Breweries and distilleries -- Fiery brews rule the roost

Anup Menon

THE breweries and distilleries industry has managed to froth, bottled though it was by tight regulations.

However, only a few major players have been the toast of the market. While there has been no change in the industry's fundamentals, company-specific issues and the fact that the industry can be classified in the FMCG category may have renewed interest in this sector in 1999-2000. However, these stocks are no longer on a high.

Breweries: Bottled potential

The breweries industry is more concentrated compared to the distilleries. For instance, UB has a stranglehold on the industry, accounting for close to 45 per cent of the total sales. For the year ended 2000, the total beer market was around 65 million cases. This is expected to grow sizeably in the near future as the country's beer consumption is much lower compared to that in other parts of the world.

Within the industry, beer can be classified into strong and mild segments. The basic difference being the alcohol content. Mild contains 4.5-7.5 per cent alcohol, while strong beer contains close to 8 per cent, and accounts for 55 per cent of the beer market.

Winds of change

There has been a gradual shift towards strong beer. This started in the 1990s and continues because in the western markets beer is treated more as a beverage because of its low alcohol content (than hard liquor). However, the consumption pattern in India is slightly different. There is more demand for beer with higher alcohol content.

Shaw Wallace latched on to this trend quite early. Its Haywards 5000 sells close to 10 million cases per annum compared to Haywards 2000, a milder beer that sells 2.5 million cases per annum. The competition hit UB's popular brand Kingfisher. To counter this, UB launched Kingfisher Strong.

The consumer preference for strong beer can be attributed to two basic factors. As mentioned earlier, in India beer is not considered a beverage. The consumer profile includes those who take drink hard liquor. However, given the similar nature of the duty structure, beer is sometimes dearer than hard liquor. Thus, regular drinkers look for value-for-money purchases in the form of hard liquor rather than beer.

The Indian distilleries industry is more fragmented than the breweries industry. Unlike the breweries industry, where UB is clearly the leader, the distilleries segment is seeing neck-and-neck competition between McDowell and Shaw Wallace. Smaller players, such as Jagatjit Industries and Mohan Meakin, also have a considerable share of the market.

For the year ended 2000, the total market for Indian-made Foreign Liquor (IMFL) was around 72 million cases. IMFL can be further classified into whisky, rum, brandy and white drinks. Of this whisky constitutes close to 65 per cent of the market, followed by rum and brandy with 16 per cent and 12 per cent respectively.

Cost-sensitive consumers

In the liquor market, consumer preferences are swayed more by costs. The high-cost structure deters many consumers. The liquor penetration in the country is around 12 per cent. Of this, around 75 per cent of the consumers have an estimated income of Rs 6,000-7,000 per month. Given this low base, price increases leads to reduced consumption.

A classic example is the consumers' preference for rum, which is comparatively cheap. The rum market is expanding at 22 per cent per annum. Regular whisky is growing at 6-7 per cent and premium whisky at around 10 per cent.

Moreover, the premium whisky segment has not been growing in the recent past, selling on an average, around 1.4 million cases. Though the overall industry has been growing at around 7 per cent per annum, this segment has been languishing. Therefore, when companies cannot push the high end brands, the logical choice would be to push volumes in the lower end.

Poised to expand

The cheap-to-medium-priced market and the lower-end segment are set to expand. The main reason for this is the flooding of products from the grey or country liquor market. Today, the country liquor market is estimated to be close to 200 million cases.

However, Tamil Nadu and Kerala have decided to ban country liquor. This is good news for IMFL manufacturers. The ratio of IMFL consumers to country liquor consumers would be around 1:5. With the ban on country liquor, some consumers may move into the IMFL segment, expanding the market.

The market these consumers would most likely turn to is the cheap-to-medium segment. However, the market has failed to pick up, primarily because with the prices rising sharply, consumers have been unable to pay for pleasure. This may dampen sales. However, with the ban on country liquor due to come into effect, consumers may have no choice but to switch to IMFL.

Key to cost efficiency

From the point of view of costs, logistics is the key factor. One of the main problems faced by manufacturers of both breweries and distilleries is their ability to reach the consumer. For instance, the regulatory framework will determine the industry's future. Though beer cannot be classified under the spirits industry, the level of government regulation, in the form of taxes, is very high. This has a profound effect on the consumption pattern.

In addition, certain States prohibit the transfer of products to other States. To circumvent these restrictions, the leading players are trying to set up manufacturing units in a number of states. To understand more on this, it is essential to understand the market's structure.

Some States, such as Maharashtra, Andhra Pradesh and Tamil Nadu, are major beer consumers. Of the total market size of 65 million cases, these three States consume close to 34 million cases -- 52 per cent of the market. Hence, companies with a stake in these markets have a major advantage.

For manufacturers, such as UB and Shaw Wallace, this will not pose a problem. UB has a significant presence across the entire country. The company was recently in acquisition mode. It bought a 65 per cent stake in Associated Breweries, and has indicated plans to acquire control over Mangalore Breweries. With Mangalore Breweries, UB will control over 26 of 56 breweries in the country. However, smaller, single-market players, such as Mangalore Breweries, could have problems. Apart from logistics, the cost of marketing and distribution could be stiff.

Marketing and distribution: Delicate scenario

With the exception of Maharashtra, Kerala and West Bengal, the liquor distribution is controlled in most States. The controls are established by way of auctions and government-controlled markets, among others. These practices lead to considerable red tape and corruption. Hence, companies have to manage their supply-chain well to break the hold of other players, that is, wholesalers and retailers in the chain. In this context, brand-building could determine a company's future success.

The strength of the retailing network is also a key factor for the company. There are some 30,000 licensed retail distributors in the country. Further, each retailer and, in the larger sense, wholesaler also takes control over specific areas that constitute a market. This being the case, the companies are at the mercy of the agents. This is so because if the retailer margins are insufficient, or the agent has a grievance against the manufacturer, it is possible that a particular brand may not be favoured. If this happens, the manufacturer loses a potential market. Hence, the distribution agents largely call the shots.

Brand-building crucial

To a large extent, the industry can be classified under the FMCG category. The consumption patterns are more or less static. Being part of the food processing industry, brand-building is crucial. This is especially true of a more competitive environment. Volumes in the industry depend on the consumer's habits. This would mean regular purchases. A regular purchase would mean that if a consumer is attracted to a certain brand, the volumes would be regular. Hence, companies have to initiate `brand-push' strategies to gain volumes. Soon brand may replace price as the decision variable.