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Liquor major United Spirits, which has reduced the number of distilleries it owns by 20 per cent, is planning to prune it further ahead of the implementation of the GST.
USL’s Chief Executive Officer Anand Kripalu said because of the tax implications, there should be at least one factory in every State, which defines the theoretical maximum cost destination.
Kripalu, who took over as the CEO of USL in 2014, said there are two big interventions that are influencing what the destination will be. “One is the franchising and to what extent we franchise our business on a State-by-State basis and the second is GST. We are not making a big noise about this, but we are just doing this in an evolutionary way on a State-by-State, case-by-case basis.”
He pointed out that GST could have a material impact on what will be the most optimal destination footprint. While the parameters of the GST is not completely clear yet, USL has already reduced its number of manufacturing units in the last two-and-half years from 93-94 to now 75-76.
He also said that a franchisee will be able to operate at a much lower cost, both in terms of manufacturing and overhead than USL. He explained that being part of the USL, salaries would be much higher than what a franchisee would need to pay in terms of salaries. “We need to pay much above minimum wages, they might just pay minimum wages, and for supervisory staff and sales staff, they would obviously pay less.”
Also, the franchisee will focus their business in a small geography and on one segment of the market. Therefore, they will be able to make a higher margin as theirs is a low-cost model. However, USL will ensure that basic quality requirements of the brand are met.
In the case of Tamil Nadu, Kripalu said the franchisee there was on a variable fee model but as it expands, it will go into a fixed-fee model. “This is a model which is a kind of eyes-on hands-off model. We are completely hands-off from this model and this kind of securitises our ongoing profitability far better and that is why we have done it this way.”
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