Internationals step boldly into tiger’s lair
"India is a geographical term," Winston Churchill said in 1931. "It is no more a united nation than the Equator." Seventy years on, the political landscape may have shifted dramatically, but for those engaged in India's beer business, particularly the multinationals trying to gain a meaningful foothold there, Churchill's sentiments may still ring true.
Despite entry to the WTO, the arrival of international beer giants and the existence of some serious brands, the beer market in India remains extremely fragmented on a number of levels. Although industry leader the UB Group holds 36% of the market and second place Shaw Wallace 25%, there are still over 60 brewers in the country and 1,200 liquor distributors.
But perhaps more significant is the vastly contrasting attitudes of India's state governments towards alcohol, with each state determining its own taxes and regulations on the sale of beer. A recent report on the Indian beer market, by leading drinks analyst Canadean, identified seven different types of state policy in relation to alcohol, from states with free distribution to those with complete prohibition of alcohol.
In between lie anything from states which auction dealer licenses annually to those where the authorities insist that imports from other states must be channelled through the government agency for distribution, but where local produce can be sold through private distributors.
And then there is the mind-blowingly complicated taxation system to be considered. There are excise duties levied by each state; state sales taxes; a central sales tax for inter-state sales; an import fee if beer is brought in from another state; an export fee levied by beer surplus states and a number of other local fees and levies.
What this means of course is that the effective rate of tax can vary wildly from state to state. And, despite India's entry to the WTO, the average total, according to Canadean, is still a draconian 60% of the cost of production. It will come as no surprise that in the states where it is higher, beer sales have largely been stagnant.
"Every state in India levies different taxes, resulting in small, inefficient breweries across key markets," explained Foster's India boss Pradeep Gidwani, in an interview recently.
And yet against this backdrop India is becoming one of the most hotly contested markets in the world, both for market share and acquisition targets. The ball really began rolling when Scottish & Newcastle announced in January that it was investing in a joint venture with United Breweries, India's largest beer maker, to develop and acquire brewing businesses in India.
S&N and UB will each have 40% in the venture and the independent management team of the JV will hold 20%. S&N has also committed to making an investment in the UB brewing business that is being demerged from the rest of UB, an investment likely to be around £60m.
But even compared to this investment by the UK brewer, it is South African Breweries that is really setting the pace for the industry. Richard Rushton, managing director of SAB India, said recently: "Consolidation through acquisitions is important in India because setting up a greenfield brewery, despite the advantage of brewing the beer you know, proves uneconomical in the long term."
And he has certainly been true to his word. Since its entry into the Indian market two years ago SAB has been aggressive in its pursuit of acquisitions, picking up 9m cases of capacity by buying Mysore Brewery, Narang Brewery and Pals beer. Meanwhile Castle lager was also introduced this year.
And now the country's second largest player Shaw Wallace has thrown its doors open to international investment, offering around a 26% stake of its equity.
The deal it is hoped will leverage access to overseas markets for Shaw Wallace products and at the same time allow an international brewer to attack the Indian market through Shaw Wallace's extensive distribution network in the country. Shaw Wallace has around a quarter of the domestic beer market.
Carlsberg, Heineken and SAB are the names heading the list of potential buyers, a move that would give the first two a substantial holding in the market and SAB a base from which to seriously attack UB's dominance. And there is a tempting 21% market share still held by the smaller brewers in the country, many of which are ripe for takeover.
But even if the multinationals manage to navigate the minefield of taxes and layers of state bureaucracy they can be under no illusion that this can be anything but a long-term strategy. To begin with beer competes with spirits on the Indian market, and these harder liquors have been more successful in capturing consumers, being subject to the same taxes as beer and therefore competitively priced per unit.
Furthermore, the Indian market is subject to government curbs on capacity expansion, which is bound to affect growth rates in coming years.
In short, the challenge is substantial as Canadean sums up: "This (growth) will require government permitting the licensing of fresh capacity, loosening of distribution controls, and also a reduction in taxes, so that the migration to hard liquor is reversed. The government's fiscal position is precarious in most states and states will be disinclined to reduce taxes unless high taxes are counter-productive in terms of gross collection of revenue."
The internationals may have arrived with considerable force on the Indian beer market but its governments and its unique and fragmented market dynamics will be influencing how they progress for some time to come.
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