Barkeep, a Glass of Your Finest Whatever

Foreign distillers are muscling in on a bubbling domestic market

When Bombay hipsters fancy a blast of foreign liquor, they have two choices. They can go to a restaurant or bar where, thanks to hefty tariffs on foreign spirits, a whiskey soda goes for $10. Or they can order a whole bottle of whiskey from the neighborhood bootlegger and pay $38.

Welcome to India's surreal liquor market, where drinking imported stuff means paying through the nose--or breaking the law. Not that such disincentives dissuade the smart set from guzzling foreign brands. Since the government slapped tariffs on imported liquor in April, booze sales at Bombay's trendy Indigo restaurant have surged 20%. "Prices have shot up," says Indigo bartender Eric Lobo. "But it hasn't affected people at all."

That goes to show just how hot the Indian liquor market is these days. While still relatively small, at $1 billion in annual sales, it is expanding 10% a year, thanks to the middle class's growing thirst for alcohol. This is quite a switch for a nation whose constitution encourages a teetotaling lifestyle. The likes of Guinness/UDV, Seagram, Bacardi Martini, and LVMH are taking full advantage, setting up distilleries and distribution joint ventures or making their booze readily available. The result is an all-out war for the Indian drinker--with bootleggers, multinationals, and local tycoons slugging it out for a piece of the action.

HELPFUL SMUGGLERS. The potential is enormous. Right now, only one-fifth of the drinking population consumes a branded product. The other 80%--an estimated 240 million people--drinks hooch, which is made in kitchen distilleries and boasts sales volumes thrice that of the organized sector. As they become more prosperous, these people will move up to $4-a-bottle local brands; eventually, they will be able to afford foreign liquor.

The bootleggers are actually helping the multinationals crack the market. Even as foreign distillers condemn smuggling, they are guiding restaurateurs to the most reliable suppliers. Admits one foreign liquor executive, sotto voce: "All multinationals knowingly encourage smuggling because of India's high tariff structure." At the same time, giants like LVMH Moet Hennessy Louis Vuitton and Mexico's Grupo Modelo hold regular tastings and promotions in the tony restaurants of New Delhi and Bombay to develop customer loyalty in anticipation of the day when tariffs drop. "The multinationals won't see returns for a while," says Sid Khanna, managing partner in India for consulting firm Accenture. "But meantime, they are building their brands."

The Indians are fighting back. Local distillers and brewers persuaded the government to impose tariffs of up to 700% on foreign liquor on Apr. 1, when India dismantled a long-standing ban on imports of spirits. Leading the effort was Vijay Mallya, the flamboyant chairman of United Breweries Group, India's largest liquor and beer company, with $425 million in sales. "We have not lobbied for unreasonable tariffs," says the 45-year-old tycoon. "All we are saying is, give us a level playing field, impose the same taxes on foreign players as on us."

Mallya is being somewhat disingenuous: Local tax on a bottle of beer, for example, is around 50%. That's high, but it's not 700%. In fact, Mallya has merely bought local players more time to prepare for the inevitable. Starting in 2004, at the behest of the World Trade Organization, India has agreed to lower tariffs to a maximum of 150% on consumer products such as alcohol.

The foreign threat has prompted Mallya to take action. He's merging his three distillers into one. He recently acquired a powerful Bombay-based brewer, London Pilsner, giving United Breweries an undisputed 44% of the market. Outside of India, he's pushing his Kingfisher brand--already exported to 50 countries. Mallya is even officially distributing dozens of well-known foreign brands including Campari, Wente wines, and several Scotch whiskeys.

It may be a rearguard action, though. Already, some multinationals have distilleries in place. Guinness has two facilities that make Green Label whiskey, Smirnoff vodka, and Malibu rum. It also markets its top-selling Johnnie Walker whiskey in India. Seagram Co. manufactures gin and whiskey, and Foster's Brewing Group makes beer. And if those tariffs do crumble, by 2004 someone will be crying into his beer--and it won't be the Indian drinker.

By Manjeet Kripalani in Bombay

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