UB Group

Strategy Project

Vignesh S (43) Sabarinathan S (45) Saranyan R (46) Venkatnarayanan P R (58)

14-04-12

INDIAN BEER INDUSTRY

The Indian Beer industry has a market size of Rs. 22, 700 crores as of 2011. The market is estimated to grow at a CAGR of 17-19% to reach Rs.44, 800 crores by 2016. The market has been growing at a rate of 7-13% annually over the past decade. The rate of growth has remained steady in recent years, with volumes passing 230 million cases during the 2011 from a mare 70 million cases in 2002. The Indian beer market is dominated by strong beers (>5% alcohol by volume), which account for 70% of the total beer industry. The premium beer market is a mere 5% of the total but this segment is rapidly expanding, touching a growth rate of between 35-40%%.

Growth Drivers
Indias favorable demographics with more than half of the population under the age of 35 proves to be favorable for the increasing consumption of beer in the next two decades. Indians sip only two litres of beer a year, just one-twentieth the amount consumed by Chinese and less than one-fortieth by Americans. SABMiller Plc, Anheuser- Busch InBev and Carlsberg see this low per-capita consumption as an opportunity. There is a societal and cultural shift in the way Indians view drinking alcohol based drinks. Alcohol is no longer considered as a taboo in the metros and this trend is likely to spread into the other towns and cities as well.

Market Share
United Breweries, which has more than 10 brands, leads the industry with a 57% share followed by SAB Miller with a 24%. United Breweries increased its beer market share to 57 per cent in 2011 from 43 per cent in 2006, according to London-based Euro monitor. In the same period, SABMillers share dropped to 24 per cent from 37 per cent.

Market share in Indian Beer industry

1% 4%

14%

United Breweries

SAB Miller
Carlsberg

24%

57%
ABI

Others

UB Group - 43,45,46,58 - PGDM A

Page 2

Foreign players
The low growth exhibited by global markets has driven multinational alcohol beverage companies to shift focus from developed markets to emerging economies. With several foreign players entering the market via greenfield projects and strategic alliances, the Indian brewery business has witnessed consolidation by way of aggressive acquisitions. We believe that the entry of foreign players will intensify competition over the medium term.

Demand- Supply
Currently, an over-supply scenario exists in the beer industry due to the regional nature of the industry. Players are required to have manufacturing facilities across states as inter-state transfers attract high taxes and duties. Supply is expected to increase in the medium term, with the leading players planning greenfield and brownfield projects to augment capacities.

EXTERNAL ANALYSIS Porters Five forces analysis

Threat of new entrants Low The entry barriers are high in the Indian beer industry, making it difficult for newer players to enter the market. High brand loyalty Market leader United Breweries has built strong brands through various associations and activation platforms over the past decade and consumers strong brand preferences act as the most important entry barrier for a new player in the market

UB Group - 43,45,46,58 - PGDM A

Page 3

Government regulations - The Indian beer industry is plagued with myriad taxes & levies that vary from state to state. In fact no two states or UTs have a same or even a similar policy. The beer industry is highly regulated. Capital requirements Setting up breweries is highly capital intensive and also requires to go through a complicated licensing and regulatory structure. Additionally Indian regulations require that brewers set up plants in each state separately and this leads to high capital investments upfront. Economies of scale Scale economies which are essential for quicker break-even are difficult to achieve as it takes to time for new players to build their brands with restrictions on advertising in place. Threat of Substitutes Medium Drinkers of beer typically graduate to drinking hard liquor and hence there lies a major substitute product in hard liquor variants like whiskey and vodka. However in the Indian context, even as a good amount of consumers shift to other alcoholic spirits, they are replaced by a new set of young people who enter legal drinking age every year and start consuming beer as their first drink. Bargaining power of suppliers Low Large no. of suppliers The beer market is served by a large number of suppliers within the country who produce raw materials like barley, malt, etc. Additionally, the brewers also import raw materials from foreign markets. Consolidated industry With two players garnering more than 80% share of the market, the buyers have a much higher bargaining power due to the high volumes Undifferentiated inputs Barley and malt are the main raw materials being procured from the suppliers and they are commodities suppliers cannot differentiate their offering from others in the market. Bargaining power of buyers Medium No direct sale to retailers Beer producers in the country do not have direct access to retail in many parts of the country. Government controls 65% of liquor retail in the country and also takes control in distribution in major beer consumption markets like Tamilnadu, Karnataka and Andhra Pradesh. Pricing restrictions - Price restrictions in many large markets remain a biggest challenge for the industry. The Government decides the End Consumer Price (ECP), leaving the manufactures with no say in determining the price of the beer. Non-price sensitive consumers Consumers typically are more of price takers and do not choose a product based on price as much as they do based on the brand. Rivalry among competing sellers High There is high rivalry based on price as there is not much of differentiation possible in the product except for the brand. UB Group - 43,45,46,58 - PGDM A Page 4

Strategic groups
The industry can be broadly divided into two strategic groups: Players in the Premium and sub-premium segments: Account for 85-90% of the industry. Players include UB, SAB Miller, Mohan Meakins and all other regional players.

These companies aim at having a full market presence and have brands that cater to most segments. The companies in this group are currently looking to have a presence in the super premium segment with their product portfolio due to the higher margins it offers. Super premium players The super premium beer category falls between the imported beer and the premium beer segments and accounts for 10-15% of the industry but is a fast growing segment. Leaders are Anheuser Inbev (with its Budweiser brand) and Carlsberg. UB has made a foray into this segment with its Ultra and Heineken (which it distributes) brands while SAB has its Miller Hi-life brand to cover this segment. Players in this group initially focus on activating the brand at premium pubs, bars, lounges, restaurants and retail outlets to drive awareness and trial, and will leverage their brands global proposition.

Industry Life-cycle analysis

The Indian beer industry is in the beginning of a shakeout phase though it is expected to achieve high growth in the coming decades.

UB Group - 43,45,46,58 - PGDM A

Page 5

The industry has seen consolidation in the past 4-5 years even as new foreign players like Carlsberg and Inbev continued to enter the market. The consolidation was largely led by the market leader United Breweries Ltd in order to acquire more capacity and increase its market share across segments. Drivers for consolidation Some of the key factors driving consolidation in the Indian beer market are: Need for a pan India presence due to regulatory structures Existing marketing and distribution channels Technical expertise and know-how manufacturing capabilities Entry of foreign players Brand loyalty of target brands

Opportunities
Huge untapped potential - As India has low per capita income the consumption of spirits is low and a huge market is still untapped. The hopes are higher as the income levels are increasing. Partnerships with foreign players for distribution - This will improve the efficiency in reach and time in distribution. Societal and demographical changes - The preferences of people are changing. Consuming beer is now so very common in all social meetings. Brand extensions

Challenges faced by the Beer Industry

Highly Taxed - Beer is taxed higher by most states compared to Spirits. Most Regulated Industry - The beer industry is highly regulated. 26 different alcohol specific taxes constitute about 50% of the consumer price which is amongst the highest in the world. Price Restrictions - The Government decides the End Consumer Price (ECP), leaving the manufactures with no say in determining the price of the beer. Inadequate Market Infrastructure - For every 21000 persons there is one outlet hampering the availability of beer in India whereas in China, for instance the figure is 300. High Input costs lead to higher costs involved in manufacturing.

UB Group - 43,45,46,58 - PGDM A

Page 6

INTERNAL ANALYSIS

Resource based view test

From RBV test, we can clearly see that the core strength of UB group lies in their Brand development, associations and extensions. It is not so easily imitable, it has high durability, and it passed the other three tests also (Appropriable, Non-substitutability, Competitive superiority).

UB Group - 43,45,46,58 - PGDM A

Page 7

The distribution channels can be imitated and it doesnt provide competitive superiority. It is the same with the case for the other resource (capacity) also.

Generic Strategy

The strategy followed by the UB group is low cost strategy. They produce in high volumes and achieve high economies of scale to maintain low costs and they have acquainted or merged many small players which made them able to give products according to the taste of local people. But having low cost strategy has both advantages and disadvantages. Advantage Presence across segments - They can be all over the place due to high economies of scale and low price.

Disadvantages Low customer loyalty - Usually in low cost strategy customers tend to switch brands easily hence low customer loyalty. Imitation ability of competitors - This is easily imitable by the competitors.

UB Group - 43,45,46,58 - PGDM A

Page 8

Trade-off Market presence vs. positioning - A company following this strategy have to make a trade-off between having high market presence and positioning. If a company wants to have a distinctive positioning then low cost strategy wont work well as it will increase the costs involved and on the other hand if they follow a low cost strategy then they cant position themselves or have distinctive features.

How the Resources/Capabilities support its generic strategy??

The two main resources are Capacity and Brand. Capacity provides the ability to achieve high economies of scale and it can be highly achieved through the state-of the art technologies and automated processes. Brand provides the opportunity with garnering higher volumes of sales through efficient marketing and promotion strategies. These both resources together provide the ability to bargain with the suppliers due to them achieving high economies of scale and due to maintaining a comparative advantage over competitors.

VALUE CHAIN ANALYSIS

Value chain analysis is a useful tool for working out how you can create the greatest possible value for your customers. Kingfisher, a multi product company, focuses itself on manufacturing beer. In terms of value chain, companys activities are divided in two groups: primary activities and support activities.

UB Group - 43,45,46,58 - PGDM A

Page 9

Primary activities

The primary activities for a firm constitute bringing different types of materials into the company. These can be grouped under three categories : raw materials (eg : grapes, wheat used in manufacturing process), components purchase from the market requiring further machining at the companys plant and component and other materials (such as packeting and some minor accessories) which can be assembled without any further processing. The company saves cost in its activities through several different ways. Inbound Logistics Certain Breweries have been set up for certain functions. Beer is brewed in either the companys owned or non-owned Breweries. This reduces overall cost and reduces threat of the suppliers. The company also has its own franchise for the production of the beer as exemplified by the Taloja plant situated in Mumbai (near Navi Mumbai). The owned plant has reduced the switching cost of the suppliers of Kingfisher. The cost of beer is sensitive to the prices of key raw materials like malt, hops and barley as they can reduce the profit margin and affect operations. Barley and glass bottles constitute approximately 12% and 40% of the total operating expense of UBL. Any price increase in these two commodities has a direct bearing in reducing the overall operating margin of the firm. Due to price increase of barley by over 33% and increase in bottling cost, during FY2008 the net profit margin fell by 26%. Another significant factor for price volatility is the shifting of area under cultivation from barley to sugarcane in states such as Uttar Pradesh, Rajasthan and Madhya Pradesh which, accounts for approximately 80.34% of total barley production. To hedge the risk of rising raw material prices, UBL has always tried to enter long term arrangements for sourcing of the vital inputs. In addition it has extended its own contract farming initiatives in the state of Punjab. The 51% Equity stake in Maltex Malsters Limited, a manufacturer of malt, is also an initiative towards vertical integration and excellence in inbound logistics. Operations UBL emphasizes a lot of focus on quality and hygiene. Central Scientific Laboratory(CSL) has been set up in Bangalore and is responsible for setting the standards for all its breweries. Quality Management Systems laid out along the lines of ISO 9000 control the quality at every stage of production, from raw materials to the end product. The beer is tested as per the standards laid down by the European Brewery Convention on 40 different parameters. By these standards, United Breweries' beers don't just equal, but even surpass, several Dutch and American beers.

UB Group - 43,45,46,58 - PGDM A

Page 10

For its production process UBL has set up 28 distilleries across the country to cater to each state of the country. Further Greenfield expansions are planned with new brewery plant set up in Nanjangud(Karnataka) and Patna(Bihar). The entire manufacturing unit is highly automated. However, it doesnt produce bottles but obtains second hand bottles from local scrap dealers and they are thoroughly cleaned before the actual bottling process. Cans on the other hand were earlier imported from Thailand, UAE and Singapore. Now they procure them locally from Raxem industries. This has reduced the overall cost of production The company saves cost through higher productivity. Outbound Logistics UBL doesnt rely on internal distribution rather uses third party to distribute its product. The channel is however very strong. Combined distribution leverage of UBL and USL gives best route to market. UBL through deal with Heinekken, utilizes Heinekkens distribution and manufacturing facilities in the international markets. Alcohol is a state subject in India and distribution and logistics is tightly controlled by the state government. In states like Delhi, Andhra Pradesh, Karnataka, Tamil Nadu and Kerala , government controls the distribution while in Rajasthan, Bihar and Himachal Pradesh auction based distribution is used. UBL however enjoys a well established distribution network. It has established 28 distilleries across the country to meet the requirements at the regional level giving it an unparalleled distribution reach within India. Marketing and Services It has a well trained sales force for its sales activities. Since the company cannot advertising directly due to legislations engages in surrogate advertising and spends a lot in other marketing promotions to create a brand recall. The firm desperately tries to create brand loyalty through various avenues. The services part of value chain is insignificant as beer is not a complicated product.

SUPPORT ACTIVITIES
Procurement UBL procures high quality raw materials to ensure high quality end product. Except for a few critical components it procures other components from a number of component manufacturing companies all those manufacturer are in big scale sector and enjoy cost advantage in the form of lover overhead. Therefore, the supplies from those manufacturers are comparatively at competitive price. With regard to sourcing of raw materials, there are major components sourced. Barley is procured from Patiala, rice flakes from Delhi and Karnataka while hops is imported from Germany. The hops desired is of highest quality as it is the most important ingredient lending the characteristic bitterness and aroma.

UB Group - 43,45,46,58 - PGDM A

Page 11

Technology The breweries are highly automated through standard Allen Bradley systems. This has reduced the cost and increased productivity. Infrastructure UBL coming under the bigger umbrella brand of UB group obviously enjoys state of art infrastructure. Finance UB limted is unsurfaced by the financial woes of other SBUs of the UB group. It is in a cash rich position because of lower debts and hence lower interest payment burden.

Value creation along the value chain United breweries limited have a highly automated state of art production system (Allen Bradley system) this has helped the organization to cut cost heavily and achieve increased productivity. The implementation of this system has help UBL to achieve better margins than its competitors and sustain its position as market leader. Also UBL leverages on the existing distributing channel on United spirits limited and achieves a much better distribution network than its competitors.

COST DRIVERS
Capacity: Beer industry is a highly capital driven industry hence the cost associated to build or expand create capacity is one of the primary cost drivers. This further increase the expenditure on value chain i.e. distribution expenses such a transport, procurement, processing and packaging linked to it. Marketing: Not much differentiation is possible as beer is a generic product, but to increase the customer loyalty United breweries have established strong brands in multiple segments. Even though advertising is highly restrictive their marquee brand kingfisher has achieved the position of being the prominent brand through various associations such a fashion, sports etc this has constantly increased the spend related to marketing and promotions. Taxes: The industry is highly taxed. It has multiple taxes and these vary from state to state and are dependent on the capacity and sales.

UB Group - 43,45,46,58 - PGDM A

Page 12

Tetra threat framework analysis

Threat of Imitation: HIGH Beer as a product is very generic and the switching costs associated with it almost negligible, UBL tackles this threat by Brand UBL has created a strong brand (Kingfisher) through which it has achieved a huge loyal following. Economies of Scale UBL has installed 28 breweries by this effectively reducing the cost and increasing the margin for distributors.

Threat of substitution: MODERATE Even though beer as a category doesnt have any real substitutes most of the consumers switch to hot drinks such as whiskey, brandy etc to fight these UBL has a wide product range; it offers beers with a broad range of alcohol content (Strong to mild) and taste. Threat of hold-up: LOW Beer industry in India is highly consolidated the top two players (UBL and SAB miller) have almost 80% of the market share thus commanding high bargaining power over the suppliers. Also the suppliers are highly fragmented making the threat of hold-up across the value chain is extremely low. Threat of slack: LOW The organization looks very effective in its operations. In a report submitted to SEBI the organization has expressed a mild concern on the attrition of talent pool but this has been effectively shunned by offering competitive pay packages and HR policies.

UB Group - 43,45,46,58 - PGDM A

Page 13

RECOMMENDATIONS
Sustain market leadership Achieve penetration across geographies The major consumers demographic of beer are majorly south and western India; the organization should achieve more penetration in northern parts of the country to increase the market size. Focus on super premium segments With the entry of foreign brewers and many craft breweries the super premium segment has started to grow. UBL is already catering to this segment but more focus is required so that not to lose market share. Differentiation will be critical Enhance brand extensions and alliances Moving forward the Industry is undergoing major changes as the profile of the consumers are drastically different. To sustain its current position UBL must work on differentiation and brand extensions.

UB Group - 43,45,46,58 - PGDM A

Page 14