Diageo is tightening its grip on India with premium push, strategic buyouts, and bold innovation

Diageo has been trying to change this ever since it took over United Spirits a decade ago: it knows that very few markets offer the headroom for growth that India does. But the changes have come in fits and starts.

Hina Nagarajan, named Diageo India’s boss in 2021 after a similar role at its African business, is hastening the pace. Nagarajan, who prefers a low profile despite being the MD & CEO of a liquor giant, talks in terms of months, not years.

Putting it Together

Sitting in her austere office, the MD & CEO pauses briefly to adjust her green blazer before recalling one of the early strategy meetings right after she took over in July 2021. Nagarajan’s table is clean, and her room is sparse (We are drinking tea, and there is no display of Diageo’s 63 alcohol brands in the room). Most importantly, she is relaxed, which is admirable given the complex regulations, tax rates and even bottle sizes across states. Some states depend heavily on taxes from liquor revenues.

“The first thing we asked ourselves was what we stood for. It was clear that we had to set ourselves a mission to be among India’s top-performing consumer packaged goods companies,” she says. Although a Diageo-owned company, it was yet to get out of the woods; Nagarajan had a tough job on her hands. Diageo acquired United Spirits from the flamboyant Vijay Mallya, a liquor baron who crash-landed in debt after his aviation venture ran into trouble. Mallya is out of the picture and left the country in 2016.

Nagarajan, Diageo India’s second MD after Anand Kripalu since its 2014 acquisition of United Spirits, found herself with an impressive brand portfolio that was struggling for traction. France’s Pernod Ricard, with brands such as Imperial Blue, Royal Stag and Blenders Pride, had been investing heavily and growing at the expense of Diageo. Pernod India’s revenue had grown from Rs 8,730 crore in FY14 to almost Rs 19,500 crore in 2021 when Nagarajan joined Diageo and surveyed her rivals. (Pernod India reported a turnover of Rs 25,039 crore in FY24). Other key players in the spirits market include Radico Khaitan (which owns Rampur and 8PM whisky brands, Magic Moments vodka, and Morpheus brandy), and Allied Blenders and Distillers, which owns whisky brands such as Officer’s Choice and Sterling Reserve.

Diageo set some targets for its Indian subsidiary, Diageo India. “We had to be the most trusted company with sustained double-digit growth and mid to high teen margins. Plus, we had to deliver value to all our stakeholders, be it our investors, employees, consumers and our communities,” says Nagarajan. The stock had not had it easy, and uncertainty on the way forward troubled the investor community. When Nagarajan took the helm in mid-2021, Diageo India’s market capitalisation was around Rs 46,000 crore. On September 5, it was Rs 1,07,135.14 crore.

She has made some hard decisions, like taking a close look at the diverse portfolio that United Spirits got when it was formed in 2006 by merging McDowell, Herbertsons, Triumph Distillers and Vintners and Shaw Wallace Distillers, among others. Most were “popular” brands such as Old Tavern, Haywards, Green Label, White Mischief, Honey Bee, and Romanov. In liquor, popular, prestige, premium and luxury categories are derived from price points.

“Some of the brands were flat or even declining, and we had to look at the future of the overall business,” explains Nagarajan. In September 2022, Diageo sold 32 brands in the popular segment to InBrew Beverages and franchised out 11 for five years. While taking the road to premiumisation, Diageo retained McDowell’s brandy, rum and DSP Black, which she terms “the first bridge from popular”.

Abhijeet Kundu, Senior Vice President of Research at Antique Stock Broking, thinks a combination of inflation and regulation on product pricing makes the mass segment a difficult business. “The effort you put in is never commensurate with the margins. The company’s profitability took off after the deal, and they clearly made the right decision.” Look at the numbers (see graphic ‘Big Shot’) and see how volumes declined from 72.5 million cases in FY23 to 61.4 million cases in FY24, dragging down revenues for a while but pushing up net profit margins steadily (up 50% between FY22 and FY24).

Yo, Ho, Ho… and Innovation!

Diageo India is cranking up its innovation engine, adding a twist of speed. Earlier, it would take 18-24 months from inception to launch. Not good enough to grab today’s evolved consumer.

Nagarajan holds up Epitome Reserve, a craft whisky. “We got it out in 95 days flat. The secret was to have agile teams and not get bogged down by processes,” she says. While Epitome was a test case, the process is now down to six to nine months. People tend to underestimate how much they can achieve, and she says the worst case was not working within the stiff deadline. “There is a start-up mentality within the organisation where I ensure very few things come to my table,” she says. She wants to create an “entrepreneurial FMCG” where even a 50% success rate will make it more agile.

The “I” in Vikram Damodaran’s title of CIO stands for Innovation. Innovation comes from getting consumer insights and trends right, which is the CIO’s job. Getting it right is not easy, but the upside is huge if the company does.

Diageo has just refurbished its innovation centre in Bengaluru’s Whitefield. “There is a lot of work to be done. It will be very different once it’s up,” says Damodaran. The innovation centre, which resembles the lab of a pharmaceuticals major, is where mixes and flavours are finalised. The centre carries out research & development for Diageo’s range, creates new products, gets deep into analytics and sensory sciences, works out flavours, handles process R&D, and comes up with special spirits. The centre tries to pin down evolving consumer tastes and handles advocacy, education, and community building.

In 2018, the observation was a big shift in whisky consumption among the youth and the preference for something lighter, sweeter, creamier, and not with a masculine touch. “Across the country, we noticed they wanted easy drinking, and anything that met this expectation was a winner,” he says. The answer was bourbon, leading to the launch of Royal Challenge American Pride. Unlike Royal Challenge, a mix of Scotch and whisky from molasses, the bourbon variant has no molasses.

“In the upper prestige segment, it is the fastest growing brand,” says Damodaran. The Royal Challenge brand (the brand is easily associated with the RCB Indian Premier League cricket team that the company owns) was going through a bit of a challenge, which was a big push. “It also showed us how to premiumise it within the category and brand.”

The American Pride variant costs nearly twice as much as the base version, ensuring no user overlap. Funnily enough, Royal Challenge (RC as it is popularly known) was once a premium brand, and this success has opened up ways to do more with it. While RC’s growth has been positive, Kundu points out that it is imperative to invest consistently. Signature and Antiquity are works in progress. A YES Securities report in June says Royal Challenge American Pride “already accounted for 8% of the Royal Challenge trademark”. It outlines how the Black Dog Triple Reserve variant is 40% of the trademark, or Johnnie Walker Blonde, a light Scotch variant for the next-generation non-Scotch consumer, “now forms 7% of the trademark”.

Launching Single Malt

Nagarajan says Diageo India was not always known for successful innovation. Through proprietary tools, it picked up trends in bourbon, among other things. “We removed the outer carton on Signature when sustainability started to get very important or pushed for white spirits when a low-calorie choice was preferred. All that feeds into our innovation pipeline,” she says.

In the case of Indian single malt, the market had already opened up. “We were late to the game and wanted to get it right with a very good product,” says Damodaran. Artisanal was the tack, and the brand was Godawan (another name for the Great Indian Bustard, the state bird of Rajasthan). “It gives us a chance to present Indian craft differently. The consumer views Godawan as a brand from artisanal makers.” One is speaking of just a one million-case market, but it can take off on the back of premiumisation.

Take the case of tequila, where Don Julio was brought in from the global portfolio about a year ago. At that point, tequila was a 40,000-cases-per-year market in India. That has doubled, with Don Julio alone doing 15,000 cases. “The consumer insight came from tequila being healthy and not leaving one with a hangover,” says Damodaran.

By picking up stakes in Nao Spirits, owners of the Greater Than and Hapusa gin brands, and more recently in Pistola, a player in the agave spirits business, Diageo has shown it wants a larger play in these segments.

The obvious opportunity in the portfolio lay in McDowell’s, a brand founded 125 years ago that accounts for about two-thirds of the company’s volumes. Recent launches under the brand have included an Indian single malt. In the prestige category under McDowell’s X series, it has unveiled rum, gin and vodka—a certain vintage of drinkers will recall that all of these once existed. “They may think it is retro, but it is also progressive, and for the youngsters, it is a new brand. McDowell’s has very high equity, and it makes perfect sense to build on it,” Damodaran says.

In Indian single malt whiskies, an early entrant was John Distilleries with its Paul John brand. “To us, the latent need for high-quality alcohol was obvious. For a significant part of the population, there was no visible constraint of money, which was too big to miss,” says its Chairman, Paul P. John, whose company also owns the Original Choice brand. Today, his single malt sells in defence canteens and duty-free shops at airports.

Building a liquor brand is difficult. According to Preeti Sawhney, Founder & Principal Brand Strategist at BrandRx Strategy Advisory, the pillars of the brand-consumer relationship are the product, its image, price, and packaging. “Looked at this way, several marketing mix variables are available to sharp brands to build their brand equity. For brands don’t just communicate through advertising [which is heavily restricted in India and may be further restricted with the new regulations set to come out shortly],” she says.

That means the non-verbal route is also taken. “It is through the product itself, its quality, taste, uniqueness, and composition, as well as through the packaging, the colours, and the symbolism, to express its positioning. Communication is also through their users, where the PLU [people like us] principle is a strong influencer to drive brand preference,” Sawhney says.

Moving Upwards

Diageo’s premiumisation strategy has many components. High growth in the spirits business now comes from the “prestige and above” or P&A category. (See graphic ‘Rising Spirits’ for the break-up across price points.)

Nagarajan is betting on the demographic shift. “By 2030, India will have 175 million households in the upper-income bracket, larger than many countries. In the next three years, we will have 30 million households in the richest segment, which is the size of the UK,” she says. Then there is the headroom in per capita consumption—90 litres in the UK and just 4.5 litres in India—and Diageo has a pretty good business case.

“Demographics and affluence levels in India are mind-boggling,” says Nagarajan. Also mind-boggling are the recent trends: Women are driving the consumption of single malt whisky and white spirits. “I remember asking Ivan Menezes [the India-born global CEO of Diageo from 2013-2023, who has since passed away] soon after joining Diageo if vodka would be a dead category in five years. It was declining, and gin was exploding, while tequila was taking off in North America,” Nagarajan recalls.

Today, vodka is back with a bang, and India will see a boom in whisky and white spirits. “I see a lot of pride post-Covid and craft spirits is a good example. This phenomenon will continue.” From a revenue perspective, the P&A segment in FY24 accounted for 89% compared with 84% in FY21.

More demographics: India will have 100 million consumers coming of legal drinking age in the next five years. “The market today is about brands and not products. In consumer products, people down-trade but not in our business, where they reduce the number of occasions,” explains Nagarajan. The premiumisation approach has excited investors, and that comes from how the stock has performed (see graphic ‘Raising a Toast’).

Kundu says, “Diageo is smartly moving in the direction of the overall spirits market. The P&A segment gives its brands salience, and with the right execution, it will only make the business more profitable.” Will Diageo push gin and Indian single-malt whisky? Kundu says these are small markets today but have big growth potential.

John Distilleries’ John agrees that high-quality premium alcohol is still largely an untapped market, but it is challenging. “You can get it right on quality and packaging, but it all depends on how well it is distributed. First, you must convince the wholesalers, then hope the consumer accepts it,” he says. India has no more than 80,000 retail outlets that sell liquor, and the battleground is right there.

The premiumisation opportunity cuts across product categories. Prateek Srivastava, Co-founder of ChapterFive Brand Solutions, points out that it allows the real value of a product category to get unlocked apart from making higher margins and an effective way to build a brand. In the case of spirits, he speaks of how the lack of advertising is hard to counter.

“A brand can be created, but how does one market it? That’s why trade marketing becomes so critical and new schemes are constantly announced.” There is a certain peculiarity that exists in the overall liquor industry. “Brands like Diageo and Pernod Ricard have a certain hierarchy ladder, and the better brands draw in consumers as their incomes rise. It is similar to consumer behaviour in cars or fashion, but one does not change a cooking oil, biscuit or a shampoo brand.”

For Nagarajan, it has been an interesting three years at the helm. At a time when India is being viewed as one of the few growth economies, Diageo stands to gain in a big way as more young people move up the ladder. Diageo already has a “hipster” range: premium Scotch such as Black & White in flat, small plastic bottles aimed at millennials and GenZ. The hipster, which has 180ml of blended Scotch whisky, is also an affordable taste bridge to the premium brands. Diageo figured that only a format-based innovation could create a younger, cooler image of Scotch. Hence, the hipster.

With all the pieces at her disposal, Nagarajan will now be hoping that the puzzle fits.

@krishnagopalan