Can USL get its mojo back after Mallya's resignation?
The exit of Vijay Mallya has finally given Diageo true control over United Spirits, at a much higher cost than originally estimated.
- Mar 9, 2016,
- Updated Mar 9, 2016 5:41 PM IST
On 9 November 2012, after nearly five years of on-off talks, Diageo, the world's largest alcoholic beverages company, made an announcement. It had reached an agreement with UB Group Chairman Vijay Mallya for acquiring a 53.4 per cent stake in India's largest spirits company, United Spirits, or USL, for Rs 11,667 crore. Mallya needed the money for his now-defunct Kingfisher Airlines.
Ivan Menezes, the then COO of Diageo, and now its CEO, could barely contain his glee. "The acquisition of shareholding in USL is a significant milestone in Diageo's strategy to build presence in the world's fast-growing markets." Under the agreement, Mallya would continue as chairman, in spite of his minuscule stake. Menezes, born in Pune and an alumnus of St. Stephen's College and Indian Institute of Management Ahmedabad, said that the personal rapport he shared with Mallya had helped in sealing the deal. Menezes had led the negotiation on behalf of Diageo.
Cut to February 25, 2016. Abanti Sankaranaryanan, USL's Business Head of Luxury and Corporate Relations and former Diageo India head, announced that Diageo has entered into a separation agreement with Mallya - barely 10 months after the USL board called for his resignation for alleged diversion of Rs 1,337 crore to other UB Group companies. Mallya would get $75 million, including $40 million in the first year, as a parting fee.
Under the deal, Mallya would not only resign but also have no say in running the company. The two sides also signed a global non-compete agreement (which excludes the UK, where Mallya is reportedly planning to settle) valid for five years. Also, Mallya will not buy more USL shares apart from the 3.99 per cent he owns.
"The agreement allows USL to move forward with certainty over board governance and focus solely on commercial priorities. The possibility of litigation has also been mitigated," says a USL spokesperson.
Will the end of the impasse help USL, which has been struggling with declining sales and market share ever since the Diageo deal, get back its mojo? In other words, is the $75-million payment worth the gains USL expects from getting Mallya off its back?
Another way to look at the Indian spirits industry is by categorising products as premium, prestige and popular. Premium is category where prices are more than Rs 350 per bottle. USL's vast portfolio of 140 brands comprises primarily prestige and popular categories. As incomes in India rise and lifestyles change, it is the premium category that the players are targeting.
USL has 18 brands with sale of a million cases each, including five brands with sale of 10 million-plus cases each. Then there is a long tail. After Kripalu joined, it has been focusing on 14 power brands and emphasising premiumisation to earn more per sale, a strategy that has been helping Pernod earn higher operating profits than USL in spite of clocking less than half its volumes. Paul P. John, Chairman and Managing Director of John Distilleries, says another worry for the players right now is that the market is growing at 1-2 per cent after a decade of rip-roaring growth. It may have even stagnated depending on how it is measured, he says.
USL, too, has seen sales fall from 123.7 million cases in 2012/13 to 117 million cases in 2014/15. Its market share fell from 44 per cent to 40 per cent during the period. In a stagnant market, a drop in sales means competitors are eating into your market share.
The company defends its strategy. "To balance the benefits of scale with the power of focus, we have identified a portfolio of 'power brands' in each segment of the market, popular, prestige, premium and luxury, which we are nurturing through increased investment, innovation and renovation. This strategy will not only leverage the premiumisation trend among consumers but also improve margins," the USL spokesperson said in a written response.
"Understanding the drivers of premiumisation and building it into our marketing plans is a big part of what will get us to succeed. Over the last several months, we have made significant investments in brand associations. We will continue investing in programmes that will build brand equity, not just give us short-term gains. This includes renovation of brands such as Royal Challenge and McDowell's No. 1 which has met with tremendous success. Royal Challenge has grown 57 per cent since it was re-launched in 2015," he says.
With Mallya out, Menezes and his team will be hoping to reverse the losses. It has already tried to trim flab by reducing the number of subsidiaries from 73 to 22 and net debt from Rs 5,323 crore to Rs 3,891 crore. It has also pushed up its share in the premium category from 23 million cases in 2011 to 35 million cases in 2105. Besides, it has embarked on what it calls a "productivity goal" to generate Rs 500 crore savings over three years (starting 2015). It has also launched iSpeak helpline, a toll-free number for employees to report any issue or concerns. It is run by an external company.
A damocles sword in the form of regulatory body SEBI is, however, hanging over the entire settlement, but the company wants to move on and focus on the market.
"We embarked on a journey to transform the reputation of USL and the alcohol industry. We have a clear strategy to achieve our vision to become the best performing, most trusted and respected consumer goods company in India," says the USL spokesperson.
With Mallya out of the way, Kripalu will be hoping that the company can get back to its winning ways.
On 9 November 2012, after nearly five years of on-off talks, Diageo, the world's largest alcoholic beverages company, made an announcement. It had reached an agreement with UB Group Chairman Vijay Mallya for acquiring a 53.4 per cent stake in India's largest spirits company, United Spirits, or USL, for Rs 11,667 crore. Mallya needed the money for his now-defunct Kingfisher Airlines.
Ivan Menezes, the then COO of Diageo, and now its CEO, could barely contain his glee. "The acquisition of shareholding in USL is a significant milestone in Diageo's strategy to build presence in the world's fast-growing markets." Under the agreement, Mallya would continue as chairman, in spite of his minuscule stake. Menezes, born in Pune and an alumnus of St. Stephen's College and Indian Institute of Management Ahmedabad, said that the personal rapport he shared with Mallya had helped in sealing the deal. Menezes had led the negotiation on behalf of Diageo.
Cut to February 25, 2016. Abanti Sankaranaryanan, USL's Business Head of Luxury and Corporate Relations and former Diageo India head, announced that Diageo has entered into a separation agreement with Mallya - barely 10 months after the USL board called for his resignation for alleged diversion of Rs 1,337 crore to other UB Group companies. Mallya would get $75 million, including $40 million in the first year, as a parting fee.
Under the deal, Mallya would not only resign but also have no say in running the company. The two sides also signed a global non-compete agreement (which excludes the UK, where Mallya is reportedly planning to settle) valid for five years. Also, Mallya will not buy more USL shares apart from the 3.99 per cent he owns.
"The agreement allows USL to move forward with certainty over board governance and focus solely on commercial priorities. The possibility of litigation has also been mitigated," says a USL spokesperson.
Will the end of the impasse help USL, which has been struggling with declining sales and market share ever since the Diageo deal, get back its mojo? In other words, is the $75-million payment worth the gains USL expects from getting Mallya off its back?
Another way to look at the Indian spirits industry is by categorising products as premium, prestige and popular. Premium is category where prices are more than Rs 350 per bottle. USL's vast portfolio of 140 brands comprises primarily prestige and popular categories. As incomes in India rise and lifestyles change, it is the premium category that the players are targeting.
USL has 18 brands with sale of a million cases each, including five brands with sale of 10 million-plus cases each. Then there is a long tail. After Kripalu joined, it has been focusing on 14 power brands and emphasising premiumisation to earn more per sale, a strategy that has been helping Pernod earn higher operating profits than USL in spite of clocking less than half its volumes. Paul P. John, Chairman and Managing Director of John Distilleries, says another worry for the players right now is that the market is growing at 1-2 per cent after a decade of rip-roaring growth. It may have even stagnated depending on how it is measured, he says.
USL, too, has seen sales fall from 123.7 million cases in 2012/13 to 117 million cases in 2014/15. Its market share fell from 44 per cent to 40 per cent during the period. In a stagnant market, a drop in sales means competitors are eating into your market share.
The company defends its strategy. "To balance the benefits of scale with the power of focus, we have identified a portfolio of 'power brands' in each segment of the market, popular, prestige, premium and luxury, which we are nurturing through increased investment, innovation and renovation. This strategy will not only leverage the premiumisation trend among consumers but also improve margins," the USL spokesperson said in a written response.
"Understanding the drivers of premiumisation and building it into our marketing plans is a big part of what will get us to succeed. Over the last several months, we have made significant investments in brand associations. We will continue investing in programmes that will build brand equity, not just give us short-term gains. This includes renovation of brands such as Royal Challenge and McDowell's No. 1 which has met with tremendous success. Royal Challenge has grown 57 per cent since it was re-launched in 2015," he says.
With Mallya out, Menezes and his team will be hoping to reverse the losses. It has already tried to trim flab by reducing the number of subsidiaries from 73 to 22 and net debt from Rs 5,323 crore to Rs 3,891 crore. It has also pushed up its share in the premium category from 23 million cases in 2011 to 35 million cases in 2105. Besides, it has embarked on what it calls a "productivity goal" to generate Rs 500 crore savings over three years (starting 2015). It has also launched iSpeak helpline, a toll-free number for employees to report any issue or concerns. It is run by an external company.
A damocles sword in the form of regulatory body SEBI is, however, hanging over the entire settlement, but the company wants to move on and focus on the market.
"We embarked on a journey to transform the reputation of USL and the alcohol industry. We have a clear strategy to achieve our vision to become the best performing, most trusted and respected consumer goods company in India," says the USL spokesperson.
With Mallya out of the way, Kripalu will be hoping that the company can get back to its winning ways.