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After McDowell’s success, USL increases focus on higher-priced brands

Mihir Dalal, MINT (A Wall Street Journal Partner)

Bangalore, May 13, 2013

After successfully wooing drinkers toward McDowell’s No.1 products from cheaper labels such as Bagpiper, United Spirits Ltd is increasing its focus on higher-priced brands such as Antiquity whiskey and Black Dog scotch.

From April to December, the volume growth of United Spirits’ premium brands—products including and priced more than its McDowell’s No.1 whiskey—was 18%, faster than the industry average of 12%, according to data supplied by the company. A majority of the growth was driven by McDowell’s No.1 whiskey and rum, both of which overtook Bagpiper, the company’s largest-selling brand for more than a decade.

United Spirits expects its other premium brands to continue growing faster than the market this year partly as it shifts its marketing spending toward these products, managing director Ashok Capoor said in an email.

India’s largest distiller has introduced new packaging or ‘packaging value adds’ for some products such as Antiquity Blue, one of its highest-margin brands, Capoor said.

According to analysts, it’s essential for United Spirits to accelerate sales growth of premium products and show more consistency in growth if it wants to catch up with France’s Pernod Ricard SA, which earns more profits in India than United Spirits despite selling less than a fourth of its rival’s volumes.

The reach and variety of United Spirits’ product portfolio is unrivalled in India. It has brands at practically all the price points from Bagpiper at the lower end to Black Dog scotch at the upper end and products such as McDowell’s No.1 and Signature in between.

“The width of portfolio allows companies to use distribution muscle and gain margins and market share. It also allows companies to shield themselves from a drop in sales of a given brand as they have others, some even in the same segment, to make up for it. This kind of a flanking strategy also reduces the manoeuvring room for any competitor,” said Devangshu Dutta, CEO of retail consulting firm Third Eyesight.

For instance, last year, Signature whiskey—one of the company’s fastest-growing premium products of the past five years—saw a drop in growth last financial year. However, Signature Premier, a brand variant that is 10% costlier than Signature, grew significantly more than the latter, Capoor said.

“There were some interim ‘downtrades’ from Signature in a few markets. Royal Challenge was the major beneficiary in such states. Each brand has a role to play in the premium price ladder. For example, Antiquity Blue sits at the top end of this ladder driving imagery for the franchise, while Antiquity Rare is pitched to facilitate upgrades from brands below it in the price ladder,” he said.

The flip side is that it can become unwieldy to manage so many brands and can lead to inconsistency in growth.

United Spirits has more than 10 brands priced higher than McDowell’s No.1 whiskey and rum that contribute significantly to sales and profits. In comparison, Pernod Ricard gets a majority of its business from just four whiskey labels—Royal Stag, Imperial Blue, Blender’s Pride and 100 Pipers scotch. These brands, three of which are priced higher than competing products by United Spirits, have consistently reported compounded annual growth of 17-31% in 2007-2011, according to data by International Wine and Spirit Research (IWSR).

United Spirits’ premium brands have shown less consistency. Black Dog and Antiquity Blue both reported an increase in volumes at a compounded annual rate of over 30% in2007-2011, according to IWSR data. This year too both products gained market share from rivals such as Beam Inc.’s Teacher’s as United Spirits increased distribution in so-called tier 2 cities. The company’s McDowell’s VSOP brandy grew by 53% last year, taking significant market share from rivals especially in Tamil Nadu.

However, Antiquity Rare and Royal Challenge, other premium products, grew less than 8% over the same period. Another premium brand, McDowell’s No.1 Platinum, a pricier variant of McDowell’s whiskey, reported a sharp drop in growth last year partly due to price increases. McDowell’s Platinum, which was launched three years ago, reported a volume rise of just 15% after sales nearly quadrupled in 2011-2012.

Still, some analysts said that United Spirits’ wide portfolio would serve the company well in future, especially given the impending stake sale to Diageo Plc. The world’s largest distiller announced in November that it would pay $2.1 billion for a 53.4% stake in Vijay Mallya’s United Spirits. The deal is expected to be completed in the quarter to June, though Diageo will end up owning roughly 30% or lesser.

United Spirits has a much wider approach than Pernod, which has “extremely good” but fewer brands placed in attractive niches, said Sunita Sachdev, an analyst at brokerage UBS Securities.

“It’s not a like-to-like comparison between United Spirits’ and Pernod’s strategies. Going forward, with Diageo coming in, we expect to see increased ‘premiumization’ across brands at United Spirits. There should be heightened competition with both global players in India, but given the strength of United Spirits portfolio—and complemented by Diageo’s branding and marketing expertise—this is going to be a formidable challenge for the rest of the industry,” Sachdev said.

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