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CASE STUDY –
INDIAN BEER INDUSTRY
Microeconomics Group Assignment

Group 3:
Shubham Arora – 3
Karthik B – 4
Manisha Garg – 19
Rama Lakshmi M - 32
Sstitute of Management S.P Jain Institute of Management and Research Research

Indian Beer Industry – Case Study Analysis
The Indian beer industry has been witnessing steady growth of 7-9% per year over the last ten years. The rate of growth has remained steady in recent years, with volumes passing 100m cases during the 2005-2006 financial year.
With the average age of the population on the decrease and income levels on the increase, the popularity of beer in the country continues to rise.

Industry Consolidation and Emergence of a new Bi-polar Market
Dynamic
The Indian beer industry has witnessed a big change during the last five years. The industry was previously dominated by competition between the
Vijay Mallya-controlled United Breweries Group and the Manu Chabbriacontrolled Shaw Wallace. The scenario changed, however, with the entry of
SABMiller in India. The international beer giant started by acquiring small breweries in the south but then completely changed the landscape with the acquisition of Shaw Wallace’s beer portfolio for a reported US$132m in 2003.
This gave SABMiller ownership of strong brands like Haywards 5000, along with its existing brands. After the acquisition, SABMiller focused on spreading its footprint across India, including opening new breweries in states where Shaw
Wallace did not have a presence.
On the other hand, rival UB bolstered its presence in the country in 1999 by creating sister company Millennium Alcobev, which produces beer brands like Zingaro and Sandpiper. Today, this is a joint-venture between the UB
Group and Scottish & Newcastle (S&N). The company started as a 61:39 joint venture between the UB Group and Ravi Jain, a friend of Mallya’s. In January
2002, this was expanded to accommodate Scottish & Newcastle (when it became a 40:40:20 joint venture between UB, S&N and Ravi Jain). In early
2006, Ravi Jain ceased to be an equity partner and Millennium Alcobev became a 50:50 joint-venture.
The SABMiller acquisition of Shaw Wallace gave the company a good position in the strong beer sector (beer with an alcohol content of 6% and over) which is the fastest-growing segment in the market. While SABMiller’s
Haywards 5000 is the biggest-selling strong beer brand (a fact hotly contested by UB Group), UB’s Kingfisher is the largest-selling beer brand overall in the market.
UB has been making inroads into the strong beer segment during the last year. Kingfisher Strong, whose sales five years ago were only equal to onefifth of Haywards 5000, is now running neck and neck with Haywards – indeed both companies claim market leadership for their brands.

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Between them, UB – along with Millennium Alcobev – and SABMiller account for nearly 90% of the Indian beer market. SABMiller total up to 37% of the market UB has the lion’s share of 47%. There are some smaller, regional players too; of them, one of the most important is Mount Shivalik Breweries, which owns brands like Thunderbolt.
Mohan Meakin is also a strong regional player in the country (In 1983, Mohan
Meakins controlled 18% of the beer business. UB controlled 14%), though family rifts have prompted the family-owned business to put itself up for sale.
Consensus between family members is proving difficult to reach, but, with companies such as SABMiller, UB and APB showing interest, the company’s fate should be decided soon [1]
[1]

http://en.wikipedia.org/wiki/Indian_beer

http://economictimes.indiatimes.com/articleshow/msid-1869013,prtpage1.cms

Bottle supply crunch hits the beer industry
SABMiller, which manages Shaw Wallace Breweries Ltd, has warned that the country could face a beer shortage in the approaching summer, the peak consumption season, as the industry was crippled by short supply of bottles.
Mr Richard Rushton, Managing Director of SABMiller India Ltd, told Business
Line in an interview that he feared industry would not be able to adequately service the demand in the summer months on the back of "an inefficient bottle pool management" in a market that is heavily dependent on recycled bottles. He said the price of recycled bottles had soared and the shortage assumed serious proportions as hoarding and profiteering tendencies surfaced in the run up to the peak season.
He said the bottle pool management in the industry remained tardy and added there was urgent need for concerted action by the brewers' along with the State Governments. “I think we should highlight the global practices in this regard and how the soft drink industry here has executed it to a large extent," Mr Rushton said. "The route which the bottle takes to the trade and ultimately to the consumer should be the same it takes back to the brewer through the value chain. But in India, it gets fragmented and dispersed to spend a lot of time in the trade and results in high incidence of breakage," he added. The supply of recycled bottles are in the hands of a few key dealers in each
State, who have hiked their holding capacity after tasting blood, in the wake of the bottle shortages leading to the last summer levels. "The normal time for

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a recycled bottle to get back into the production system used to be two months. Now, it can stretch to over six months, as the trade is in the hoarding game," sources added
Meanwhile, SABMiller's top honcho also argued that States should let the brewers pass on cost pressure to the consumer. "In the free market spirit, we should be allowed to pass part of the cost pressure prudently enough to the consumer," he said
The soaring prices of recycled bottles, which went over Rs 7 per bottle as against the normal rate of Rs 2.75 to Rs 3, crippled the beer industry in the last financial year.
"A bottle crisis" in the run-up to the summer this year saw costs soaring over Rs
7, forcing the main players to even look at the option of importing bottles. In fact, UB disclosed that the spiralling bottle costs shaved off Rs 30 crore-40 crore in its operations during the last financial year, 2003-04.
INDIAN brewers have injected about 250 million new returnable glass bottles into the beer market during the last nine months to beat down prices of recycled bottles.
Even as the injection of fresh bottles would go on, the beer industry is also looking at lasting solution to the problem of recycled bottles that include looking at alternate packaging such as aluminium cans and contemplating a mechanism of their own to bring back the recycled bottles. [2]
[2] http://www.blonnet.com/2004/02/27/stories/2004022701400600.htm http://www.blonnet.com/2004/10/28/stories/2004102801180900.htm http://www.blonnet.com/2004/11/27/stories/2004112702220400.htm

SABMiller to identify potential areas for barley cultivation
WITH a view to helping local farmers and sourcing quality raw material for its brewing from local areas, SABMiller India Ltd, a subsidiary of the UK-based
SABMiller plc, has decided to identify potential areas to promote barley cultivation. The company, a leading brewer and beer player in the country, will commission an internal panel in three months to prepare a report to assess the potential for growing barley in some States. It would also study how small and medium farmers could be reached.

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"We are a company based mostly on agricultural produce (barley and sugar). We would like to help local farmers in growing those crops," Mr Ashok
Dhingra, Operations Director (South) of SABMiller India, said.
The study would also look into the areas such as increasing quality and productivity at various levels, Mr Sundeep Kumar, Director (Corporate Affairs), said. In India, the company would also engage an independent agency to assess the resulting economic benefits to the local farmers.
At present, the company sources its barley needs to the tune of 12,000 tonnes of barley malt (made from 15,000 tonnes of barley) from farmers in Haryana and Rajasthan.
The beer industry in the country as a whole consumed some 40,000 tonnes of malt annually.
"There is a huge potential for growing barley in Andhra Pradesh," he said, pointing out that it was one of the focus States.
On investments, he said the company would invest Rs 250 crore on up gradation in the next five years. In Charminar Brewery in Andhra Pradesh, the company would invest Rs 60 crore.
The company, which recorded a turnover of Rs 1,000 crore last year, hoped to cross the Rs 1,200-crore mark this year.
He said the beer market registered a declined by seven per cent in the AprilJune period in Andhra Pradesh due to the increase of sales tax on premium brands under the new policy. Karnataka clocked a growth of 37 per cent and Tamil Nadu 42 per cent during the period. A bottle of beer cost Rs 6 more in Andhra Pradesh than Karnataka. [3]
[3]
http://www.thehindubusinessline.com/bline/2005/07/14/stories/200507140113
1200.htm

Questions
1. What were the market conditions initially and how are the current and future market conditions in Indian beer industry?
2. What are the entry barriers that in the Indian Beer Industry and why are there only two major players in the industry?
3. Why there was beer supply crunch and corresponding price raise in the
Indian beer industry?

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4. What are the steps being taken by SABMiller, India to remain productive in the long run?

Answers
1) What were the market conditions initially and how are the current and future market conditions in Indian beer industry?
Initially 1983, the market conditions in beer segment were fragmented with
United Breweries Group controlling 14% and Mohan Meakin controlled 18%.
Then UB group grew and became the market leader in beer industry and with its premium brand kingfisher
The scenario changed with the entry of SABMiller in to Indian market with the acquisition of local players and strong international brand under its belt like foster. We would like to study the scenario of UB group being the market leader and
SABMiller entering into the market capturing the market share (current market share of UB – 47% and SABMiller – 37%) with the duopoly Cournot’s model.
Even as there are some small players in a year or two they will get consolidated with the bigger player thus creating a perfect duopoly market
As per the Duopoly Cournot’s model the graph drawn below depicts the market conditions. Quantity1 and Qunatity2 represent production quantity of
UB group and SABMiller. R1R1 and R2R2 represent the UB groups and
SABMiller’s reaction curve. With UB group as the market leader the quantity output is OR1. With this condition SABMiller selects various strategies to enter in to the market and capture the market share by acquisitions and international branding and it produces a output of OA. Because OR2 production of
SABMiller will be surplus.

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Q2
R1

R2

Quantity 2
(SABMiller)

E
A

O

R’1

R1

R2

Q1

Quantity 1(UB)

Since SABMiller has entered the market the UB group will change it production by decreasing it to OR’1. Similarly SABMiller reacts by changing its production along the Orange dotted line in the graph. Then both the player reach the equilibrium point (E) or try to attain the point such that the price is satisfactory, both of them are able to sell the quantity which is exhausted and are able to maximize their production.
It is with this model the market leader UB group has moved to lower market share of 47% and SABMiller to 37%. There will be further change in the market share to attain the equilibrium point (E).
In the Cournot equilibrium model the two firms are making the profits that exceed those that earned under perfect competition but less than those that would be earned by monopoly. They earn less than a monopoly would earn because of their joint outputs exceeds the monopoly outputs. They earn more than perfectly competitive firms would make since each is aware that it drives the price down when it increases its own output.
Thus the above analysis shows the duopoly market condition in Indian beer industry 2) What are the entry barriers that in the Indian Beer Industry and why are there only two major players in the industry?
The article shows that currently there are two major players in the Indian Beer
Industry – United Breweries with a 47% market share and SABMiller India with a
37% market share. The remaining 16% is held by smaller regional players. The

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Indian beer industry is a highly regulated one and as such a new entrant faces many hurdles. Also the capital required to set up and maintain a brewery is very high. Branding is another issue. It takes time for a new beer brand to gain acceptance and shift loyal customer tastes. Hence the Indian
Beer Industry has remained a duopolistic one.
The two most common ways of entering the market is by buying into an existing small manufacturer, or by manufacturing brands through an existing local player with excess capacity. The first method was adopted by the
SABMiller group as shown in the article.
3) Why there was beer supply crunch and price raise in the Indian beer industry? There was a beer supply crunch due to the shortage in the supply of beer bottles. As the normal supply process of beer bottles from industry to the retailers, after the consumption of the beer the bottles returning back to the industry were very low.
As per the analysis of the case it reveals the cartel formation in the recycling bottling industry. There are few players in between the retailers and the industry who control the recycled bottle and supply them back to the industry. MR p1 S

£ per unit E p0 D
0

Q1

Q0

Quantity [thousands of tons]
Market equilibrium for recycle bottling industry

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Formation of cartel by itself forms a monopoly in which prices of the goods raises and the output reduces.
Here Q0 and Q1 are the quantities of the recycled beer bottles released to the industry. P0 and P1 are the price levels fixed by the industries.
Initially the recycled bottling industries produced Q0 quantity of recycled beer bottles at the price level P0 (around Rs 3 in our case). Due to the formation of cartel and since a monopoly they have reduced the supply to
Q1 (Q1 < Q0) and raised the price to P1 (around Rs 7 in our case)
This has led crunch in the supply of the bears and since the intermediate players raised the prices which were usually around Rs 3 to Rs 7 correspondingly the pressure falls on the customer side which raised the price of the beer.
4) What are the steps being taken by SABMiller, India to remain productive in the long run?
Currently SABMiller sources its barley needs to the tune of 12,000 tonnes of barley malt (made from 15,000 tonnes of barley) from farmers in Haryana and
Rajasthan. However with a view to cut costs and improve quality, the operations team of SAB Miller is looking at sourcing the raw material locally by helping the local farmers to grow barley in local areas near the breweries. For this it has set up an internal panel that will study and prepare a report on the potential for growing barley in some states.
To remain productive in the long run the company adopts the below policies:
a) Keep abreast of latest technology and constantly use innovative methods that will reduce costs - The strategy of sourcing quality raw material by helping farmers grow barley locally is one such technique. This causes the cost curve to shift downwards.
b) Investments on upgradation - To remain competitive in the long run
SABMiller plans to invest Rs 250 crores on upgradation activities. By investing in research and development activities as shown in the article SABMiller looks to cut costs by decreasing the prices of inputs (raw material) that are used in its breweries. S.P Jain Institute of Management and Research

The figure shows the long run cost curve (LRAC) for the company assuming the input prices are kept constant. The LRAC is the boundary between the attainable and unattainable levels of cost. Since the lowest attainable cost of producing q0 is c0 per unit, the point E0 is on the LRAC curve.
Suppose the company producing at E0 desires to increase output to q1. In the short run, it will not be able to vary all factors, and thus unit costs above c1, say c2, must be accepted. In the long run a plant that is the optimal size for producing output q1 can be built and costs of c1 can be attained. At output qm the company attains its lowest possible per-unit cost of production for the given technology and factor prices.

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