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A giant leap for Vijay Mallya

May 24, 2007 13:48 IST

Liquor tycoon Vijay Mallya has shown his customary astuteness in snapping up Whyte & Mackay, which produces nearly one-tenth of the world's Scotch whisky.

Publicity-wise, the purchase gives Mallya a first-mover advantage in an industry where success is determined by mindspace.

After this, other Indian liquor manufacturers may buy up a few Scotch companies. But it's Whyte & Mackay that'll be remembered. The media loves Mallya for the footage he gives of his luxurious life-style, and his inevitable TV interviews on his acquisition will embed Whyte & Mackay deeper into the mind of India.

India is the world's largest whisky market. This is where India differs from the world's richer countries, as Mallya knows only too well.  Tipplers in India love whisky in a way advanced societies don't.

India consumes nearly twice as much whisky as rum, brandy, vodka or gin put together. Whisky accounts for 65 per cent of hard liquor sales here while rum, vodka, gin and brandy share the other 35 per cent.

Contrast this with Britain where whisky is outsold by vodka. Though it's the home of Scotch whisky, Scotch sales have stagnated in Britain. They actually dropped in 2005 compared to the year before.

Mallya knows that whisky's slow decline isn't limited to Britain. Whisky sales are falling everywhere thanks to the drink's image problem. It's seen as an unfashionable drink world-wide, all right for old-time fuddy-duddies but not for hip youngsters.

Scotch whisky exports in value terms dropped in diverse markets as far apart as Germany, Greece, Denmark, Canada and Brazil between 2004 and  2005. But India and China present a startling contrast. Their legal Scotch import leapt by nearly 90 per cent in the same period.

It is this awareness, and also India and China being home to one-third of mankind, that prompted Mallya to hike his acquisition price for Whyte & Mackay to $1.2 billion.

Mallya knows the acquisition makes commercial sense in a flattening world.  Take India. It's whisky-loving, but Scotch currently accounts for only 1 per cent of India's whisky sales. The reason is it's unaffordable, thanks to high duties of as much as 264 per cent on imported wines and 550 per cent on spirits.

As a domestic liquor manufacturer, Mallya has  himself fattened on this protection. It has helped his companies boom.  But the world is changing rapidly. WTO obligations commit India to phasing out these duties in the next five years.

When they do, Mallya's Scotch sales will climb, till 2112 arrives when India finally presents a level playing field for domestic and foreign liquor companies, with both paying the same amount in taxes.

Mallya sees his Whyte & Mackay acquisition as an investment in the future. Rightly, he sees whisky sales spiralling in India and China as their economies prosper.

Future profits are visible in another sense. As societies get richer, people up their standards. To draw an analogy between liquor and cars, in low- or medium-income societies, first-time car buyers buy the cheapest car. But once car-ownership becomes common, first time buyers become more choosy and move up the car quality ladder.

Their first car purchase becomes a slightly more expensive car, say a Zen instead of a Maruti 800. It's the same with whisky. When societies get richer, drinkers move to better-quality whiskies.

A more-prosperous China, for instance, imports better-quality Scotch than India.  In terms of bottles, China's Scotch imports were only one-third more than India's in 2005. But the price it paid for them was twice what India shelled out for its own Scotch import.

As in other industries, value additions produce the fattest profits in whisky-making too, the single malts of Scotland being a perfect example.

Mallya's Whyte & Mackay acquisition also stems from a heartening demographic reality. It's the young who drink the most and India has the largest number of young people in the world, 575 million people below 26. They outnumber the entire population of the US, UK, France and Germany put together.

Currently, India's per capita consumption of beer, wine or spirits is very low compared to western nations. But as incomes rise, these 575 million youngsters will form a huge future market for every kind of beer, wine and spirit, including Scotch from Whyte & Mackay. 

Aspirations accompany drinking. Anecdotal evidence suggests that when India's carpenters or electricians become more financially secure, they move up from country liquor to the cheapest whiskies and rum. 

The drinkers of cheap whisky move to more and more expensive whisky. And the drinkers of the most expensive Indian whisky move up to Scotch. So India itself offers a bottomless future market for Whyte & Mackay products.

But that's in the future. Mallya's current challenge lies in expanding the market for Whyte & Mackay products in a world where 2,500 Scotch brands compete for attention.

The economy of the Scotch industry rests on exports. Nine out of ten Scotch bottles are exported. Mallya's flamboyance, however, could promote Whyte & Mackay products in a way its earlier owners couldn't.

Arvind Kala