The Hindu Business Line : No small beer

A joint venture between UB, S&N and Ravi Jain makes frenetic moves to grab volume and market share in the Indian beer market. It is geared to deliver unassailable advantage to UB and its Chairman Vijay Mallya's competitive value in the beer world. Will it keep their mugs brimming over?

(from right) Dr Vijay Mallya, UB Group Chairman, Brian Stewart, Chairman, Scottish & Newcastle, and Ravi Jain, Managing Director, Millenium AlcoBev Ltd.

OVER the last 20 years, United Breweries and its Chairman Vijay Mallya have crafted many inventive deals. Some worked well while some left them with bruised egos.

The latest deal is a three-way joint venture between Millennium AlcoBev Ltd (MABL), a UB group company, UK brewer Scottish & Newcastle (S&N) and Mallya's strategic ally, Ravi Jain. Will it be another watershed move? It is unusual, almost preposterous, to suggest that a less-than-three-year-old company - MABL was floated in December 1999 - may rewrite equations in the complicated Indian beer market.

But then Mallya, S&N and Jain do have a chemistry in their unpredictable big bang approach. Today, Mallya's UB accounts for nearly 40 per cent of total domestic beer sales and controls close to 50 per cent of the brewing capacity. The $6 billion S&N has startled the global beer industry with some audacious deals to emerge as a key player in continental Europe. Ravi Jain, a former managing director of Shaw Wallace & Co credited with building that company's beer assets, has influenced the industry more than anyone else in recent times.

This perhaps explains the significant ground covered by the venture in the local beer market. Following the deal, which awaits a nod from the Foreign Investment Promotion Board (FIPB), UB will dilute its holding in the restructured MABL to take S&N as an equal equity partner with a 40 per cent stake each. Jain will keep the remaining 20 per cent stake and has the option to exit anytime in the next 10 years by splitting his stake equally between the two major partners. Cumulative investments into the company, including the equity infusion, are estimated at around Rs 500 crore. S&N is investing Rs 190 crore (it will be investing Rs 250 crore separately in UB which is optionally convertible into equity at a later date), while MABL has raised Rs 250 crore from Rabo Bank. "There is nothing in thin air. We are ready with the resources and a plan," says Ravi Jain, managing director, MABL.

Almost half the money has been spent on acquiring five strategically located breweries, and the company is still on the prowl. The serial acquisitions, though briefly interrupted when South African Breweries (SAB) picked up two, have been touted as the biggest investment in a largely under-invested domestic brewing sector. The acquired breweries provide MABL with annual capacity of 15 million cases besides contract agreements to lift five million cases more from seven other breweries. It enables the company to service 86 per cent of the national beer market locally, a huge competitive advantage given the inter-state levies on sensitive alcoholic beverage products.

Jain says MABL will sell "at least 10 million cases this year". In doing so, it may topple traditional powerhouse Mohan Meakins Ltd and emerge as the third largest brewer in the country after UB and Shaw Wallace. The company's brand portfolio includes Zingaro, Sandpiper, Marco Polo, Turbo and Guru, in addition to leased labels from UB such as Bullet, Charger and Kalyani Black Label Strong. "Zingaro and Sandpiper will be our national brands. Others will occupy regional positions," adds Jain. MABL is studying the S&N portfolio to launch the best-suited brand here and indications are that Kronenbourg is the front runner. But then S&N brands are not likely volume grabbers.

Industry observers admit that MABL may churn out the projected volumes at the end of the current financial year. "It has acquired crucial capacities in the three biggest markets of Andhra Pradesh, Maharashtra and Tamil Nadu which together account for nearly 50 per cent of the national sales," they say. The buyout of Inertia Industries Ltd and the takeover of GMR and Empee units have provided the company with brewing capacities in these three States, besides Kerala and Haryana. "The acquisitions have propelled the company into the top three apart from giving it a `challenger profile' in the industry," observers say. And MABL is losing no time in sprucing up quality levels in these breweries before going full blast. "After improving quality, these units will be operating full capacities in the coming months," Jain adds.

The combined sales of MABL and UB will extend the group's volumes to 40 million cases (as against 32 million last year) in a market estimated to touch 82 to 85 million cases this year.

"We will act as a growth engine for UB and add crucial capacities as well as sales in a consolidating beer market. We have also taken out their under-used brand assets enabling them to focus more on their leadership," Jain says.

It seems MABL's moves are geared to deliver unassailable advantage to Mallya's competitive value in today's fast paced beer world. And how?

MABL hopes to keep the second largest brewer Shaw Wallace embroiled in a battle rather than allow it to move closer to UB's top slot. The company says its brewery acquisitions delivered a blow to SAB's plans in India and forced the world's most aggressive brewer to slow down in the local market. It claims to have pipped SAB at the final post in most deals even as the multinational feels that the asking prices were too high to make commercial sense. Take the oft-heard refrain from SAB: "What happens to these costly acquisitions if beer industry gets deregulated in the future and brewery licences come more easily?"

However, a section of analysts deflate SAB's argument. "Like in other emerging markets, brewers in India are gearing up for the consolidation wave sweeping the global beer industry. Their immediate concern is short- or medium-term valuation. A long-term proposition doesn't exist for many," they say. It makes sense as none of the developing countries' brewers, may be with the exception of San Miguel in Philippines, seem ready to effect reverse mergers and make their presence felt in the world market, analysts add.

Further, MABL's emergence would make life difficult for any foreign brewer who plans an Indian foray in the near future. Belgian Interbrew along with Russia's Sun Breweries have been evaluating opportunities here. Besides, smaller brewers like UK's Cobra Beer are also keen on a local presence. Jain says there are more acquisition targets in his radar and it may enhance the company's brewing capacity by another 10 million cases. It would steer MABL to a position from where it can visualise an annual sales of 30 million cases within five years, he adds.

But rivals aren't deterred. Shaw Wallace beer brands have continued their belligerent growth even in markets where MABL added fresh capacities. "We are targeting at least 26 million cases (as against 21 million last year) in 2001-02 and we have a captive brewing capacity of 30 million cases," Shaw Wallace officials say. SAB has reportedly set a target of 7.5 million cases in the current year and its acquired domestic brand, Knock Out, has shown rejuvenated growth in most major markets. Meanwhile, SAB has been exploring a strategic deal with Shaw Wallace, which would keep both companies on Mallya's trail, and given further aggression, within striking distance.

Industry sources say Jain's frenetic volume moves may sober down as S&N settles down in the Indian market. "Global brewers talk about operational efficiencies and profitability. There is no reason to believe that S&N is different," they add. Says Jain: "What you will see in MABL is the synergy between our entrepreneurship and S&N's professionalism. But professionalism doesn't mean lack of aggression. We will go after volumes and market share. I hope to take the entire board along. This company is not going to be a fiefdom for me or for Mallya." It remains to be seen how the company manages contradictions pertaining to competition with UB, and whether these could pull its board in different directions.

For the moment, MABL's mug is full of fizz. The challenge lies in keeping it from going flat.

Send this article to Friends by E-Mail
Comment on this article to BLFeedback@thehindu.co.in

Stories in this Section
No small beer

Action's all at home

States spruce up

Hurrah for competition

Attending seminars a must

`A smaller agency can deliver more bang for the buck'

Brands must fulfil consumer needs

Ps & Qs of global brands

Cartoon