Tapping into India's Growing Alcohol Market

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Adeel Halim / Polaris

A press conference for Indian-brewed Budweiser beer

Steven Spurrier was in Mumbai but thinking of Paris. He is the British wine expert best known for organizing the so-called "Judgment of Paris" — a 1976 blind tasting between French and U.S. wines in which the Americans improbably came out on top. The contest was a sensation, and sparked the explosion of the American wine market. Now, 33 years later, Spurrier is hoping to witness another revolution, this time in India. He went to Mumbai in November to co-chair the inaugural Sommelier India Wine Competition, in which a panel of India-based experts judged more than 450 wines, most of them imported, in a country where the market for wine was virtually nonexistent 10 years ago. "The enthusiasm to try wine is just tremendous," Spurrier says. "To me, it's an enormous pleasure and a rush."

The Indian market for alcohol — mostly spirits and beer, as well as wine — totaled $14 billion last year, and was one of the fastest-growing alcohol markets in the world. Imports account for only a tiny fraction of that, but with India booming while demand elsewhere stalls, no international beverage company can afford to ignore it. Over the next five years, the Indian market for alcohol is projected to grow at 10% a year — more than in China, the U.S. and Europe combined, according to an estimate by KPMG India. "You've got a sizable population, a growing middle class, a growing economy," says Nigel Fairbrass, a spokesman for SAB Miller, one of the world's largest brewers. "All of that is driving increasing consumption of alcohol products."

Drinking patterns in India are unlike those of any other major market. Hard liquor is far more popular than beer and wine, with spirits accounting for about 70% of the market. Nearly all of that is whiskey — a legacy of the colonial fondness for Scotch. India is the largest whiskey market in the world, so American whiskey producers figure they've got a head start in India compared to other new markets. "Indians are preordained whiskey drinkers," says Frank Coleman, senior vice president of the Distilled Spirits Council of the United States, a trade group for American spirits makers. "They've developed a taste for whiskey."

What they're drinking, however, are well-established Indian brands, not imports. The U.S. exported only about $1 million worth of whiskey to India last year, just 1% of total U.S. whiskey exports and an even tinier fraction of the $7.5 billion Indian whiskey market. Coleman is hoping to change that. In October, his trade group organized a three-city tour of India to introduce Indian consumers to the pleasures of bourbon, rye and other American whiskeys. At the New Delhi event, the New York City bar legend Toby Cecchini, who is credited with inventing the Cosmopolitan, mixed classic cocktails and some with an Indian twist, like whiskey sours spiked with ginger, for bar managers and bartenders from the city's top hotels and restaurants. "The Manhattans are awesome," said one attendee.

But it's the taxes on imported whiskey, not the taste, that prevent it from winning more market share. The import duties begin at 150%, and additional state taxes can add another 150% or more to the price of a bottle. Wine and beer face similar import duties, as well as additional and constantly changing state taxes and regulations. The complexity of the market means that only big producers like Jack Daniels and Jim Beam can afford to make a go in India on their own, and usually only with their premium labels. Although single-malt is a new status symbol in India, Scotch-whisky producers have been similarly frustrated in their efforts to crack the Indian market. In response to complaints at the World Trade Organization, India has lowered its base tariff, but alcohol importers and trade representatives from the U.S. and E.U. are pressuring India to lower taxes even further.

In the meantime, beer companies have found other ways to get their products into Indian glasses. Brewers have used joint ventures, dedicated local breweries and local contract farmers to expand distribution and lower their costs. SAB Miller, for example, contracts 10,000 farmers in the northern Indian state of Rajasthan to grow barley for all the beer they sell in India — including Foster's, which is branded as Australian but brewed in India. The company has been operating in India since 2000, and last year made a profit of about $7.5 million on $230 million in revenue — enough to convince it to invest $500 million more in India over the next five years. Carlsberg and Heineken have been in India less than three years, but both companies are expanding. Heineken bought a 37.5% interest in India's largest alcohol company, United Breweries, while Carlsberg has invested $53 million to reach its target of 5% of the Indian beer market this year. InBev, which recently bought competitor Anheuser Busch, has just launched Budweiser in India and plans $96 million in investment.

Wine consumption, meanwhile, is growing much faster than spirits or beer in India, but from a much smaller base. Only about 700,000 cases were sold last year, about 2% of the total alcohol market, but it has benefited hugely from the growth of the middle class, particularly women, for whom drinking wine is a mark of urban sophistication. The wine market has grown from virtually zero 10 years ago to $253 million last year, and it is expected to more than double to $630 million by 2013. "There's a complete turnaround," says Gianander Dua, an importer based in New Delhi. He represents not just French and Italian wines but also those from Argentina and Austria, which are much smaller wine-exporting countries. They all see the Indian consumer as a safe harbor in a global recession, Dua says. "The buying capacity in India is there."

Of course, the risks of betting on the next big thing are well known to drinks companies. The Chinese market for wine, for example, has failed to live up to its hype. Spurrier says India is different: the high taxes and complex regulations make doing business difficult, but getting into the market is much easier. "The lights in India are on green," he says. And there is a certain camaraderie between domestic and imported wine producers in India, who face the same challenge of getting Indians in the habit of the grape. At events like the one in Mumbai, they came together easily, toasting with both aged vintage Champagne and Maharashtra shiraz. Now that's a revolution.