Ex Managing Director
In a country like India, the biggest advantage of mergers and acquisitions that have taken place, is the opportunity they created for opening the market up.
Speaking for the InBev and SABMiller M&A, the market opened up to the branch of InBev, and removed one very large barrier to success, which is manufacturing footprint. The advantage that they traditionally had was because of the head-start. InBev had licences in every state and therefore manufacturing places in every state. Considering the tariff structure in the country, that’s a huge advantage. So from the country point of view, the moment you have a nationwide footprint, you have a huge cost advantage. Another big advantage was that of an established distribution and logistics network which immediately became available.
In the case of InBev, they had a brewery in Maharashtra and Andhra. SABMiller on the other hand, closely matched the footprint of UB. As a result, the entity that emerges out of the SABMiller – InBev merger now has a big advantage. The costs are much lower and they can beat the competition by being in a position to distribute the product much faster and fresher to the market place. Therefore, they can really give a huge competition to UB.
The other advantages are pre-acquired licences and land, which are a huge challenge to setting up a new unit. Both of these are not easy to come by, as there are huge restrictions in too many states. As a result of this, it’s very difficult and challenging to set up a new brewery.
Hence, a merged entity will have an advantage over companies like Carlsberg, has been pumping capital to set up breweries so that they have the advantage to reduce the capital outlay on their manufacturing. They can concentrate on brand growth and marketing activities.
In this industry in a country like ours, mergers will give you a great advantage.
Then there are instances of joint ventures that slowly become an acquisition. In the best example, Mahau came with a joint venture and slowly took over Arian Breweries. The strategy here depends on the JV partner because the manufacturing footprint is very important. You are actually transporting water. So, in industries where margins are really high, you have to see how the cost is met. If you have an Indian partner, an entity who has that advantage, it is often the best way to take over that business. It’s rather like coming into the market with an established brewery.
If this arrangement is not possible, a large part of the advantage is lost for new entrants. Licences, land, equipment everything is a challenge and eats into the investment money needs to be pumped ceaselessly in the brewery. There is clearly a much bigger advantage for brands entering with a merger with another company which has an existing facility.
Carlsberg’s big advantage is that they have spent a number of years in India; they have manufacturing breweries in Himachal, Maharashtra, Rajasthan, Andhra, Bihar and near Kolkata in West Bengal – a much bigger footprint, in comparison to InBev. But now, Budweiser also has that advantage.
The other advantage that Carlsberg had was an existing introduction in the Indian market. They had a brand called Tuborg Strong. Elephant is doing fairly well, but it is a subset of Tuborg, which is not as dark as Kingfisher Strong or Tuborg Strong.
They can have competition from Budweiser, but only if Budweiser is able to develop a strong brand rapidly. Now that they have production locally, Budweiser will have margins that will afford them the luxury of having a manufacturing footprint. Hence, if they acquire marketing expertise and distribution, they can fight this competition.
But what may be a challenge is that in India, 77% of the market is strong beer. Budweiser is a small part of the segment dominated by Kingfisher even if they are very successful, they still need a much more viable business to be a strong brand. Of course, it’s too early to say if any of these strategies will affect UB. In any case, UB has a strong strategy team, they will be aware of these things and they would also be working on strengthening their strong beer market.
Despite all these developments, the beer market is not growing and it hasn’t for the last 3 years. That is largely because of regulations and the prohibitive environment that has been here.
But three years ago, the market was much more buoyant and was seeing growth of 10% – 11%. In business, investments are made based on potential. That way India is a very lucrative market since almost 65% of Indians are under the age of 35. It is difficult for brands to get such a big country with such a young demographic. Nobody enters a market which is near saturation, and India, in the long run is probably one of the most exciting beverage businesses to be in. It’s a question of time that the picture becomes rosier.
It is difficult for brands to get such a big country with such a young demographic. Nobody enters a market which is near saturation, and India, in the long run is probably one of the most exciting beverage businesses to be in.
Regarding the situation today, nothing in this beer market is static. There has been strong representation from the industry against the regulations and taxations regime. In fact, even though beer and wine did move into the Food Processing Industry, the flexibility of controls to move away from hard liquor segment has not really happened. There are many reasons for this.
It’s important to realize that the government is dependent on excise revenue. Prohibition has not worked anywhere. But in many areas, there is a very powerful women’s vote bank in this segment that was demanding prohibition. We need to remember that any decisions which are political in nature will not be taken or changed overnight. Behind their brand, they will need to push for some time.
For delinking the beer taxes from those on spirits is becoming a central subject, the industry has been lobbying for the last twenty years. Actually the reason is that no state government will allow the central government to have any say over the alcohol industry because they are highly dependent on the duties that they get. This is the reason why GST has purposely missed out the alcohol industry.
Therefore, becoming a part of the system where the central government has a role in taxation, remains a distant dream. We have been talking about this, beer duties separating from liquor duties, but it did not happen.
While the microbrewery segment will also grow, this is by definition, product driven, not brand driven. Unless they bring some special expertise, there is no brand there is no Carlsberg or Budweiser in that segment. The fact is, that is an important enough sector as of now, in the scene.
However, commercial brewing is still a lucrative investment in India. Over the next four-five years, if I had to invest in that business, I would!