DGE Diageo Plc

Liquor maker is lobbying Indian officials to slash taxes, preempt prohibition

By Saabira Chaudhuri 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 11, 2019).

Johnnie Walker-maker Diageo PLC is betting on India, the world's largest whiskey market, to power its growth. But first, it has to win over dozens of local governments that want to either ban liquor or tax it heavily, even as more Indians embrace drinking.

To protect sales, Diageo is helping a number of Indian states develop tax policy. To demonstrate that it is a responsible actor, it is rolling out road-safety programs. Diageo is even presenting ways that states can move up India's ease-of-doing-business rankings -- which are important for attracting investment -- by cutting red tape for alcohol.

Indian society has long viewed alcohol consumption as a sign of moral laxity. Yet, consumption is soaring. The average Indian drank 38% more alcohol in 2017 than in 2010, according to a study in The Lancet, a medical journal. The rise is among the world's steepest and has led to more deaths and diseases attributed to alcohol, up 12% and 9% respectively. Booze has also been blamed for road accidents and wasted household incomes.

The growing popularity of liquor, along with protests from women who say alcohol leads to domestic violence, is prompting some Indian policy makers to act. The state of Andhra Pradesh, which is home to 50 million people, took over thousands of liquor stores last month as a first step toward prohibition. In August, the top court in the hill state of Uttarakhand ordered the government to ban alcohol.

"Some educated people say that drinking liquor is a fundamental right. I strongly object," Nitish Kumar, chief minister of Bihar, a state with 100 million people, said in a recent speech. "There is data to back the claim that liquor is evil for society." After Bihar banned alcohol three years ago, Diageo's sales slumped in the state and it was forced to shut its distilleries there.

Navigating India's volatile regulations is an increasing area of focus for the world's biggest whiskey maker, especially because it is counting on the country's burgeoning middle class to offset slowing drinking in the West. Between 2013 and 2014, Diageo paid $3.2 billion for a controlling stake in United Spirits Ltd., India's largest spirits company. It now generates roughly 60% of its volume growth from the country.

Other alcohol giants, facing similar headwinds, are also betting on India. Pernod Ricard SA, which bought Seagram Co.'s India assets in 2001, has pushed pricey brands like Chivas scotch. Sales are growing strongly and India is vying with China to be Pernod's second-largest market behind the U.S. Budweiser brewer Anheuser-Busch InBev SA and other brewers are also doubling down.

Still, some executives question whether Diageo can successfully apply its global mantra -- that alcohol in moderation can be part of a balanced lifestyle -- to India.

"The alcohol culture in India is totally different to the West," said Manish Shyam, who worked in corporate affairs for Diageo until earlier this year. "It's about bang for your buck, about spending as little as possible and getting the maximum kick."

Moreover, India is one of the world's toughest places to sell alcohol. Booze is subject to a complex patchwork of state-by-state regulations, alcohol advertising is banned and imports are taxed at 150%. Diageo India requires about 200,000 permits and approvals each year to do business.

Influencing regulation in India is like "trying to break a rock," said Diageo India head Anand Kripalu at an investor event in May. "You've got to chip away, chip away and one day it'll part."

In 2015, Diageo set up a 12-person team to improve the alcohol industry's reputation and influence policy. It's also working with the International Spirits and Wines Association of India, an industry trade body, to forestall damaging regulation.

"The prohibitory message was getting picked up a lot," said Indu Anand, who worked as Diageo India's head of public policy until 2017. "We had to intervene and come up with programs and projects to say we encourage responsible drinking."

Taxes are a key focus. Alcohol is one of the few industries that states have been able to tax directly since 2017, prompting states to raise taxes on booze to generate revenue and discourage consumption.

In response, ISWAI, the trade body, is holding workshops to "co-create" mutually beneficial tax policy for imported brands with excise officials. Its argument: Lower taxes boost demand and generate higher tax revenue.

That effort secured a 30% price cut for Johnnie Walker Black Label last year in Karnataka, the state that's home to Bangalore. Volumes jumped 64% in the five months after the move, a success story that's now being used to convince regulators elsewhere. Volumes of Pernod's Chivas brand jumped 332% after taxes fell 28%.

"My message to everyone is it's not a Pernod versus Diageo fight. It is everybody versus the government," said Amrit Kiran Singh, who runs ISWAI.

The World Health Organization says high taxes are among the most effective tools to curb binge drinking, and many public health researchers are wary of the industry's efforts to influence tax policy and public-health interventions. "You become the policeman as well as the thief," said Vivek Benegal, professor of psychiatry at the Bangalore-based National Institute of Mental Health and Neurosciences.

In 2017, India's Supreme Court banned the sale of booze at shops, bars, restaurants and hotels within 500 meters (547 yards) of national and state highways in a bid to reduce road accidents. The move contributed to Diageo's sales falling by more than half during that fiscal year.

To prevent further restrictions, Diageo is funding programs endorsed by the transport ministry that it says are designed to improve road safety and encourage responsible drinking. The ministry is relying on Diageo to educate university students applying for driver's licenses about the dangers of speeding, not wearing helmets and driving drunk.

Harman Singh Sidhu, a road-crash victim turned campaigner whose 2012 petition led to the highway liquor ban, said industry efforts to curb drunken driving pale in comparison with advertising that encourages drinking. While alcohol ads are banned on TV and in print, brands advertise heavily on social media. They also sell booze-branded products such as bottled water, soda and playing cards that generate little revenue but serve as effective marketing tools.

"As far as India is concerned, we are in the lap of the industry," Mr. Sidhu said.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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November 11, 2019 02:47 ET (07:47 GMT)

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