enormous.”

In the twilight of his professional life, Kripalu says the Diageo-USL experience has been the management experience of a lifetime. “We tried to build an institution. Businesses can go up and down, but institutions stay forever. While a business is built on numbers, an institution is built on values and culture.”

The above news was originally posted on www.businesstoday.in by @ajitashashidhar


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