Indian Beer Market An Oligopolistic Market
Submitted By Rajeev P Nair Section A Roll no : eMEP -023
History of Beer in India: Beer began to be exported to India in the early days of the British Empire, Empire, including porter and India Pale Ale, Ale, also known as IPA. The first brewery in India was set up in Kasauli, Kasauli, in the Himalaya mountains, near Shimla, Shimla, in the late 1820s by the Englishman Edward Dyer. Dyer's brewery
produced Asia's first beer, called Lion. The brewery was soon shifted to nearby Solan (close to the British summer capital Shimla), as there was an abundant supply of fresh spring water there. The Kasauli brewery site was converted to a distillery which Mohan Meakin Ltd. still operates. Dyer set up more breweries at Shimla, Murree, Rawalpindi and Mandalay. Another entrepreneur, H G Meakin, moved to India and bought the old Shimla and Solan Breweries from Edward Dyer and added more at Ranikhet, Dalhousie, Chakrata, Darjeeling and Kirkee. In 1937, when Burma was separated from India, the company was restructured with its Indian assets as Dyer Meakin Breweries, a public company on the London Stock Exchange. Following independence, in 1949 N.N. Mohan took over management of the company and the name was changed to Mohan Meakin Ltd. The company continues to produce beer across India to this day and Lion is still available in northern India. Lion was changed from an IPA to a lager in the 1960s, when due to East European influence, most brewers in India switched from brewing Ales to brewing lagers. Today no brewer in India makes India Pale Ale. All Indian beers are either lagers (4.3% alcohol — such as Australian lager) or strong lagers (15 % alcohol - such as Australian Max super strong beer
Indian Beer Market Overview Indian beer market is valued at INR 35 bn with volume sales of 172 mn cases for FY 2009-10 and at the current trend the market is expected to grow at an annual rate of 17.2% till 2011. With Global beer market being stagnant,the focus of international firms is on untapped potential in India In contrast, beer is flying off the shelves in India. A recent report by global beverage consultants Canadean states that consumption of beer in BRIC countries (Brazil Russia, India and China) increased by almost 50 per cent during 2002-2007. In India, beer sales grew at nearly 90 per cent, compared to a less than 60 per cent growth for other alcoholic drinks. Industry sources estimate that the Indian beer market is expected to nearly double to 23.3 million hectolitres by 2012 from 12.5 million hectolitres at present. But the market is difficult to break into. More than 80 per cent of the market is controlled by the two players, UB and SAB Miller. While UB with brands like Kingfisher, Zingaro and Kalyani Black has a 48 per cent market share, SAB's bouquet of acquired brands-- Haywards, Royal Challenge, Knock Out and Foster's deliver a combined market share of 37 per cent.(See exhibit 6 for Market share) In the last 9 years beer consumption has been growing rapidly at a CAGR of 7% .Looking from the industry perspective,the Indian beer industry has been witnessing steady growth of 10% per year over the last ten years. With the average age of the population on the decrease and income levels on the increase, the popularity of beer in the country continues to rise.
Drivers and Challenges Drivers: ➢
Huge Market Potential:
“Increase in purchasing power and growing popularity of beer makes India a market of high potential, with 15 per cent to 30 per cent annual growth," says Joakim Sande, Marketing Director, India, Carlsberg. The beer market in India is pegged around 12 million hectolitres and is expected to double in the next five years or so . ➢
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Rising Income Levels: India is one of the most attractive consumer markets in the world with about one-sixth of the global population. The rising income levels has a direct positive impact on beer sales in India. Also, urban consumers who are more exposed to the western culture socialize with beer. The growing income levels particularly in the urban earning class is a potential market for beer manufacturers in India. Entry of International Brands: Many foreign beer manufacturers have entered or plan to enter the Indian beer market with their product line. The market is set to flourish with 15 new breweries and 10 international brands in the next 3 years. With the global markets experiencing low or stagnating growth and focus shifting to India, the Indian industry is expected to witness fast growth in the coming years.(see Exhibit 02 for the major brands available in India)
Challenges: ➢ Regulatory Environment: Building brands, particularly for alcoholic beverages, is easier said than done. In the mid1990s, the Indian government banned advertising of alcoholic beverages. By then, existing brands such as Kingfisher, Foster's and Haywards had already built their brand without any surrogate branding efforts. In contrast, the new entrants will have to rely only on surrogate advertising. For instance, Cobra is now advertised on television as sparkling water with the tag line "so smooth, anything goes down well". [7] As the advertisement of liquor is banned in India, Carlsberg has cashed its international image to boost its sales in the domestic market. They have targeted the public houses and discotheques for their promotion which is very apt. Kingfisher employs the style of surrogate advertisment, where it try to gain cutomer attention by advertising about its mineral water,etc. But with government banning even indirect advertisements of wine, alcohol, liquor and any tobacco products forthwith in the interest of public health, the brand building is going to be a great challenge.(See exhibit 14) ➢
High Tax Structure: Minority preference for beer in India and high tax structure are the major challenges for Indian beer industry. One of the reasons for the low preference for beer is high taxes imposed on beer consumption. On absolute alcohol basis, beer is taxed higher than spirits in most of the states in India. There are about 26 different alcohol specific taxes that constitute 50% of the consumer price which is among the highest in the world. In India, beer taxes are levied by individual states and taxes are also paid between states.[9](See Exhibit 5 for comparison of tax rates) Beer, which is a softer form of alcohol consumption, is taxed higher by most states compared to Spirits on absolute alcohol basis. This is primarily because taxes on beer in India tend to be relatively higher than spirits whereas in most parts of the world, in fact, the reverse is true. Globally, on a per alcohol basis beer is taxed at 50% of hard liquor whereas in India,
beer is actually taxed 60% more than hard liquor. (See Exhibit 8) The Indian beer industry is plagued with myriad taxes & levies that vary from state to state. In fact no two states or UTs have a same or even a similar policy. The inconsistency in the state policies leads to fostering an environment of mismanagement & lack of focused strategy to manage state finances. States usually do not adopt policies based on scientific management or by considering the social aspects of managing this trade. The policies are generally short term in their outlook, with little or no thought to long-term interests of all stakeholders, including the general public. (See exhibit 3 for Sample duties table)
Trends: ➢
Growing demand for barley and evolving contract farming: Barley accounts for one-sixth of the cost of making beer. Increase in domestic consumption and export demand has pushed the barley prices up by 20% from Jan 08 - June 08. Moreover, Increase in barley prices has let to 10% increase in cost of beer. The protein content in barley crop in India is 13-15% compared to 7-10% in developed nations and this high protein content in Indian barley is not suitable for making beer. Rajasthan is an ideal place where barley can be grown under suitable climatic conditions for having lower protein content required by the beer industry. SAB Miller India is encouraging farmers in Rajasthan to cultivate a type of malt barley required by the industry. The company launched a programme called Saanji Unnati for educating farmers to sow the right type of certified seeds and practices. [10] (see exhibit 11 & exhibit 12 for growth of barley prices and its consumption in 2008)
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Premium Beer market on the rise: Premium beer segment is outpacing the mainstream beer market touching a growth rate of between 40-50%. The Indian beer industry is moving towards premium category of beer. Lifestyle changes and increasing western culture in India are some of the factors driving the premium segment. Many domestic and foreign premium brands are finding the interests of young urban working class. Premium beers are priced about 30% higher than regular brands. (See Exhibit 9 & Exhibit 10) Some of the premium brands in India are: ✔ UBL - Kingfisher Premium, UB Premium,Ice, Kalyani Black Label Premium ✔ SABmiller India- Foster’s, Peroni, Royal Challenge ✔ Other Premium Brands- Cobra 5.0% Premium, Budweiser, Carlsberg, Stella Artois, Tiger, Beck’s
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Emerging new sub-categories of beer with consumers in India open for experimenting: New sub-categories of beer are emerging as consumers in India are now open to experimentation. With Indian consumers open to experimentation, many multi-national firms are introducing alcohol-free and flavoured beers in the market. Craft beers, which are available in unique flavours, is expected to penetrate the lager dominated Indian beer industry. Craft beers are expected to attract women consumers and these new sub-categories are estimated to cut 25-30% of market share of regular lagers. Cobra beer is bullish on alcohol-free beer and flavored beer in India. It has rolled out: ✔ Cobra LightLow calories and low carbohydrates.
Cobra Bite: Flavored beer (Includes Lemongrass, Blood Orange, Sweet Lime and Fresh Ginger flavours) ✔ Cobra Zero %: Alcohol free The UB group also sees an opportunity for new beer sub-categories and segments in India. The company plans to cater to different consumer segments in the industry and will launch three new varieties of beer including fruit flavored and low alcohol brands ✔
Competition: Currently more than 80% of the market is controlled by two major players United Breweries Limited (48%) and SABMiller India (35%).Strong beer is predicted to grow faster as it is perceived to offer value for money alternative to spirits. With InBev acquiring Anheuser-Busch, it has potential to emerge as the third major player in the Indian beer market. The future of beer market in India looks positive with the entry of many international players. Beer sales will increase along with increasing number of brands and sub-categories in India. Existing players like UBL and SABMiller are planning to expand their range of products.New players like ABInBev, Carlsberg are bringing their internationally renowned brands to India.[14] (See Exhibit 6 & Exhibit 7) Top players United Breweries United Breweries crossed milestone of 100 million cases. It enjoys a 57 per cent share in the estimated 200 million cases domestic beer market. Its total volume of sales increased by 20% while the revenues increased by 18%. The company also saw huge rise in its net profits- by 51%. UB Group today controls 60% of the total manufacturing capacity for Beer in India. The company, which sold over 100 million cases of beer in 2009-10, expects a sales growth of 30-35 per cent in the current fiscal. For FY 2008-09-The Company reported a net turnover of INR 17475.7 mn and profit after tax of INR 624.9 mn Brands: Kingfisher (Premium, Strong, Strong fresh, Draught, Ultra, Blue, Red, Bohemia), Zingaro, UB Export, Londer Pilsner Premium strong, Kalyani Black Label strong, Bullet, Marco Polo, Guru Strong, London strong.[15] Business Strategy: UBL has a manufacturing network of 22 breweries across India. The company enjoys a market share of 48% in the industry and plans to expand its share further. Kingfisher Strong is the single largest selling beer brand in India, while Kingfisher Premium continued to outperform in its category.UBL plans to set-up two new green field breweries at Mallepally in Andhra Pradesh and Nanjangud in Karnataka in order to support the revenue growth. UB Group firm United Breweries Ltd today said it is planning to locally produce Dutch beer brand ''Heineken'' by next fiscal besides launching a refurbished ''Tiger'' brand in India this year.[16] SABMiller SABMiller India is a subsidiary of SABMiller PLC registered in India as SKOL Breweries Limited. For FY 2007-08 the company reported a net turnover of INR 10860 mn and profit after tax of INR 344 mn. Brands: Haywards 5000, Haywards 2000, Haywards Black, Foster’s, Indus Pride, Peroni, Royal Challenge, Knock Out Note on Foster’s: Foster's Lager is a uniquely international beer, brewed with the finest sun-dried malted barley, the purest water, and Foster's own specially bred 'Pride of Ringwood' hops imported directly from
Australia to give the beer an authentic flavour. Its crisp, clean flavour won it immediate international acclaim when it was first brewed in Melbourne in 1888. Today, more than one hundred years later, it is still recognized as one of the world's best beers. Foster's Lager is a uniquely international beer, brewed with the finest sun-dried malted barley, the purest water, and Foster's own specially bred 'Pride of Ringwood' hops imported directly from Australia to give the beer an authentic flavour. Its crisp, clean flavour won it immediate international acclaim when it was first brewed in Melbourne in 1888. Today, more than one hundred years later, it is still recognized as one of the world's best beers.[37] Business Strategy: SABMiller has 10 breweries located strategically across India to serve the beer markets efficiently. The company has a market share of 35% and stands in the second position. The company has invested about INR 1250 mn in the past two years for upgrading the breweries to global standards. SABMiller has leveraged its global expertise in packaging, pricing, occasion and product gaps which were improved based on consumer insights.Also it plans to bring the iconic Dutch premium beer Grolsch to India. SABMiller Plc has acquired the brand for USD 1.2 bn in 2007. [17] Other players ➢ InBev India Brands: Tennents Super, Beck’s, Stella Artois, Hoegaarden, Leffe Anheuser-Busch (AB) was acquired by InBev in 2008 and formed ABInBev India; currently operates using trading name InBev India. InBev operates in India through a 49:51 joint venture with soft drink bottler RKJ Group. AB started operations in India through a 50:50 joint venture with Crown Beers International initially but later AB purchased the remaining ownership from Crown Beer India Ltd. Business Strategy: InBev India has a production capacity of 1.9 mn cases a year through two contract brewering arrangements in Regent Breweries in Madhya Pradesh & Dasappa and Sons Bangalore. InBev plans to introduce Tennents brand in North India either by finding a contract brewer or by setting up a brewery. ABInBev India launches Budweiser beer in North India in August 2009. It has received a good response in the Southern states and Maharashtra. The company expects to cross 2.9 mn cases in sales of Budweiser beer by December 2009. [18] Carlsberg It entered Indian market in 2006 & operates here through a joint venture named South Asia Breweries and positioned itself as a premium mild beer. With the launch of its flagship brand, the company is trying to create a premium, all-malt beer category. In 2009 Carlsberg was the 4th largest brewery group in the world. Its products are sold in more than 150 markets. In 2008 the Group sold more than 120 million hectoliters of beer, nearly 100 million bottles of beer a day. Their major consumers are in Southern India. Howsoever, it consciously chose the north, east and west regions of the country to set up its breweries Strategy adopted by Carlsberg is to concentrate on to the untapped market of north and west India in the initial stage of the production. Moreover, since it has positioned itself as a premium product, it is only catering to the urban cities of India.
Oligopoly behavior of Indian Beer Industry: ➢
Barriers to entry [New firms] ✔ ✔ ✔
High Government Tax Highly Regulated Market Infrastructure Advertising barriers
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Consumer tastes not aligned with the consumption of beer vis-à-vis other beverages Preference to promote to higher alcohol content drinks after starting with Beer High-Capital Barrier Challenges faced in procuring raw materials like bottle & Barley Although the market is equitable with respect to the brands, we see high concentration with respect to companies. This is mainly because of aggressive acquisitions of relatively successful brands by the biggies in the recent times.(Exhibit 6 & 7) The potential for growth is equally enticing for Major brands to participate in Indian beer industry. With Brands like Diageo & Victoria Beer venturing, we can expect dynamism in this space. ➢
Few sellers and Many buyers: Although there are more than 10 players in the market, two groups hold the maximum share of the market. On applying Herfindahl index to get a feel of the competition in the Market. (The Four Major players and their share is provided in Exhibit 6, UB – 49% SABMiller – 38% Millenium Alchobov – 9% Mohan Meaking 4%) Herfindahl index measures the degree of concentration in an industry. Herfindahl index _ ( S 1)^2 _ ( S 2)^2 _ . . . _ ( Sn)^2 where S 1 through Sn are the market shares of firms 1 through n If we apply the four-firm concentration ratio for beer industry Herfindal index = 49^2+38^2+9^2+4^2 = 3942 An Herfindal index of more than 1800 represents a highly concentrated market. With an Herfindal index of 3942, we can deduce that Beer market in India is highly concentrated and dominated by few players.
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Firms produce and sell homogeneous or differentiated Product: Beer is a homogeneous product produced in a oligopolistic market. Economies of scale exist, which indicate that a few large firms would be more efficient that many small ones. A high degree of capital investment required to create a Beer firm.
This market can be analyzed using Cornout Model. As per it, each firm must decide how much to produce, and at the same time- taking its competitor in account. Also each player treats the output level of its competitor constant when deciding as to how much to produce. Based on this model we can draw the reaction curves of the 2 firms- UBL (49% market share) and SABMiller (38% market share).
Reaction curves and Cournot Equilibrium the graph drawn below depicts the market conditions. Q1’ and Q2’ represent production quantity of UB group and SABMiller. R1R1 and R2R2 represent the UB groups and SABMiller’s reaction curve. With UB group as the market leader the quantity output is OR1. With this condition SABMiller selects various strategies to enter in to the market and capture the market share by acquisitions and international branding and it produces an output. Since SABMiller has entered the market the UB group will change it production by decreasing it along its reaction curve. Similarly SABMiller reacts by increasing its production along its reaction curve. Then both the player reach the equilibrium point (E) or try to attain the point such that the price is satisfactory, both of them are able to sell the quantity which is exhausted and are able to maximize their production. It is with this model the market leader UB group has moved to lower market share of 47% and SABMiller to 37%. There will be further change in the market share to attain the eqilibrium point (E). In the Cournot equilibrium model the two firms are making the profits that exceed those that earned under perfect competition but less than those that would be earned by monopoly. They earn less than a monopoly would earn because of their joint outputs exceeds the monopoly outputs. They earn more than perfectly competitive firms would make since each is aware that it drives the price down when it increases its own output. Thus the above analysis shows the duopoly market condition in Indian beer industry. Looking it from a micro economic perspective, we can say that there has been an increase in the demand. Hence assuming the same supply, the market would clear at a higher price.
Exhibits:
Bibliography http://en.wikipedia.org/wiki/Beer_in_India http://www.bharatbook.com/upload/Beer-Market-India-Sample.pdf http://www.mindbranch.com/Beer-India-Forecasts-R587-51/ http://www.scribd.com/doc/26542793/Beer-Market UBL Annual report 2009; SKOL Breweries Annual report 2008; Bloomberg “SABMiller Fights India’s Beer Rules in Court to Double Profit”, Dec 2008, TASMAC UBL Annual report 2009; SKOL Breweries Annual report 2008 All India Brewers’ Association report, Nov 2008 http://www.rediff.com/money/2007/dec/04bspec.htm http://wapedia.mobi/en/Indian_beer All India Brewers’ Association report, Nov 2008 Securities.com Business Standard articles “Indian beer market ready for new fizz”, May 2008 & “Craft Beers set to challenge 'Lager' territory”, Jun 2009 Company websites; Annual reports; Press articles; DNA article “SABMiller seeks bigger mildbeer glug”, Mar 2009
