The Whisky Rebellion

By Hugh Porter / Glasgow

For Vijay Mallya, taking over foreign companies is routine stuff. By building and buying everything from airlines to agrochemicals, he has created a $2 billion conglomerate. But he could be forgiven for taking a little added satisfaction in the recent $1.18 billion acquisition of scotch-whisky producer Whyte & Mackay by his UB Group, based in Bangalore, India. United Breweries has come full circle since the days of empire, when the firm was founded by Scotsman Thomas Leishman in 1915. It wasn't until India gained independence from Britain in 1947 that the first Indian director was appointed--Vittal Mallya, Vijay's father. Vijay Mallya has spread UB's global reach, and taking over production of some of Scotland's most treasured whiskies could be his most audacious move yet.

UB's liquor arm United Spirits, the biggest whisky maker in India, and the Scotch Whisky Association (SWA) have been doing a brisk trade in bitter remarks, each charging the other with unfairly blocking its exports. Hardly the spirit, given that "scotch whisky is enjoying its best growth prospects for a generation," according to Alberto Gavazzi, global brands director for Diageo, the producer of Johnnie Walker and J&B.

Scotch exports had a record year in 2006, with almost $5 billion worth shipped--a quarter of all food and drink exports from Britain. Asia's new rich are a big market--Chinese consumers imported $115 million worth of whisky last year, up from $3 million in 2000--but it is India that's driving distillers to stack the barrels high in warehouses from Islay to the Highlands. India is the biggest consumer of whisky in the world, putting away 70 million cases last year. With an 80 million-- strong middle class and an economy growing more than 9% a year, it's a market loaded with potential.

The problem for scotch producers is, it's still only potential: 99% of the whisky sold in India is made locally. Imports of scotch have grown from 5.5 million bottles in 2000 to nearly 20 million last year, but it is still a tiny sliver, less than 1% of the overall whisky market. Scotch sales are stifled by punishing taxes and duties on imported spirits and wines--totaling anywhere from 200% to 550%. Gavin Hewitt, chief executive of the SWA, describes the charges as "discriminatory" and "pure protectionism."

Vijay Rekhi, president of United Spirits, counters that the Europeans have put up an "invisible barrier" to trade by refusing to even call the stuff made in India by the name whisky. Most Indian whiskies are made from sugarcane molasses, but if they aren't made from grain and matured for a minimum of three years, they can't be labeled whisky in the E.U. "You can call them Indian spirit, you can call them rum," says Rick Connor, director of public affairs for Chivas Bros. "We do object to calling them whisky." That definition, Rekhi says, blocks UB from selling its leading Indian brands, like Bagpiper and McDowell's No. 1, in Europe.

And so the battle lines were drawn at the Glasgow's Radisson SAS hotel in April when Rekhi was invited to Scotland to address the World Whiskies Conference. Delegates chatted over tea, coffee or 12-year-old Aberfeldy, discussing only one thing: India. Rekhi opened his speech by demanding that the E.U. redefine whisky to accommodate molasses-derived brands. "There should be no definitional barriers based on geography or substrates," he says. "Whisky cannot ring-fence itself." Yes it can--and should--according to rebuttals from the scotch side. "Rules are there to protect consumers," said Mike Keiller, CEO of Morrison Bowmore. "I would have grave difficulty for something called Indian whisky made that way to sit alongside my Bowmore."

As head of the third biggest spirits producer in the world, Mallya, a flamboyant, bejeweled billionaire, is in a position to be the arbiter of peace in the whisky wars--or to mix it up further. Last year Mallya was so incensed by the SWA's whisky edicts that he called a press conference to vent. "This imposition of British imperialism is unacceptable," he said. Maybe he'll tell the SWA so himself at its next board meeting. Now that he owns 9% of scotch production, he is eligible to join the group. "I'm sure the rest of the industry would welcome him to the table," says Hewitt. "But it's not a free ride."

But Mallya's billion-dollar investment will get him more than a seat in the clubhouse. "It really gives him a good portfolio," says Alan Gray, author of the Scotch Whisky Industry Review for Edinburgh analysts Sutherlands. "It has brands like Whyte & Mackay. And the Isle of Jura and the Dalmore single malts are the icing on the cake." The acquisition also provides UB with a ready supply of scotch to blend into Indian whisky and to export to India and China. UB plans to double production at the Invergordon distillery within a year, creating the biggest whisky plant in the world.

Mallya isn't the only one expanding. William Grant & Sons, owner of Glenfiddich single malt, plans to build a new distillery, as does Bruichladdich on the island of Islay. In February, Diageo announced plans for a $200 million distillery and other facilities in Scotland, and the firm may double its investment if demand in emerging markets pans out.

That will depend on the resolution of the import-tariff dispute with the Indian government. In July an E.U. panel found the additional duty on imported wines and spirits a "blatant violation" of World Trade Organization (WTO) rules, and with the U.S. also complaining, the WTO has launched its own investigation. A ruling may be more than a year away, but things may move more quickly now that Mallya too is an importer. The self-styled "King of Good Times" is a Member of Parliament as well.

"We have been progressively reducing our import duties," says Shipra Biswas, a spokeswoman for India's Ministry of Commerce and Industry. "At the same time, there's the issue of reciprocal access to the E.U. for our whisky." Biswas insists the issues are unrelated, as has Rekhi, though he suggested to the delegates at the whisky conference that "it should be a win-win situation. You want to dismantle tariffs? Let's dismantle intellectual barriers."

When change does come, sales of imported whiskies are sure to boom. In the lobby of the five-star Grand Hotel in New Delhi on a recent Sunday night, businessmen J.P. Goenka and N.R. Pillai enjoy 12-year-old Glenfiddich at $8.50 a shot. "Those who can afford it drink it. But for most people, it's still too expensive," says Pillai. "It's a sort of a status symbol," says Goenka, each finger encased in a nuggety ring. "India has a massive middle class ready for this sort of thing, but it's still perhaps just a bit beyond them." The two men take another sip.

with reporting by Simon Robinson / New Delhi