MARKET: Survival of the Fittest

Tariff reforms in India have created real opportunities for large domestic players and multinationals. Will small Indian firms now be squeezed out, asks Euromonitor’s Catherine Mars

By 2050, India is expected to overtake China as the world’s most populous country. Given its sheer size, this market shows extraordinary potential for drinks companies  – particularly as per capita consumption of alcohol is among the lowest globally even when one takes the portion of the population that is Muslim out of the equation. In fact, Euromonitor International predicts that over the next five years, India will be among the fastest growing markets for alcoholic drinks globally (11% CAGR by total volume), with actual growth of over one billion litres boosted by the rapid expansion of the middle class and changing attitudes towards alcohol. Shifting government policy regarding alcohol and the reduction of taxes and duties presents interesting opportunities for large domestic players and multinationals alike.
The regulatory framework for alcoholic drinks in India is complicated and inconsistent. Even so, the increasing reliance of state governments on the tax accrued from alcoholic drinks, combined with significant international pressure on the central government to reduce tariffs on alcoholic drinks following the entry of India in the WTO, has resulted in a shift in government policy. As a result, the central government introduced changes to the customs duty in July 2007 abolishing the additional customs duty on beer, wine and spirits.
Tariff reforms aside, the Indian market is unique in that manufacturers face real challenges creating and building brand awareness. Firstly, the advertising of alcoholic drinks is banned in India. As a result, sponsorship and surrogate advertising methods are widely employed. For example, United Breweries and SABMiller promote their beer brands by organising parties and events, and winemakers such as Champagne Indage hold wine tasting events in order to reach their target markets. Surrogate advertising is also popular. For example, United Breweries advertises the Kingfisher brand through its mineral water of the same name.

Secondly, the retailing of alcoholic drinks is strictly regulated with over 99% of alcoholic drinks in India being sold through specialists. Because retailing decisions are made by state governments, the retail landscape differs from state to state. Maharashtra has been at the forefront of liberalisation, permitting beer and wine to be sold in supermarkets, and several states have followed this lead. However, the most interesting development in retailing is Diageo’s tie-up with supermarket giant Reliance Retail earlier this year for the distribution of its wine portfolio. Such partnerships are beneficial for alcoholic drinks players aiming to increase their exposure and Euromonitor International expects similar strategies to become more commonplace as India continues on a de-regulatory path.
The liberalisation of alcohol taxes and retail is helping to move alcohol into the mainstream in India. Increased affordability and accessibility is encouraging consumers to try out new alcoholic drinks, such as wine and RTDs/high-strength premixes. Favourable demographics in the form of a strong economy, improving lifestyles and higher disposable incomes are also boosting expenditure on alcoholic drinks, particularly in urban areas where consumers are increasingly delaying marriage and children, focusing instead on their careers and social lives.

International labels line up
International players are becoming increasingly active in India, given the improving operating environment and vast potential for growth. For international players, the race is on to establish local manufacturing facilities and distribution networks in order to gain first-mover advantage over other entrants. Although the Indian alcoholic drinks market is currently dominated by domestic brands, with imported brands being out of the reach of the masses due to high prices and restricted availability, imported brands are viewed as aspirational products and thus have huge growth potential. Clear opportunities exist for international players who are partnering with local companies to get a head start in this dynamic market.
Spirits are the alcoholic drink of choice in India, accounting for 53% of volume sales last year. Although the category is dominated by local player UB Group (56% share in 2006), competition is expected to intensify over the next five years, with major multinationals such as Diageo, Beam Global and Seagrams (owned by Pernod Ricard) setting their sights on a larger market share by launching new brands and pricing them alongside domestically produced brands in order to achieve higher sales. This year, Diageo launched Captain Morgan rum and Masterstroke whisky in India and Brown-Forman is expected to follow this lead, launching Tequila brands in India next year. Multinationals are expected to concentrate on brand building efforts by doing extensive promotions and surrogate advertising.
With sales of wine and RTDs remaining miniscule in India, beer accounted for 46% of volume sales in India in 2006. Despite the existing duopoly of SABMiller and UB Group (the companies had a combined market share of 81% in 2006), which will present challenges for new entrants, it is clearly worth the effort as market entry activity attests. Anheuser-Busch created a joint venture, Crown Beer India, in February 2006, which has since launched locally produced Budweiser on the Indian market. In early 2007, Carlsberg, through its joint venture South Asia Breweries, acquired the Himneel Brewery in Himachal Pradesh, where it has started to brew Polish strong beer brand Okocim Palone. South Asia Breweries also acquired Parag Brewery in Kolkata this year and is building a brewery in Rajasthan.

InBev, the world’s largest brewer, made its first move into India in May 2007, with a long-term joint venture agreement with RKJ Group, in which InBev has an initial stake of 49%. This is viewed as an initial step in a longer term plan to develop a presence in this high growth potential market. The company plans to introduce global or international brands into India in late 2007/early 2008, starting with Lowenbrau.
SABMiller has also been taking steps to shore up its position in the Indian market. The company bought the Shaw Wallace brewery in 2005, and stepped up interest in this market in 2006 when it also acquired the Foster’s brand and operations in India. The company also attempted to acquire Indian brewer Mohan Meakin in 2006, but an agreement subsequently collapsed when the Mohan family withdrew its company from sale. This addition of Mohan Meakin would have put SABMiller into a strong challenging position to local leader United Breweries, which controls over 40% of beer sales.

Local manufacturers
As international players set their sights on the Indian market for future growth, Indian manufacturers are becoming increasingly aggressive both in terms of expanding their product offerings in the domestic market as well as entering into joint ventures and tapping international markets. For instance, United Spirits, the spirits arm of market major UB Group, completed the acquisition of major Scotch whisky player Whyte & Mackay in 2007 and wine manufacturer Bouvet-Ladubay in August 2006 to ensure it carries international products with provenance in its portfolio and to hone best practice techniques in production. This is a clear marker of a local company who is gearing up to tackle international competition head-on. At the same time, the UB Group is further cementing its position in the domestic market with new product launches, product re-launches, packaging changes and promotional activity surrounding its key brands, Kingfisher and McDowell’s No. 1.  

Champagne Indage, the solid leader in wine in India with a total volume share of 44% in 2006, is also taking steps to defend its position. The acquisition of Australian wine company Tandou Wines will enable the company to compete more effectively with imported brands. The company’s plans for expansion include setting up more wineries in India, revamping its distribution network and opening 2,500 more exclusive outlets under the brand IVY wine bars. Champagne Indage serves as a good example for other Indian players: leveraging strong marketing and distribution competencies when adding Western brands could prove to be an effective means of protection from multinational competitors which are rolling out affordably priced made-in-India products.

Further consolidation
Intensifying competition is expected to result in further consolidation. SABMiller is actively looking for additional acquisitions in the Indian market. While Mohan Meakin is not on the table currently, speculation is rife that it will be snapped up over the next few years as its market share is in decline. If SABMiller were to acquire Mohan Meakin’s beer portfolio, this would place SABMiller neck-to-neck with United Breweries. Millennium Alcobev is another potential acquisition target, with only its high debt acting as a deterrent for United Breweries going ahead with the deal. A restructuring exercise of Millennium Alcobev is expected to be carried out, which will allow it to be acquired by United Breweries.

Meanwhile, a number of smaller regional companies, such as Lilasons Breweries, Shiva Distilleries and ND Wines, serve as potential acquisition targets due to their strong regional brands. As national and international players look towards expansion, smaller regional players will find it difficult to compete effectively against bigger players. These speculated acquisitions would lead to greater consolidation in the Indian alcoholic drinks market. With a few strong players, the bargaining power of manufacturers with the government in matters relating to regulation of the industry is expected to strengthen. This will aid the liberalisation of the retailing of alcoholic drinks and help in the reduction of taxes, resulting in even greater opportunities for manufacturers. 

© db January 2008