The Indian beer market is one of considerable potential but regulation, including a complete ban on advertising, make it a tough one to crack. Dean Best writes that, while S&N and SABMiller have established leading positions in India, other international groups may find it a hard market to penetrate.

On the face of it the Indian beer market has perhaps the most potential for growth of any in the world, with extremely favourable demographics, low per capita consumption at 0.7 litres a year, aspiring brand-conscious young consumers and a burgeoning middle class.

However, one needs to look beyond those factors to get a true picture of the market. While in the last decade the big brewing multinationals have jostled to gain a foothold in China, only two of the beer giants have carved out a presence in India, which in itself suggests a certain impenetrability. The two international groups that have entered the market, however, Scottish & Newcastle and SABMiller, have established a strong presence.

S&N owns a 37.5% stake in United Breweries (UBL), a joint venture with Indian brewing and distilling giant UB Group. UBL dominates India's fledgling beer industry, controlling 48% of a market growing by 6% to 7% a year. UBL's flagship brand, Kingfisher, accounts for one in all three beers sold in the country. The brewer's nearest - and only - rival of any consequence is SABMiller, which in May took full control of its operations in India after buying out joint venture partner, Shaw Wallace. SABMiller is thought to control around 31% of the market.

With India's beer market having evolved into a near duopoly, the potential for other big brewers to wrestle in on the action is limited. InBev and Carlsberg have made noises about setting up a brewing presence or launching an international brand in India but either task would be tough as India's beer market remains one of the most heavily regulated in the world.

India's economic liberalisation has yet to reach the beer sector. According to SABMiller, on a per unit alcohol basis, the tax on beer in India is the highest in the world. The way that tax is levied compounds that problem. The level of duty is decided at state level, leading to wide variations in tax across India. As such, the cost of transporting beer across state borders is prohibitive and only brewers that have a brewing presence in each state can absorb that cost. States also have a hand in deciding how beer is distributed among retail outlets, while beer advertising is banned, making brand-building a hugely difficult task for new entrants. In theory, India's demographics may make the country an attractive target for international brewing groups but in practice, the regulation surrounding the beer industry constitutes a huge barrier.

"When it comes to international brewers who aspire to enter the Indian market, they will face a long, very expensive learning curve because India, in terms of beverage alcohol, is unique," says Dr Vijay Mallya, UBL's charismatic chairman. "There are only two ways international brewers can establish a market presence in India. The first is through advertising; the second is through securing strong distribution. But the first, advertising, is banned; it's very difficult to act commercially with this constraint. The second is limited; what UB enjoys is a stronghold in distribution because we have a single distribution system for spirits and beer."

Nevertheless, despite their dominance, UBL and SABMiller are lobbying hard for de-regulation, particularly on tax. States like Maharashtra and Andhra Pradesh have moved to reduce duty on beer and consequently sales there have risen, a move Mallya, a member of the Indian parliament, would like to see elsewhere in India. "I have persuaded some states to reform or liberalise," says Mallya. "Some do, some don't. It's difficult to know whether it will happen totally or selectively but it is happening."

Heavy regulation has not deterred Cobra Beer, the UK-based brewer that has found success with its flagship Indian brew in the UK and continental Europe. Earlier this year, Cobra Beer set up its first brewery in India with local beer maker Mount Shivalik. Indian-brewed Cobra Beer was launched in March and, buoyed by an encouraging response from Indian consumers, the brewer has opened talks to build a second brewery within the next year.

Cobra Beer's international marketing manager Santosh Cherian acknowledges that it will be difficult to gain a foothold in the market but believes that by marketing Cobra as a super-premium beer, the brewer can tap into growing demand for premium products.

"We have a big, big task on our hands but we're quite confident," Cherian tells just-drinks. "Consumers are ready. Youngsters are becoming more exposed to the West and premium products, and the growing middle class population is our target. We are aiming for 1m cases over the next three years and we think we'll be able to achieve much more than that."

The big two meanwhile are busy driving consumer awareness of their own brands. "Brands are becoming more important in this market and national brands are most important for growth," says John Hunt, managing director of S&N's operations in Asia. UBL is looking to launch one of S&N's international brands in India next year. Hunt was coy about which brand would be unveiled but Mallya all but confirmed it would be Kronenbourg Blanc, which ambitiously would be targeted at India's female drinkers.

"Kronenbourg Blanc is absolutely the right product to be targeted at the female population of India," Mallya said. "It would encourage them to enter the drink category. It would be a very major breakthrough in a market that is used to cultural values when it comes to alcohol. It's extremely important for the beer industry to penetrate the female drinking profile and this product has that ability."

For its part, SABMiller has signalled its intent to strengthen its Indian business by setting aside a war-chest worth US$125m to invest in the market over the next five years. The company leads India's 'strong beer' segment - which accounts for two-thirds of all beer sold in India - with its Hayward's 5000 brand, while its Royal Challenge label is the fastest-growing 'mild beer' in India. SABMiller's international brand Castle is available in India but just-drinks understands that there are no imminent plans for the brewer to take more brands from its global portfolio into India.

Restrictions on retail availability and the ban on beer advertising make it tough to build new brands and fulfil the Indian market's considerable potential. Growth is there to be won in the future but with the industry still governed by laws drawn up almost 60 years ago, challenges lie ahead before brewers can reap the rewards of their investment.