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TMCNet:  United Spirits likely to exit direct operations in three states [India Business] [Times of India]

[March 18, 2014]

United Spirits likely to exit direct operations in three states [India Business] [Times of India]

(Times of India Via Acquire Media NewsEdge) BANGALORE: United Spirits (USL), now majority-owned by global drinks behemoth Diageo, plans to exit direct operations -- sales, marketing , and manufacturing -- from key markets of Kerala, Andhra Pradesh and Uttar Pradesh, said multiple people aware of the developments.


This move follows USL's exit from direct operations in Tamil Nadu late last year, indicative of its new owner's concerns about not violating the anti-graft laws in the US and UK. Diageo is bound by the Foreign Corrupt Practices Act in the US and the UK Bribery Act, which USL is now party to.

Besides, starting March 1, USL has a new Code of Business Conduct, which clearly spells out Diageo's call for increased accountability.

Liquor industry veterans point out that in Kerala, where USL operates two distilleries , Diageo would be plagued with concerns on how liquor is distributed. "Liquor retail in Kerala is controlled by government agencies and for companies wanting greater shelf space there is a certain cash payout involved," said a senior official of a liquor company, who requested anonymity . More so, given that the state government controls liquor prices in God's own country, liquor companies have to operate on very thin margins. "This would be a greater reason for Diageo to pull out USL's brands in the economy segment and focus on its premium brands through the franchise model," said one of the persons cited earlier.

In Andhra, the concerns are of a different kind. The state regulates the quantity of liquor sold based on a fixed percentage of a distillery's annual production capacity. "If companies sell out their stock before hand then the process of getting more of their products into market will set alarms bells ringing for a player like Diageo ," said a trade analyst.

USL owns two distillers in Andhra as well as three contract-manufacturing units.

Up north, in Uttar Pradesh , where USL has two distillers, liquor oligarchs that have close political affiliations control the trade opening up a Pandora's box for global companies.

Players like Diageo, who are globally listed (on the NYSE and LSE), are likely to be more sensitive on compliance with its channel partners/practices , said Sanjay Jain, director at Taj Capital, a New Delhi based investment advisory.

A statement from USL read, "The information is incorrect. USL will continue business in all states. In Tamil Nadu business will be conducted through a franchise model going forward. USL has built valuable brand equity and market shares in all these states." With more than 60% of the volume in Indian liquor industry now coming from MNCs, Jain believes that the foreign players would ensure an improvement to the industry's marketing and distribution practices, which were hitherto tailored for local players.

USL has 21 brands in its portfolio that sell more than a million cases each year or millionaire brands, of which five brands sell more than 10 million cases each annually.

(c) 2014 Bennett, Coleman & Company Limited

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