Wine Business in India – Opportunity or Dilemma?

wineshop

Re-plugging this popular post on LinkedIn for the benefit of  the followers of this site.

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The Indian wine ecosystem is evolving and with the rising profile of wine there is a lot of interest in business opportunities available in the sector. But what are the challenges? More importantly, how feasible is it to enter a business whose target market is less than 1% of the total population?
I have always considered the Indian wine market an enigma – on the one hand there is a seemingly eternal and ceaseless optimism about its future, on the other, on-the-ground realities and challenges seem to be too big to overcome in realising its true potential. But this has not deterred many optimists to venture into this tricky market, achieving mixed results at best.

As an active member of the Indian wine community, I am often asked about business opportunities and the pros and cons related to various types of wine businesses here. Although most queries reflect the above mentioned quandary of a wannabe entrepreneur and existing businesses elsewhere, it is also interesting to notice that many feel that the time is right to be a part of the Indian wine story. A lot of this optimism can be attributed to the buzz created by media stories, a lot of which unfortunately is often recycled and are far from ground realities. Therefore personally, I always take a cautious approach in this matter, not because I am not hopeful of its future but due to a realistic assessment of the present market conditions that are far from being conducive for existing wine businesses, let alone new ventures.

So what are the opportunities of entering the Indian wine market?

Let’s explore three areas which attract the imagination of most people nowadays when they think of the setting up a wine business in India. A vast majority of the queries that I receive relate to these sectors.

Import/distribution: This remains the most sought after option of entering the market but also has a disturbingly high failure rate as the short and medium term returns in this business are disproportionately low vis-a-vis the initial investment. Those aware of the market know that in the last few years, many importers have shut shop in India, some incurring heavy losses.

The survival, scalability and subsequent success of import and distribution of wines is only possible if substantial volumes are generated in the on-trade segment, which remains the main source of wine consumption in India. With hotels offering a meagre 20 to 25% on of CIF (Cost, Insurance & Freight), the margins often get diluted in huge costs a bottle of wine incurs upon arrival on Indian shores – customs duties, bonding & warehousing, taxes to state governments, brand registration charges, renewal of registrations, transportation etc. This leaves very little at the hand of the importer, a reason why achieving volumes is the key. Since this poses a big challenge, many have added spirits and beers to their portfolio which offer better margins and certainly volumes. A point in case is Brindco, India’s largest importer and distributor, whose success can largely be attributed to the top brands of spirits & beers it represents in India, including those from the multinational behemoths like Diageo & Brown-Forman.

Then comes the complex task of creating and mastering the art of smoothly operating a distribution network. You can either create your own or use an existing network to reach your customers. While the first requires huge cash injection and fulfilling endless legal obligations, the latter will see your cost skyrocketing and margins plummeting.

Finally, there is always the competition to deal with. A new entrant will not only have to put in everything to grab a share of a highly sought-after pie, he also has to find ways to remain relevant for the long term – no mean ask in a highly competitive but very limited marketplace.

Wine E-commerce: Although India is witnessing an online revolution with eCommerce start-ups leading the way, wine is unlikely to be a benefactor of this boom in the near future, mainly owing to strict (and archaic) government laws related to alcohol consumption. Apart from plethora of hurdles in selling alcoholic products online, the logistical nightmares of lawfully operating such businesses can be too many. Take home delivery for instance, which is an integral component of an entire eComm cycle – a lot of state governments do not allow alcoholic products to be delivered at home making it extremely difficult to justify the very existence of such businesses. Some online wine sellers have found a way of circumventing this problem by routing the orders through retailers who in turn deliver the wines to customers, illegally in most cases.

One should also be mindful of the risks of online wine businesses due to the socio-political sensitivity to alcohol. It may not come as a surprise if one day the government cracks the whip and decides to ban any form of liquor sale on the internet anywhere the country. Many state governments have done so in the past and there is no guarantee that such a step will not become a pan India phenomenon in the future.

Retail: This, in my view is going to be the future of wine business in India. With rising awareness, coupled with highly restrictive prices in the on-trade segment, consumers will slowly drift towards buying wines from retail. It will also be in line with the trend in other wine economies where wine retail followed a natural progression to prominence and now contribute significantly to the local wine economy (Hong Kong & Singapore are good examples).

But there is a catch – since India is unique in terms of the challenges traditional alcohol businesses face, the key to success in any retail venture will also have to be unique. A typical brick and mortar and supermarket model has to be complemented by add-ons aimed at unwavering customer focus, mainly to educate and engage a loyal membership base. These may range from regular tasting & appreciation sessions, brand training, wine masterclasses, paired dinners etc.
The Indian wine story stands at the crossroads where it will either find a much anticipated relevance in the world of wine or will remain a laggard owing to the burden of strict laws and tax regimes. Any new entrant in the business will have to find a way through this ‘either/or’ dilemma to decide whether to set up shop in the country.

Cheers,

Niladri

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