Varun Beverages has a problem most companies would like to have. It is making more money than India’s listed liquor companies. But it still does not own the brands that bring consumers to the shelf.
In the April-June quarter, Varun Beverages reported net profit of ₹15.25 billion. United Spirits made ₹4.63 billion. Radico Khaitan made ₹2.30 billion. United Breweries made ₹1.66 billion.
That should be a good reason to keep selling cold drinks in a hot country. Instead, Varun Beverages has moved into alcohol through a new subsidiary, KIVA Spirits and Company.
Why enter a business full of regulation, taxes and entrenched rivals when the present business is working so well?
The answer is in what Varun Beverages does. Varun Beverages makes PepsiCo’s products but does not own PepsiCo’s brands.
For years, Varun Beverages’ business has been clear. PepsiCo owns Pepsi, Mirinda, Mountain Dew and Sting. Varun Beverages builds the plants, fills the bottles and gets them to stores. It has done this at scale, grown fast and made good money long the way for investors.
Every additional Pepsi, Mirinda or Mountain Dew expands Varun Beverages’ sales and profits. But bottling does not expand its ownership of the consumer relationship. The customer asks for Pepsi, not Varun Beverages. PepsiCo owns the label, the intellectual property and the loyalty that brings the customer to the shelf. Varun owns the execution.
KIVA is an attempt to change that.
The alcohol venture is not mainly about higher margins. Varun Beverages’ domestic margins are already strong. Its consolidated EBITDA margin was 27.7% in the June quarter, even after the consolidation of lower-margin South African operations. Liquor is not a clear route to better profitability but to owning the consumer.
A successful KIVA brand would give Varun Beverages something its PepsiCo contract cannot. It would own the label, the product idea, and the upside from successful line extensions. It would have a brand it could grow, partner around, license or sell.
Of course, ownership is valuable only after consumers recognise the brand. Before that, it is simply a cost centre with a logo.
That is why ready-to-drink alcohol is a logical place for Varun Beverages to begin. It is adjacent to its existing business. The company understands flavour, packaging, impulse purchases, small-format consumption and distribution density. Those are useful skills for a canned cocktail or another convenience-led alcoholic drink.
But adjacency should not be confused with advantage.
A Ready to Drink is not simply Pepsi with a spike. Will the consumer see it as a better choice than beer, a spirit with a mixer, or no alcohol at all? The answer will depend on price, taste, alcohol content, occasion and state-level availability. It will not depend on bottling competence alone.
That is also why the alcohol business cannot be treated as a simple extension of Varun Beverages’ PepsiCo relationship.
KIVA is a separate Indian subsidiary. There may be no conflict with PepsiCo, which has itself explored alcohol-related opportunities in some markets. But the question is how does PepsiCo view a key bottler building alcohol brands of its own? And how much management attention, capital and commercial energy can Varun commit to a new category without taking its eye off the far larger PepsiCo business that funds the experiment?
The company is entering a market of entrenched players with enough heft.
KIVA will not compete with Diageo, Pernod Ricard, Carlsberg or AB InBev merely because they are large. It will compete with the drinking habits they already own.
Established alcohol companies also know which distributor matters in which state, which price point survives excise and how to keep a brand visible when direct advertising is constrained.
Varun Beverages’s challenge is not to enter alcohol. Anybody with capital can do that. Its challenge is to find an occasion, a price point and a format that incumbents have left under-served.
Varun Beverages has built a formidable business from PepsiCo’s brands and its own execution. KIVA is a bet that execution can become ownership.
But in alcohol, the factory is the easy part. The hard part is becoming a consumer’s habit without paying too much, spending too fast or mistaking distribution for desire.
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