The Vijay Mallya Deal - Diageo squares up to Pernod Ricard

After having driven Vijay Mallya's UB to drink, Pernod Ricard might soon need some of that strong stuff itself. When Diageo took a majority stake in Mallaya's UB, in one stroke it surpassed Pernod Ricard India in volume sales. Not bad for a company that had quit India ten years ago.

When the London-based Diageo exited the Indian market in 2002, its French rival Pernod Ricard was starting on an extraordinary journey that would make it the most profitable liquor company in India by 2010.

But Diageo has shown everyone what a strategically timed deal can do. Led by its Indian-born Chief Operating Officer Ivan Menezes, who personally led talks with Vijay Mallya, Diageo is buying 53.4 per cent stake in the flamboyant Indian businessman’s United Spirits, which is the largest liquor company in the world by volumes.

This changes things for Pernod Ricard. It had acquired Seagram's India business at the turn of the century to start its love affair with the domestic consumers. It remains more profitable than United Spirits in the Indian market despite selling just 24 million cases in 2011, which was one-fifth of what the Indian major sells every year. The domestic market is an important part of the company’s global plan to expand its business through emerging markets. Its Indian operation is already the fourth largest after US, China and France and executives expect it to “soon” overtake the French market. Royal Stag, its Indian whisky, is its largest selling alcoholic beverage in the world. Its other brands such as Blender’s Pride and Chivas Regal have also done very well.

But it will soon have to slug it out with Diageo, which now adds its own high brow brands like Johnnie Walker and Smirnoff with United Spirits’ high volume labels like McDowell’s No1 and Royal Challenge. "The combination of United Spirits' strong business with the capabilities which Diageo brings as the world's leading premium drinks company will ensure that United Spirits continues to lead the industry in India," Diageo Chief Executive Paul Walsh said in a company statement.

According to International Wine and Spirit Research, the Indian spirits market is expected to grow by 5.6 per cent from 2011 to 2017, among the fastest in the world and faster than China. The country’s spirits consumers favour the domestically made liquor, also known as Indian Made Foreign Liquor. According to Kepler Capital Markets, this IMFL market is worth 120 million cases.While Pernod Ricard has already taken advantage of this segment, it might be now the turn of its London counterpart.

Diageo never had it so good in India. It exited in 2002 after selling its Indian business that included Gilbey’s Green Label, which was at that time the third largest whisky brand in the market. Ironically, Gilbey’s was eventually bought by Mallya and now after the latest deal goes back to its original owner.  The company made series of attempts later to correct its mistake and get back into the Indian market. Most of them were failures, including a joint venture with Delhi-based Radico Khaitan that saw the launch and fall of a new whisky brand, Masterstroke. Last year, Diageo launched a new premium whisky brand Rowson’s Reserve and it is unclear if it got the desired results.

Now with United Spirits, Diageo has got the volumes and the network that will make it easier for the company to launch and distribute new brands, especially at the high end and give Pernod Ricard a good competition. It is a strategy that the company has followed in other emerging markets like China, Brazil and Turkey where it has bought local brands.  Before the latest deal, the two companies were almost neck-in-neck in their exposure to the emerging markets.

But Pernod Ricard has been slowed down by its hangover of the Absolut vodka acquisition that left it with debt that now hovers around $10 billion. And now with the United Spirits deal, more than half of Diageo’s revenue comes from these fast growing markets, compared to about 40 per cent in the case of Pernod Ricard. India also becomes the second largest market for the London-based company after the US.

It needs a plan B now and quickly!

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