Bulk Scotch Users Will Benefit The Most

India’s spirits market is at a turning point. With the government halving import duties on Scotch whisky, the overall expectation is that the price advantage will now be passed onto the consumers. However, a deeper look at the scenario suggests that bulk Scotch users rather than bottled in origin brands will have a better playing field, observes SANJIT Padhi, CEO, International Spirits and Wines Association of India (ISWAI).

The sales dynamics for imported Scotch vis-à-vis domestic whiskies are set to change with India halving the import duty on Scotch whisky to 75 percent with a further cut to 40 percent planned over the next decade. Sanjit Padhi underlines that to understand what this implies for consumers, it is important to note that Scotch is imported into India in two formats: bottled in origin (BIO), applicable to brands such as JWBL and Chivas Regal, and bulk Scotch, which is used for bottled-in-India (BII) Scotch as well as for blending with IMFL. A reduction in the duty on BIO translates into a consumer benefit that should automatically be passed on to consumers, since state governments control prices in almost all major markets.

That said, the benefit to consumers will be modest, only around 7–10 percent, since customs duty accounts for roughly 15–20 percent of the MRP

“In terms of overall scotch imports, the split is 21 percent BIO and 79 percent bulk, of which 47 percent of bulk Scotch is used by domestic IMFL manufacturers. This would mean that a reduction in duty on bulk Scotch is a cost benefit, the application of which lies entirely with the manufacturers,” points out Sanjit.

Scotch is an input for many Indian whisky blends. Sanjit’s view is that “the smarter players will focus on building long-term gains through enhanced quality and stronger market positioning, rather than pursuing short-term profiteering. Ultimately, however, this will depend on each company’s quality ethos.”

The ISWAI Strategy

How ISWAI intends to engage with policymakers to balance trade liberalisation with the need to protect and grow India’s domestic alcohol beverage sector is another consideration. According to Sanjit Padhi, it should not be forgotten that ISWAI members are the largest players in the domestic IMFL market. They are also among the highest taxpayers, major revenue contributors and substantial contributors to CSR. The economic contribution of ISWAI members is substantial, and they are as much Made in India as any other domestic company.

Our objective is to work on what is beneficial for the industry as a whole and the approach is to work with the stakeholders in building premiumisation which would help states to maximise revenue.

Addressing the Concerns

While Scotch exporters and ISWAI members have welcomed the decision, domestic players have raised apprehensions. Sanjit says this is incorrect. “The two largest domestic players have publicly welcomed the duty cut, stating that it will improve their margins.

In addition, Scotch accounts for only 2.6 percent of the total alcoholic spirits market. Any reduction in BIO prices has no impact on premium Indian whiskies, as the price gap is significant and consumer preferences are distinct,” he explains.

In fact, Indian single malts have benefitted from the market expansion for single malts created by imported Scotch Malts and have successfully positioned themselves at a premium in most markets. The success of Indian malts clearly demonstrates that consumers are driven not by price but by other intangibles.

Meanwhile, there are calls from domestic companies for a minimum import price (MIP) on bottled-in-origin Scotch to prevent market distortion. ISWAI is of the opinion that MIP are designed as barriers to prevent an influx of cheap products.

“Let’s look at the facts. Scotch must be matured for at least three years and available only in limited supply. There is no economic rationale to underprice it and sell at low margins, particularly when supply itself is limited. It should also be noted that the cost of producing Scotch whisky is at least 2.5 times higher than ENA, making it impossible to compete on price by any measure,” notes Sanjit.

The Winners

Some analysts believe mid-tier Scotch brands could now compete head-tohead with premium Indian whiskies. However, the price gap between premium Indian whiskies and 3-year- S old Scotch is over 50 percent, and a marginal drop in Scotch prices will have no real impact. Premium Indian whiskies, on the other hand, have an opportunity to significantly enhance their quality and position themselves more effectively as value-for-money options for consumers. It should also be noted that BIO products remain subject to foreign exchange fluctuations and international freight costs, both of which could offset any meaningful price reductions that might otherwise affect premium Indian whiskies.

This brings us to the question of who the likely winners of the India–UK FTA are — British exporters, Indian whisky makers, or consumers. In Sanjit’s opinion, at a broader level all stakeholders stand to benefit, though the degree may vary. At this stage, however, the biggest beneficiaries will be IMFL manufacturers. As for whether the agreement creates reciprocal opportunities for Indian spirits in the UK market, or whether the benefits are largely tilted towards Scotch exporters, Sanjit observes, “Indian exports operate in the UK at zero percent duty, making them both competitive and highly profitable. In fact, many Indian malts are sold at a premium to Scotch malts, and that too without carrying any age statement.”