A short note on why you really shouldn’t invest in Indian craft gin…

A lot of people ask me why I haven’t invested in any Indian gin brands.

After all I make a living investing in early stage consumer brands. And I love gin. In the early 2010’s I was one India’s earliest gin evangelists. And I still own India’s best craft gin collection. So it felt like a logical fit.

But being a good investor comes with having certain rules that you follow with discipline. And two rules I have always followed are:

1. Follow the math 
2. Don’t assume the consumer is someone like you.

This is why I don’t invest in Indian craft gin. It’s drunk by people like us. A market of 100,000-200,000 people. You can’t build a real business with it. You can’t create enterprise value.

But since I still see my friends still wasting money on Indian craft gin investments, let me break this down some more.

Let’s define Indian craft gins as gins that cost more than Rs. 3000 in Mumbai.

There have been 67 Indian craft gins launched in the last 5-6 years. 

Let’s remove Third Eye (Stranger and Sons) and Nao Spirits (largely Greater Than and Hapusa) from this list because they are the two that have reached some scale and can make a return for investors. I will explain why you can’t use these as a comparison at the end of this note. 

That leaves us with 65 brands. 

Most of them have raised between 1-4 crores (let’s take 2 cr as an average though that is a low estimate).

That’s 130 cr of invested capital. 

Let’s assume that this is for an average of 20% equity in these companies.

That assumes that the valuation of these brands is 650 cr. 

If this was a profitable sector then we could apply a discount on current cash flow values. But let’s be charitable and assume this is a growth business and apply a revenue multiple.

Early stage Food product business today get a 4x to 6x valuation.

Keeping in mind the regulatory and distribution challenges faced by the alcohol business (like separate label registration, excise etc in every state), liquor will obviously have a discount to that. 

So let’s assume 3x as a multiple. 

This means that the assumption is that the Indian craft gin brands must do business worth at least 215 cr to justify a valuation of 650 cr. 

Now let’s look at the whole Indian premium gin industry. Remember that Indian craft gins are a subset of the larger premium gin industry.

The total Indian premium gin industry (above 3k in Maharashtra) is 2.5 lakh cases annually. A case is 12 bottles. The whole industry is worth roughly 900 cr in MRP and less than 450 cr in actual annual revenue to the gin manufacturer.

This includes all the big global brands. Bombay Sapphire, Tanqurey, Gordon’s, Beefeater, every single premium gin brand you can think of together do sales of 450 cr. And this includes Stranger snd Sons and Hapusa. 

The whole craft gin industry that collectively needs to be doing sales worth 215 cr a year is just a small niche in this 450 cr market. If you exclude Stranger and Hapusa, all these 65 craft gin brands have collective sales of less than 40 cr a year in a best case scenario (I would venture it’s 25-30 cr in reality). 

You could still justify it if the gin industry was growing rapidly. If you said for example that in 5 years the craft gin business could get to 400 cr from 40 cr there’s still some logic (and that too if you negate the time when the money was actually invested and the expected returns on it and treat it as money invested today). 

But that would need a CAGR of about 70% for that to hapoen. Instead, gin is growing at under 7%. And gin seems to have peaked globally with agave spirits and zero proof being the big global growth areas. 

So what you have is an industry where with massive deployed capital, low growth rates, no large market and macro headwinds. Which will see at least 130 cr of invested capital being destroyed over the next 18 months. 

And remember this is on the basis of the following assumptions which are all on the generous side:

• 2 cr raised on average when it could easily be more than 3 cr 
• Saying that these 65 brands have an 8-9% share of the premium gin market when it’s probably lower than 5%
• Ignoring the time value of money for the last 5-7 years of money invested

When you factor in these numbers closer to reality, the investments in this sector look even more inexplicable. 

We’ve already begun seeing this value destruction turning into reality. There are a few down rounds being disguised as bridge rounds. But more than that we are seeing brand after brand starting to shut down.

And that’s why you can drink all the gin in the world but don’t get high on your own supply. Follow the math. It’s all you need to do. 

Postscript on Nao Spirits and Third Eye:

People say what about Nao and Third Eye?

When it comes to Nao, most of its numbers come from Greater Than which is half the price of the gins people are backing. You’re comparing apples and oranges. Hapusa is the more relevant comparison and its domestic numbers are still small. And it’s now effectively a subsidiary of Diageo. Which hurts the chances of another brand getting a strategic exit because there’s only 2 other potential buyers. 

Third Eye if anything proves my point. All their eggs are no longer in the Stranger and Son’s basket. They are now a house of brands. Stranger, Short Story (at lower price points), Svami. 

Both brands that have got some traction and created some enterprise value have do so by moving AWAY from craft spirits and into the masstige segment which is the fastest growing segment in Indian alcohol. 

But that’s a whole different ball game from investing in craft gin! 

Sources:

• multiple people in Diageo, Pernod Ricard and radico khaitan on market size and taxes and realisation 
• Allied market research for additional data on market size and CAGR
• The list of 67 brands I compiled manually.