United Spirits Targets Growth Through Product Innovation

United Spirits Ltd., a subsidiary of Diageo Plc, has announced a goal of achieving 30% of its business from product innovation within the next three years. The move comes as the company aims to enhance its pricing mix and boost sales.

“We are at 11-12% now,” Hina Nagarajan, managing director and chief executive officer at Diageo India, said when speaking about the current contribution of product innovation, a significant increase “from just 5% about a year and a half ago.”

As the largest spirit maker in the country, United Spirits is stepping up the premiumisation of its portfolio. Nagarajan said that consumers are now “drinking better and not necessarily drinking more". This shift in consumer behaviour is evident from the company’s sale of 32 mass market brands, including Haywards, Old Tavern, And White-Mischief, indicating an upward trend in premiumisation.

According to Nagarajan, “innovation and renovation” are going to play a “transformative role” in the company’s portfolio given the changes in consumer demand. "We are focussing on the prestige and above segment, and there is room for premiumisation in each of these segments.”

She also said that the company’s presence in the luxury category, such as scotch, “is still very low” and they see a lot of potential for growth in this area. “That said, we expect innovation to contribute 30% to our annual sales."  

United Spirits' prestige and above brands range from McDowell's and Royal Challenge to Johnnie Walker, Black Label, and more. The company has witnessed a 35% compound annual growth rate over the past five years for brands priced above Rs 2,000. Brands within the Rs 800-2,000 price range have also seen growth, increasing by 15%. The prestige range, priced between Rs 400 and Rs 800, has grown by 5%, while brands priced below Rs 400 have seen a decline of 2%.

Nagarajan said that the company’s focus on premiumisation has also facilitated a reduction in its debt. From a debt of Rs 5,320 crore seven years ago, United Spirits has brought it down to Rs 443 crore as of September 2021.

Despite this, profitable growth was a matter of concern.

"We strengthened our balance sheet but our growth but very moderate in till 2021. We were growing hardly at 2-3% and our prestige and above portfolio was growing at 5-6%," she said.

However, the situation is now improving. "Over the last two years, we are growing in double-digits, and we want to maintain that going ahead," said Nagarajan. The company's net sales value growth, adjusted for the impact of the Covid-19 pandemic, surged by 15% in FY23, an increase compared to 9% the previous year and 3% between FY15 and FY21.

Despite steady demand, inflation in essential raw materials is putting a squeeze on profit margins. The alcoholic beverage maker continues to engage with state governments, seeking permission to hike prices.

And while the company did increase prices this year, it proved insufficient to offset the impact of inflation. Nagarajan said that pricing challenges persist, and the company is committed to “advocating for a balanced approach to pricing” in the medium to long term.

United Spirits would like to benefit from inflation-indexed price increases, a practice common among most consumer companies. However, Nagarajan said that they do not expect an immediate implementation.

To mitigate the challenges, United Spirits has been working on cost-saving measures. In FY23, the company saved Rs 268 crore in costs, effectively counterbalancing a 39% inflation rate. Despite these efforts, analysts anticipate that near-term margin pressures will persist.

Factors such as rising prices of glass, limited production capacity, potential impact on ENA prices due to El Nino and ethanol shortage exert pressure on the company, according to Abneesh Roy, Executive Director at Nuvama Institutional Equities. “However, the worst of inflationary pressures are now behind," he said.

According to Statista, the Indian whisky market, which was valued at $14.9 billion in FY20, is projected to reach $22.4 billion by FY25. This growth is fuelled by demographic trends, the emergence of new consumers, and the ongoing trend of premiumisation. However, the popular and prestige segment continues to dominate the market with a market share of over 80%.

The premium and luxury segments are expected to expand their contribution to the overall market and projected at 33% by FY25, up from 31% in FY21. The premium end of the Indian spirits market is largely dominated by the two leading global spirits companies, Diageo and Pernod Ricard. In the nine months ended March 2023, Pernod Ricard reported a revenue growth of 15% compared to the previous year, much lower than the 41% growth reported by Diageo-led United Spirits in the prestige and above segment.