The Indian wine industry uncorked. Driven by demand

Transcription

1 The Indian wine industry uncorked Driven by demand

2 Title The Indian wine industry uncorked Driven by demand Author Cherry Jacob Date February 2008 Copyright No part of this publication may be reproduced in any form by print, photo print, microfilm or any other means without written permission of Rabobank. Disclaimer Neither Rabobank nor other legal entities in the group to which it belongs, accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection herewith. Contact address for this publication Rabobank International F&A Research and Advisory Website: Rabobank, 2008

3 Table of contents Executive summary 2 Introduction Drivers of growth 5 Increasing consumption 5 Government policy and infrastructure support 9 Conclusion 11 Industry structure; the competitive landscape 12 Production and processing 12 Distribution 15 International trade 17 Cost competitiveness 18 Conclusion 19 Strategies for the sector 20 Strategies for domestic companies 20 Strategies for foreign companies 21 Outlook 22 Rabobank Indian wine industry

4 Executive summary The Indian wine industry is currently on an upswing. Production and consumption are expected to increase by 25% to 30% over the next 4 to 5 years. Being in the early stages of market growth, the industry enjoys protection from the state as currently it fares low in cost competitiveness when compared with the global benchmarks. This, coupled with growing domestic demand, therefore orientates the industry highly towards the domestic market and much less towards exports. The wine industry is largely driven by favourable consumer trends induced by high growth in disposable incomes. Rapid urbanisation and growth in the retail is expected to sustain the domestic demand for wine. The emergence of modern food retail chains will make wine available for a new and fast expanding consumer base. Constructive policy measures in terms of excise duty exemption, provision of infrastructure facilities such as wine parks and wine institutes provided the necessary fillip to the industry for the establishment of wineries. Investments are increasing fast. As a result the industry is currently on the verge of a new phase of its lifecycle after the emerging phase, during which the latent demand for wine was initiated. Though dominated by few players at present, the wine industry is in an expansion phase with more and more companies entering. These entries include small grape growers and specialised wineries, as well several national and international beverage majors such as United Breweries, Diageo, Seagrams (Pernod Ricard), and the beer company Cobra, leveraging their distribution network and brand-building skills. As distribution and brand building are key, these entrants are certainly worth keeping an eye on, in particular when they establish specialised sales forces for wine, as selling wine is quite different than selling beer or spirits. The industry is therefore expected to evolve further with intensifying competition, and more investments in wineries and bottling facilities as well as in the distribution network, in promotions and advertising. If increasing domestic demand supports such investments this will ultimately result in the expansion phase in the lifecycle of the industry, leaving the emerging phase. This will bring about new requirements and challenges, such as increased competition, pressure on prices and the related need to be able to offer scale advantages. This in turn will ultimately result in consolidation. Indian wine companies are expected to adopt various business models in the current scenario. It is important to note that Indian wine companies can currently not compete on costs, and cannot continue to rely on government protection. Focus on the segment of cheap wines is not an option and may ultimately impact demand when quality is not good enough. Companies therefore need to focus on the quality segment of the wine offering to be able to compete and sell their wines. Rabobank Indian wine industry

5 This is easier said than done, as all competitors are aiming to increase quality as well. A strong focus on quality, from the terroir (the expression of soil and micro climate) to the vine, the consistent quality of the grapes harvested and finally wine processing; all phases of the industry should be geared towards quality. This requires a long term commitment to a very capital intensive industry. Further strategies for Indian wine companies would be based on combining of establishing alternative distribution channels, brand building, bottling of imported bulk wine and strategic alliances for selling imported bottled in origin wines. Larger and new players are likely to enter into contract manufacturing option with smaller wineries in the short term for an early market entry. For foreign wine companies targeting the Indian wine market strategic alliances for import and distribution could be the suitable mode of entry. The Indian government plays a crucial role in the current phase of the Indian wine industry, supporting the current momentum amongst others through financial assistance and market protection. For a capital intensive industry with a long term business cycle it is important that investors get comfort from a consistent policy. Gradual reduction of import duty levels will no doubt lead to increased competition through imports, but will on the longer term result in a competitive industry that is able to export its top quality products to overseas markets. Rabobank Indian wine industry

6 Introduction Impressive growth rate in wine industry The Indian wine industry, although miniscule in size when compared to other countries worldwide, is in its infancy and holds promise buoyed by impressive economic growth and growth of the consuming class. An estimated current market of 785,000 cases (twelve 0.75 litre bottles) of wine, is relatively negligible when compared with the alcoholic beverage industry s 480 million cases consisting of country liquor (local spirits such as feni, toddy, and arrack are collectively called country liquor), whisky, brandy, rum, vodka, beer and wine. Though dwarfed in market size and volume by other categories in the alcoholic beverage industry, wine has attracted a great deal of the country s attention in recent years. A compound average growth rate (CAGR) of over 25% over the last six years, although from a lower base, has attracted high participation from local entrepreneurs, foreign liquor companies and private equity firms, which has caused increased local interest in understanding the various growth drivers, industry structure and strategic decisions shaping the Indian wine industry. The objective of this report is to provide a better understanding of the challenges in the Indian wine industry so that the potential growth opportunities in the wine market could be effectively and strategically exploited. This is done by exploring the main growth drivers of the industry such as trends in consumption, retail, policy issues followed by the industry structure in terms of production, processing, distribution and trade. Further, on the basis of this understanding various strategic options for Indian and foreign companies are evaluated. This report has been published in line with Rabobank s long-term commitment to the international food and agribusiness. It is one of a series of publications undertaken by the global department of Food & Agribusiness Research and Advisory. Rabobank Indian wine industry

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