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Feb 2017 Interview

Published on: 2017-02-16 11:32:20     3392 times read    0  Comments
“We are introducing a new beer with an investment of Rs 3 billion”

Vijay Kumar Shah, Founder Chairman of the Himalaya Distillery Limited has been active in the liquor business in Nepal for the past fifty years. Shah who is the Chairman of Jawalakhel Group of Industries (JGI) represents the fifth generation of his family in this business, and is interested in research and has introduced many new technologies in the Nepali alcohol industry. Having served as Vice-chairman of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), he is now a Governing Council member at the Confederation of Nepalese Industries (CNI). He is also the only surviving founder of the Nepal Beverage and Cigarette Industries Association.  Shah’s family is considered among the highest taxpayers in the country. Himalayan Distillery is the first distilled beverage company in Nepal to receive the Green Building certification. Several of its brands have received many international accolades. Shah himself had designed the Jawalakhel, Shah and Himalayan distillery plants. In an interview with Madan Lamsal, Editor-in-Chief of New Business Age, Shah shares his insights into the recent trends in the liquor market, problems of the industry, the introduction of Royal Treasure whisky and the plans of Himalayan Distillery, among other issues. Excerpts: 

Why Royal Stag left Nepal and where is it now?
We only receive raw materials and packaging materials for the production of Royal Stag with the permission of the brand owner Pernod Ricard. At present, production of the whisky brand has ceased in Nepal as we have not been able to receive the permission and packaging materials. Pernod Ricard and Seagram’s have so far taken royalties of over Rs one billion which is not a small amount. However, we have heard some false rumours about us closing down the production of Royal Stag. The reality is that the government last year changed the policy citing the huge outflow of money in the form of royalties in alcohol paid by local producers to foreign brand owners.   

The new government policy bars foreign companies from taking royalty of more than six percent of the value or 10 percent of the profit from the brands that are produced here.  This resulted in a decline in royalties for Seagrams. 

Now, Pernod Ricard is also thinking about it. We do not have any misunderstanding with the company. We have been paying the royalty as per our agreement. Royal Stag and Blenders Pride each have 26 percent and 30 percent in royalties respectively. But the government officials objected to this, stating that how is it justifiable for the distilled beverage industry to send Rs 400 million in royalties when Nepalis work tremendously hard and suffer to earn dollars abroad. This led to the introduction of new policies.

For us it was a loss. A major brand with 300,000 cases in the market is gone. But money is not everything. We supported the government. A liquor company pays 30 percent in income tax and five percent in dividend tax. But in royalties, the government only receives 15 percent in tax. If we were just after the money, we could have saved 20 percent by investing through a tax haven. But we did not do that and supported the government.  The policy has also helped to control money laundering. We know that dozens of Nepali industrialists have been visiting Pernod Ricard officials in India looking for business. The France-based company has various other products in vodka, whisky and gin categories. We are not engaged in importing their other products. Others are importing such products here. Pernod Ricard and other multinational companies present here are in a wait and watch situation. Meanwhile, many MNCs are thinking of coming to Nepal seeing the lucrative market opportunities here. Companies such as Radico Khaitan, Allied Blenders and Distillers, and others want to come to Nepal. 

But why haven’t you said this publicly till now?
Because, nothing has taken place officially. And, nothing has been made public regarding the issue. What would we do if someone tomorrow says ‘go for it’?

Pernod Ricard’s country manager has left Nepal. You still have the license but Royal Stag is not produced here. What will happen next?
Yes, production has stopped. But they have not said anything. Royal Stag used to sell like hot potatoes. For the past six months we have not produced the brand. 

Did Pernod Ricard think they would sell Royal Stag anyway?
An MNC may have that sort of hubris, which is wrong. We know better about the demand of Nepali consumers than any foreign company. 

You have introduced Royal Treasure which is similar to Royal Stag. This is interpreted as a special strategy of yours. What is the reality?
The launching of the Royal Treasure whiskey is due to the situation of wait and watch. We had to bring out something as consumers were searching for a whisky. We have released 60,000 cases of Royal Treasure in the market within four months of production.  There is a large vacuum created by the absence of Royal Stag. If we do not fill it, others will seize the opportunity. The production volume of other companies may be less, but they too have quality products. 

How do you assess the current whiskey market in Nepal after the exit of Royal Stag?
Compared to before, there is less demand for whisky in Nepal. Consumers are drawn to vodka and beer. Last year, the market for beer and vodka increased significantly and what we produced was insufficient. We sold 90,000 cases of Ruslan Vodka last month alone. That was beyond my earlier expectation. When I ask our marketing executives about the market for Royal Treasure, they answer that everyone is drinking vodka.

Himalayan Distillery faced huge losses in the past. But things have changed dramatically for the company in recent years. How did this happen?
Himalayan Distillery made remarkable progress after it came under the management of Jawalakhel Group of Industries (JGI). Asian Distillery, Rolling River Distillers, Vijay Distillery, Himalayan Distillery and Raj Brewery are operating under JGI. It has been the main reason for our strength. This is a high-risk industry. 90 percent of the brands launched in the market fail.

Himalayan Distillery has been receiving incomparable support from its sister companies. The sister organisations buy all extra neutral alcohol (ENA) produced by Himalayan distillery paying good prices. This contributes to the full capacity operation of Himalayan Distillery. 

Himalayan Distillery is a public limited company while other companies under JGI are private.  Doesn’t this cause a conflict of interest? 
The more profit Himalayan Distillery generates, the better it is for us. Everyone associated with us will be happy. High profit pleases the general shareholders of the company, the banks as well as us. There are some 4,000 shareholders in the company. The Rs 100 priced share has now reached Rs 500-600. Of the profit generated, we get 95 percent on the basis of our share ownership.   On the other hand, if Himalayan Distillery had not been under JGI, it would have been difficult for the company to break-even.

To raise Rs 1 billion investment in a manufacturing company today is a herculean task. The investor of such a company can be termed a ‘genius’ if the business achieves a break-even in five years. The situation is such that new investors who have invested billions of rupees in the business are shedding tears. Their earnings are considerably less than what is required to pay the interest on bank loans. 

The liquor industry requires continuous investment in new technology. Himalayan Distillery is performing well because all our extra neutral alcohols (ENAs) are of high quality and our sister companies buy the ENAs. All companies under JGI are supporting each other. The brands of Himalayan Distillery get promotion during the promotion of brands of our other companies. For this Himalayan pays only one part of the promotional cost.  We engage in co-branding of the products. For example, while doing the promotion of Ruslan Vodka, we asked customers to buy Royal Treasure, Golden Oak and Blue Diamond as well. Our promotional expenditures go over Rs one billion yearly. JGI has a sales team comprising of around 250 staff which is the largest in the Nepali liquor industry. All of them also market the products of Himalayan Distillery. The share of Himalayan Distillery is just 20 percent in the overall promotional activities of JGI companies. It is important to note why Royal Stag came to Nepal. The whisky brand came after observing the increasing market for vodka here. The vodka market cooled after Royal Stag took centre stage. 

How is business this year? What would the shareholders get?
We can’t say anything for sure in Nepal. Our plans, for instance, turns upside down if there is general strike. But I am confident that our business will not be less than last year. 

Discussions are going on to bring in more manufacturing industries to the stock market. Do you think it will be good for the companies to become publicly listed?
Honestly speaking, I would not suggest a privately-owned company to become a publicly listed entity. There are some crucial reasons behind this. There are many decisions that need to be made immediately that cannot be delayed at all. In a publicly listed company, you will have to call the board meetings, hold AGMs and a number of other activities. Many things are lost in between. For example, when a boiler in the factory, it will lose money each day if not changed immediately. If the company is privately owned, it will be easier for the owner to buy a broiler machine by selling his/her house or by taking out a loan. But, not in a publicly listed company. There are so many legal hurdles. If I find out a competitor has introduced a new technology, I need to call for a board meeting and a general meeting for the approval to purchase the new technology. The process takes around six months and after that I must approach the bank for a loan. Privately-owned companies do not have to face such hassles and can work in whatever way they like.   

Publicly listed companies in Nepal are weakened for the sake ofthe security of general shareholders. In Nepal, BFIs though being publicly listed are performing fine. But it is not pragmatic for those industries that need immediate decisions. I think becoming publicly listed is right for institutions of certain sectors such as banking and insurance in our context. For FMCG companies such an approach won’t be pragmatic.    

You have been operating Himalayan Distillery and Jawalakhel Distillery. One is private while another is public. Why?
It is due to our huge trust in a public limited company in the beginning.  But, we suffered so many problems from bureaucracy and the board of directors that we changed our minds. Our main aim was to provide more and more return to the shareholders.  We had to sell our ancestral home and 27 ropanis of land at Jawalakhel, that too at Rs 300,000 per anna. We had an empire in Jawalakhel, we lost it. How many people can do this?  But we did it to save the company thinking of it as our duty. 

What is the level of your participation at Himalayan Distillery at present? 
I participate only in research and development. I want to bring the world’s advanced technology to all our companies.  We cannot develop by bringing technology from our two immediate neighbours.  Our roads are bad, electricity supply is not adequate and we have low labour productivity compared to the two neighbours. In this regard, how can we compete with them by using the cheap third grade technology borrowed from them?   We have been investing tens of millions into technology. The lab we have is our pride. We are training many people there. I am busy with it.

You are regarded as The King of Nepali liquor industry. You have witnessed many changes over the years. What is the difference between then and now? 
The market has always been competitive.  40 years ago Khukri Rum was in competition with Ruslan Vodka. Brands such as Star Beer, Ye Grand Earl Whisky and Snowland Gin in the past used to compete with other brands.  Today is a time of transition.  Now there is the control of the MNCs in the distilled beverages and beer industry. We can’t say for sure what’s going to happen next.  New players are coming in the market at present. They are rich, smart and big and are in many businesses. Many companies registered here are backed by large business houses and are much bigger than us. But in the course of time their balance sheet will show their actual status. 

In the past, Himalayan Distillery existed without earning a single penny for ten years. It’s been only 2-3 years since we started distributing dividends. It will take more time for new companies to reach that position. It takes a minimum of five years for a new company to break-even if it is fortunate enough. 

We are bringing a brewery with advanced technology which will be the first of this type in the whole of South Asia. If we did not have big transactions, it would not have been possible for us to invest. 

How are the low grade alcohol producers doing in Nepal?
Many industries have been making low grade liquor outside the capital valley and they are selling well. They are required to pay lower excise duties. Some do not pay even that, and the government doesn’t pay attention to it. Only large industries pay the taxes. The irony is that the government focuses only on those who pay taxes honestly. There are tax officers around us 24 hours a day. There are many who sell their products at prices lower than the excise duty. For example, it has become normal practice in the market to sell a product at Rs 900 even if the excise duty levied upon it is Rs 1,200.  We have proposed an SMS tracking system to control this kind of behaviour. We will be stronger if the revenue leakage comes down and the government gets more active. Last year alone, we paid Rs eight billion in taxes altogether. 

Why are there always complaints between the Department of Industry (DoI) and the liquor producers?
The DoI should know that it is its duty to protect the intellectual property right as per the international agreements signed by the government.  There are hundreds of spirits in the market that have copied the taste, brand name, colour and everything of the popular brands such as Royal Treasure, Blue Diamond, Golden Oak and Virgin etc.  Many consumers especially those from rural areas do not understand the details printed in English on the label.  Such an act of copying is a crime. 

A company invests hard work, money and time to develop and establish a brand. But there are fake ones like Golden Yak in place of Golden Oak and Blue Demand in place of Blue Diamond. There are 40 brands in the market like the Blue Diamond dry gin at present. The brand names and labels of such products have either Blue or Diamond. The bottle design is the same with the same colour. 

We register our brands before starting the production. It takes around six to eight months to get a brand registered. However, there are many instances where we have found out that others have supplied their products in the market immediately after applying for the registration of labels at DoI. They start the production and supply before finalising the registration of their labels. If anyone asks, they say that the labels have been forwarded for registration.  These types of acts have largely eroded the values of the intellectual property rights. I have talked about this issue with many industrialists, government officials and experts. The future of this industry relies on the support of all stakeholders to resolve the issue. Unethical activities are rampant in the Nepali alcoholic beverages industry at present. 

What other misconducts prevail in the market?
Go to a ‘c’ grade restaurant and ask for Johnny Walker whisky, they will serve you Virgin after a while.  They serve Ruslan Vodka calling it imported vodka. Even the high level ones are doing so. Tax evasion, widespread use of fake trademarks, and mixing cheap drinks with expensive brands are the main problems.

You are launching beer. How much will be the investment?
We are bringing out the German Premier Pilsner Warsteiner beer. It is a premium beer and the price too is premium. It has upto five percent alcohol content. We will be investing around Rs three billion in the production.  This is the largest family-owned business in Germany and is a hundred years older than Carlsberg. We will give five percent in royalties to the owner of the brand. The factory is ready and will launch during an auspicious time. We believe in ‘Vastu Shastra’ and auspicious moments. Raj Brewery will be producing the German beer in Nepal at its production facility located at the Bhairahawa-Nawalparasi corridor. The facility has been installed with the best and expensive water supply system. 

Many multinationals undermine markets in Asia and Africa and think that consumers only drink cheap drinks here. But we can confidently say that Nepali consumers too look for quality products.  This belief in the consumers and the zeal to provide them with quality products is the key to success for our family. 

Many new producers have entered the business in recent years. In the meantime, you also changed the distributor. What is behind this?
A big game has begun in the Nepali liquor market. This market is too big and challenging compared to what is being run by a business house.  To ensure this, companies need to have a swift and up-to-date distribution system.  We have changed the distributor to focus all our available resources on the supply system. We will supply the new beer via this system. Using the supply system, it will be easier for us to ask consumers to buy the beer while they purchase the vodka.  

Like in other industries, many people jump into this business after seeing the success of others. But the actual scenario is different. While it is difficult for the established companies in terms of sustainability, it is more difficult for the new comers. 

Are you saying this to discourage others from coming as competitors?
We don’t tell anyone not to come. We don’t stop people from entering the business. What I want to say is the liquor business is not as easy as it seems. I had demanded the opening up of licenses for liquor companies when I was the President of the Nepal Beverage and Cigarette Industries Association.  You can‘t do anything without competition. But the competition needs to be healthy. I will welcome it if Nepalis come to invest in the business rather than foreigners. 


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