Spirited Attack: Western Liquor Makers Eye Rich Indian Market --- A Local

Whisky King, Tariff-Protected, Feels Heat as Tastes Evolve

Eric Bellman
A1
English
(Copyright (c) 2007, Dow Jones & Company, Inc.)
MUMBAI, India -- Vijay Mallya calls himself the King of Good Times, and he has the
credentials. The biggest maker of both whisky and beer in India, he wears gold necklaces
and a diamond bracelet, surrounds himself with film stars, and holds liquor-soaked
parties on his 165-foot yacht, once owned by Elizabeth Taylor.
Such behavior didn't square with the anti-alcohol ethic in India when Mr. Mallya
inherited a family liquor business 24 years ago. Some states required a doctor-signed
"liquor permit" to buy alcohol.
But as India opened up to world trade in the past decade and its economy boomed, a new
urban generation began to embrace partying, travel and free spending. Mr. Mallya's
flashy image became an asset that helped turn his empire into a commercial giant.
Protecting it, meanwhile, were import duties of up to 550% on foreign liquor.
Now, the same liberalizing forces that changed India and propelled Mr. Mallya to riches
threaten his dominance. Western spirits companies that long ignored India because of its
attitudes and its tariffs are coming in.
Britain's Diageo PLC, France's Pernod Ricard SA and Fortune Brands Inc. of the U.S. are
offering locally made brands here. They're ramping up marketing and building Indian
distribution networks. And they're mounting a legal attack on the tariffs, determined to
make their premium scotches and other famous brands affordable in India, where many
covet but can't afford them.
The prize in this competition: the world's largest market for whisky by volume, one long
largely closed but now starting to open.
Western whiskies cost some $40 a bottle here because of the duties, a stiff price even for
those who can afford to go to nightclubs. But even at that price sales are rising. Kishore
Frederick, owner of a high-end club and restaurant in Mumbai called Seijo and the Soul
Dish, says the piles of empty bottles of Johnnie Walker, Bacardi and Absolut behind his
bars get larger every weekend.
"People have dismantled the myth about alcohol being taboo. India has shed its
inhibitions," Mr. Frederick says. His favorite drink is Cutty Sark (made by two United
Kingdom companies) and soda. For Indians like him, "what used to be a treat has now
become a necessity."
In March, after intense lobbying by scotch makers, the European Union petitioned the
World Trade Organization to consider ruling against India's tariffs. The U.S. has also
petitioned the WTO. A panel of the trade organization now is examining the case. If it
rules against India, it could force New Delhi to slash its tariffs within three years. Indian
officials have hinted they might cut them pre-emptively.
Mr. Mallya says he doesn't care about the emerging threat of foreign whiskies. His top-
selling Bagpiper brand goes for about $5 a bottle, far less than any imported one. He
thinks the gap will keep his consumers loyal.
"The combined annual sales of all of the multinationals operating in India is less than the
incremental growth that I've got each year," Mr. Mallya says. "That's how much of a dent
they're making."
But Mr. Mallya is also working hard to shore up his position. He is applying some of the
foreigners' marketing tricks, such as holding tastings at bars, and he is pressuring his
distributors around India to shun foreign brands.
Mr. Mallya's business empire is the world's third-largest seller of spirits by volume, after
Diageo and Pernod, although because of low Indian prices it is far smaller by sales.
United Spirits, the main liquor company in a group of businesses he controls known as
the UB group, has just acquired a Scottish whisky company, Whyte &Mackay Ltd.
Another Mallya-controlled company makes Kingfisher beer, which dominates the Indian
market. A third runs an airline also called Kingfisher. It features flight attendants in red
skirts called "models of the sky." Echoing the line about liquor, the airline's ads tell
people to "fly the good times."
Mr. Mallya, a 51-year-old billionaire, owns lavish homes from Mumbai to Monaco to
Marin County, Calif., along with a castle in Scotland. He travels in a private jet and a
helicopter, both bearing the bright-red Kingfisher logo. In London, he keeps a gold-
colored Maybach luxury car with the license plate "UB1." Mr. Mallya is known for flashy
moves like pulling out a $100 bill and writing a goal for managers on it, promising
rewards such as round-the-world plane tickets for hitting targets.
"What I do is what Trump or Branson do," Mr. Mallya says in an interview. "I use myself
as the brand ambassador. We're talking about lifestyle brands, and this is what the youth
of India perceive as my lifestyle."
"People want to be like Mallya. They want to party and have a nice time," says Vikram
Kapoor, a 30-year-old real-estate agent in Mumbai who has seen the sweeping social
changes.
"India is full of cultural changes. We've now got more multiplexes, malls, extramarital
affairs and divorces. . . . It has become the American way," Mr. Kapoor says. "In the '90s
there were three places to go" to drink and dance in downtown Mumbai. "Now on every
other road there is a lounge or a discotheque, and they are so full you can't even walk
properly in them." He drinks Kingfisher beer in the summer and in the monsoon season
he switches to McDowell whisky, also from Mr. Mallya's companies.
Whisky has a long tradition in India. It arrived in colonial times and remained the drink
of the country's high society after independence in 1947. (It also retained the British
spelling; the liquor is called whiskey in the U.S.) When the British left, Mr. Mallya's
father bought up some British-owned alcohol companies.
Alongside this tradition was Mahatma Gandhi's ascetic vision of an alcohol- and tobacco-
free India. As recently as 1977, India tried to implement nationwide prohibition, and
alcohol is still banned in Gandhi's home state of Gujarat. Mr. Mallya's father added to his
business by acquiring distressed local sellers of spirits. His death in 1983 left the business
to Vijay, then a 27-year-old party boy whom many expected to fritter it away.
Instead, he hired professional management, unusual for a family-run Indian company. He
steadily snapped up more local competitors, launched new brands and expanded the
company as the stigma attached to drinking faded. Two years ago, companies Mr. Mallya
controlled bought their main Indian competitor, Shaw Wallace &Co. That gave them
about half of the Indian spirits market, to go with their 50% of the Indian beer market.
The deal also gave Mallya companies great influence with India's thousands of small
shops. His more than 140 brands represent as much as 70% of many liquor store owners'
profits. The more than 10 companies in the UB group, five of which are publicly held,
also have stakes in other businesses, from software to soccer clubs to U.S.
microbreweries.
Their annual revenue totals more than $2 billion. The biggest company, called United
Spirits, reported net profit of $123 million on $1.15 billion of revenue in the fiscal year
ended March 31. Mr. Mallya and his family control 39% of United Spirits but 55% of the
UB group's holding company, called United Breweries Holdings.
As Mr. Mallya's business grew, so did his image. He arranged Rolling Stones and Elton
John concerts. Last weekend, Aerosmith gave a concert in Bangalore sponsored by one of
Mr. Mallya's whiskies.
His Kingfisher calendar, featuring Indian models in bikinis, goes to a few thousand of his
friends and acquaintances each year. For his 50th birthday in 2005, Mr. Mallya produced
a heavy coffee-table book with tributes to him from members of parliament, a Bollywood
actor, a cricket star and a religious guru.
Ravi Nedungadi, president and chief financial officer of the overall UB group, says he
tries to keep Mr. Mallya from taking on too much. "He is an acquisitory animal by nature,
and he doesn't like to sell things," the finance chief says. When Mr. Mallya came to him
with plans to start the airline that became Kingfisher, Mr. Nedungadi says, he told his
boss he needed to sell some minority stakes in other firms to lighten the debt load.
The airline grew quickly and has aspirations to fly internationally. It has ordered 20
Airbus planes, and local papers say it is soon to announce further orders worth more than
$1 billion. A Kingfisher Airlines spokeswoman wouldn't comment on the reports.
Similarly named products are useful in marketing alcohol in India. The nation bars beer
and liquor advertising in almost every medium. But makers can get the names before the
public by having like-named products that don't face ad restrictions: Kingfisher airlines,
Smirnoff CDs. One UB group whisky, Royal Challenge, advertises golf accessories with
that name.
The first foreign challenge to Mr. Mallya came from Pernod Ricard. It saw that many
Indians wanted to trade up from local whisky brands costing only $2 to $5, but couldn't
afford imported scotch. So a few years ago Pernod revamped a whisky made in India, put
it in an impressive new bottle and priced it at $7 to $10.
"It was bloody attractive," Mr. Mallya acknowledges. He began changing the look of his
own products, hiring a London design firm to provide fancier bottles and packaging. He
also beefed up promotions in bars, a technique long common in the West but not much
used in India until recently.
Pernod has seen sales of its Indian whiskies grow at as much as 35% a year, although on
a relatively small base. Now it has enough of a distribution network that if import tariffs
fall, it can import and aggressively promote its premium scotches, such as Chivas Regal
and Ballantine's.
Pernod's success has attracted others. Diageo, which had abandoned India several years
ago, is getting back in. A study Diageo did two years ago concluded that if India's liquor
duties fell by half, Indian consumers would buy two million to three million cases of
imported scotch a year, topping China, which now imports about 1.8 million cases of
scotch annually. In the longer run, India could become the world's biggest market for
scotch, according to the research.
Last August Diageo linked up with Mr. Mallya's largest Indian rival, Radico Khaitan Ltd.,
to produce new Indian-made whiskies priced at about $10 a bottle.
At that price, they would have to taste better than local blends. Indian whiskies are
usually made of sugar-cane molasses, and can be bitter. Western whisky is made of
grains. This is largely barley in the case of Scotch whisky, which, to bear that name, must
be made in Scotland and aged in oak for at least three years. Indian molasses whiskies are
rarely aged at all.
In February, Diageo launched an Indian-made whisky called Masterstroke. Like Pernod's
Indian-made entry in a fancy bottle, Masterstroke is distilled from Indian-grown grains,
made by a master blender brought in from Scotland. "It's mellower and smoother. It
doesn't taste like petrol," says the head of the U.K. company's Indian operations, Asif
Adil.
A United Spirits executive says it's wrong to say molasses-based whisky doesn't taste as
good -- that what matters is the "the quality of the distillation process." It does makes
some whisky with grain and may make more because sugar cane has grown more
expensive.
Diageo's operation in India also imports some liquor, such as Captain Morgan rum. The
company is holding sampling evenings for Indian bartenders. At these, it sometimes pairs
different blends of its Johnnie Walker Scotch with various Indian dishes.
Mr. Mallya is trying to make life difficult for these foreigners. He has required some of
his distributors to sign exclusivity agreements that bar them from carrying competitors'
products. The move is legal. "We have the largest clout in terms of distribution and we
intend to use it," he says.
Mr. Mallya's UB group has long since sewn up many key sports and entertainment
sponsorships. Diageo tried to wrest away sponsorship of a major Mumbai horse race by
offering more than a Mallya company was paying. Race organizers declined to drop UB,
citing a long relationship.
A few weeks ago, the UB group's United Spirits paid $1.2 billion for Whyte &Mackay,
the fourth-largest scotch producer, which also is the largest supplier of private-label
whiskies for retailers. He plans to use the firm several ways: Import its best brands by the
bottle; relaunch some of its defunct names in India at lower prices; and bring in barrels of
its scotch to blend with Indian-made whisky to improve the taste.
As he battles back the imports, the king of good times's persona seems to be an advantage
in today's India. "People aspire to be like him because they see him as a global icon,"
says Mr. Frederick, the club owner. "His brutally, blatant, aggressive display of wealth is
kind of vulgar, but it works today."
(See related letter: "Letters to the Editor: India's Liquor Tariffs" -- WSJ June 15, 2007)