India Food and Drink Report Q2 2008

India's domestic alcoholic drinks industry achieved something of a triumph in February 2008 when the WTO rejected complaints from the US about the level of import tariffs on international spirits in the country. In BMI's newly published India Food & Drink Report for Q208, we examine the impact the ruling will have on India's dynamic alcoholic beverages industry, where investment remains high in spite of a number of significant challenges.

The US's complaints centred on the enormous disparity between Indian import tariffs and those imposed by other regional markets, claiming that India's excise duties amounted to unfair discrimination against imported brands. Arguably the country has a case; international spirit brands account for just 1% of the local market, with import tariffs putting already high prices beyond the reach of even affluent Indian consumers. With the Indian spirits industry amounting to over 1bn litres per annum in 2007, the US's desire to gain a foothold is understandable. To 2012, BMI expects volume sales growth in the industry to stand at 25.8%, with value sales growth far outstripping this as consumers begin to trade up.

Low disposable incomes have proved a barrier to alcohol sales growth across the board in India and manufacturers have been forced to price competitively in order to secure customer loyalty. For the lower value beer industry this has been less of a problem and January saw UK-based Cobra Beer join the vast army of multinational brewers pursuing growth in India. Cobra, which specialises in Indian lagers, has acquired a 76% stake in Bihar-based brewery Iceberg and will now invest US$20mn in constructing two new greenfield brewing facilities in the country.

Cobra's news coincided with UK spirits behemoth Diageo, fresh from cutting its vodka and whisky prices by 10-37% in a bid to stimulate sales, announcing that it would begin the local production of Guinness in India with a view to bringing down prices and pushing up sales. Diageo is ambitiously targeting a 7% share of a beer market that BMI expects to grow by an impressive 52.4% in volume terms to 2012. We caution in this report that Diageo's target might be just too ambitious and yet with uncertainty surrounding the takeover of market leader United Breweries' partner Scottish & Newcastle, Diageo could well use any possible disruption to boost its profile.

Throughout our current forecast period, to 2012, BMI would expect the Indian alcoholic drinks industry to continue to receive significant foreign direct investment (FDI) inflows and to remain enormously dynamic. With this in mind, United Breweries' owner UB Group will have its work cut out for it in terms of remaining the leading player in an increasingly crowded market and yet the company also refuses to forget its own international ambitions. The company plans to leverage the improved profile of Indian alcoholic drinks to begin exporting its domestically made wines to some of the world's leading winemaking markets, including the US, Australia, New Zealand and France.