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Is Indian Beer market to emulate China’s growth story?
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Monday, 12 April, 2010, 10 : 29 AM [IST]
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Pinaki Mukherjee
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It is believed that the Indian climate is perfect for consumption of beer, yet, like many other paradoxes that make India a country full of surprises, Indians prefer distilled liquors such as whisky or rum over beer. In 2009, per capita consumption of beer in India stood at a mere 1.2 liter, compared to the global average of 31.3 liters. Even the so called emerging world economies such as Brazil (47.9 liters), China (31.3 liters), and Russia (69.9 liters) consume much more beer than India. However, if one has to go by the recent buzz created in the Indian market as a number of international brewers lined up to start Indian operations in the near future, the potential that India presents for growth of the market can hardly be ignored. Recently, Pradeep Gidwani, Managing Director, Carlsberg India commented, “Carlsberg has tasted success in China and the management feels that India is ripe for a beer explosion”. What is behind all these optimism? Is it another story on ‘If China could, why can’t India’? Or India is really ready to emulate the Chinese growth story? Let us examine.
Beer Market in India is a duopolistic tangle in a complex and overlapping duty structure
United Breweries and SAB Miller, two behemoths together, sweep close to 80% of the Indian beer market. Individual state oriented excise structure has further allowed these two companies to develop a near duopoly in the market, since differentiated alcohol policy in different states, localized distribution monopolies and state excise on imports and exports of alcoholic drinks make distribution and logistics of beer almost economically futile for most of the new entrants. This arrangement calls for heavy investment by the brewers in terms of setting up of brewing facilities in multiple locations (to overcome hassles such as the state of Tamilnadu does not allow beers brewed in any other state to be sold in the state), which certainly brings in inefficiencies in terms of operations. This can be substantiated by the fact that an average brewery in India has a capacity of 1 million hectoliters per annum, while world’s largest brewery by Groupo Modelo has a capacity of 60 million hectoliters per annum.
Inorganic growth remains the most plausible and exercised avenue for the new entrants in the Indian beer market
As the beer market in India offers very limited scope for organic growth for the new entrants, a number of global major breweries have already set up their operations in India through the inorganic route. Acquiring a partial or the whole stake at a local brewery not only enables the companies to strategize the interstate distribution metrics but also save them for the hassle of waiting for the long gestation period (roughly about two years) to start operations. The following table lists down all the major acquisitions (major and minor) in the beer market that took place in India in the recent past.
During 2007-08, Carlsberg shut down a few of its manufacturing facilities in Europe due to falling sales and in the years followed, most of the major brewers globally saw further bleeding as the demand for beer in the developed economies continued its downslide. Like any other industry segment to address the problem of stagnating domestic market the brewers also adopted a ‘Look East’ approach to secure at least some growth. In this regard India, by virtue of having one of the lowest per capita beer consumption among all major non-Islamic countries, has become an obvious target by many of these international brewers. The situation aggravated to such an extent that since the last two years a number of global brewers have either entered Indian market or have expressed definitive plans to enter India in the near future. And for most of these companies the most preferred vehicle to enter into the Indian terrain remained through mergers and acquisitions.
Youthful exuberance, rapid growth in disposable income and urbanization are the biggest selling points for the brewers to enter India
Beer is traditionally associated with young age consumption and often considered as an urban socializing phenomenon. Although as of today the demographic distribution of beer consumers in India does not testify this trend, with the advent and availability of more number of Western premium brands of beers in India, the younger generation is also considering beer as an option to ‘hang-out’ with. The staid image of earlier generations’ at-home whisky or rum drinking habits are mostly being replaced by a more jazzy ‘club drinking’ culture in India. The cult images of brands such as Carlsberg, Tuborg, Heineken, Tiger, Cobra, Budweiser, etc., are further helping the cause as more number of present days young Indians are influenced by Western cultures and customs. With India expected to remain the youngest among all the bigger economies even in 2030 across the globe, the outlook for the beer market is definitely much more than just bright.
Another factor that hugely works in favor of the beer market in India is the fact that the fairy tale of meteoric rise in personal disposable income of Indians is far from losing steam. The strong resilience demonstrated by the Indian consumers at the backdrop of global economic downturn in the past two years further establish the fact that the consumption expenditure in India is to grow from here, and perhaps, at a much higher pace than most of the other parts of the world.
On the other side of the coin, there are a number of hurdles to overcome to see Indian beer market growing by its true potential
The retail price of beer consists of almost 50% duty component, and beer is not taxed by its alcohol content, rather as a commodity. As a result, there is not much of a price differential between strong and lighter beers. What is even more surprising is that beer in India is taxed at the same level as of spirits across most of the Indian states, and in the other states the tax rate is, in fact, higher. Moreover, by virtue of having a higher storage and distribution cost, beer is often the less preferred option for the retailers to promote compared to spirits. As a result, in spite of being a lighter and less harmful alcoholic drink, beer in India is equally discouraged/encouraged to that of spirits for bearing a similar value vs. price equation. Unless the regulatory environment in this regard in India is reviewed and rationalized, this will always act as an impediment in the way of seeing a healthy growth in the beer market in India.
Globally, most of the developed (or even developing) countries realized that enforcing ban or stipulations over alcohol consumption is lesser effective than promoting a lesser harmful and sensible drinking culture. For example, Chinese government has been particularly successful in significantly curbing down the consumption of locally produced and often hazardous country spirits by gradually promoting beer as an alternative. In India, every year thousands of deaths are caused by consumption of spurious country spirits. Such things can certainly be avoided if certain measures in terms of regularizing and promoting a more sensible and lesser harmful drinking culture are taken up by the government. Overall, beer potentially fits the bill of being a lesser harmful alcoholic drink and it might be just a matter of time before the market gets a boost from the government’s side as well.
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