BEER INDUSTRY ANALYSIS

Group Members : Anjali Chauhan Avik Chattopadhyay Avishek Bhattacharya Mukul Attri Sahil Swapnil Bhosale Zeeshan

Contents

1. Size

2. Structure - Key Players

Market Shares 3.Growth rates over the past 3-5 years 4.Expected Growth Rate in future

5.Key growth drivers

6.Segment analysis (what r they n their shares) 7. Key performance parameters for industry 8. Dynamics of the industry ( Price n cost

9. Critical success factors (core strength)

10. Regulations that affect the industry 11 Imports n Exports 12. Recent Events 13. Analysis of Cost and Profitability 14.Risks & Future Outlook

INDIAN BEER INDUSTRY: SIZE & SCENARIO

Indian Beer Industry

Huge growth since the liberalization and opening up of economy in 1991. Intolerance towards alcohol in India has decreased through globalization and cultural influence of western countries Majority of Indian population falls in the age group of 18-35 years, which is the targeted segment for beer sellers So, India has become the ideal market for the industry.

Indian Beer Industry(Contd)

The Indian beer market is expected to grow 20 times in next 20 years in view of changing life styles, burgeoning middle class and the government policy to promote low alcoholic drinks in the country. Presently, some 36 units are manufacturing beer in India with an estimated output of 670 mn litres. In consumption, India holds the 29th position with the annual consumption growing by 8% per year.

Per capita consumption of beer is as low as half-a-litre as against 128 litres in Germany, 129 litres in new Zealand and 116 litres in Denmark.

In the last 5 years, the total beer market has seen a 10% cagr.
Average indian drinker consumes - 1.7 litres of beer a year (Hong kong- 22 litres, China- 37 litres, US-74 litres)

Beer's key consumer - young adults and professionals aged 18 - 40 years.

Beer in metal cans is growing faster than beer in bottle. In 2012, strong beer category grew over 16% and continues to dominate the beer market, accounting for around 85% of the beer category.

Companies like carlsberg and anheuser-busch inbev launched strong premium beers carlsberg elephant and budwesier magnum, respectively.

The premium beer segment is currently growing at the rate of 49% and is the fastest growing segment within the Indian beer market, driven by urbanization and the increase in disposable income. The Indian beer industry has shifted towards the strong beer segment. The ratio in mild-strong beer has shifted from 66:34 in 1993-94 to 45:55. In the mild beer segment: ~ Kingfisher ~ Golden Eagle ~ Royal Challenge

In the strong beer segments ~ Haywards 5000

~ Haywards 2000 ~ Knockout ~ Khajuraho

Beer Prices in India

Beer Taxation in India

Availability of Beer

Overall Industry Growth

Low beer consumption

Market overview

Indian beer market grew by 17.1% in 2010 to reach a value of $5,022.8 million Volume grew by 13.8% in 2010 to reach 1,687.4 million liters

Standard lager is the largest segment accounting for 91.8% of the market's total value.
United Breweries Limited is the leading player having 42.4% share of the market's volume. Indian beer market is highly concentrated, with the top three players holding 70.6% of the total market volume. In 2015, forecasted to have a value of $9,639 million, an increase of 91.9% since 2010.

Market Value
Market Value
250,000.00 30

200,000.00

25

20
RS. millions 150,000.00 15 100,000.00 10 50,000.00 % age growth

In 2010, Indian beer market grew by 17.1% to reach a value of $5,022.8 million. CAGR for period 2006-2010 was 21.9%.
Rs. million % Growth

0.00 2006 2007 2008 Year 2009

0 2010(e) Data source: Datamonitor

Market Volume

Market Volume
1800 1600 1400 1200 Volume 1000 800 600 400 200 0 2006 2007 2008 Year Data source: Datamonitor 2009 2010(e) 18 16 14 12 10 8 6 4 2 0 % Growth Volume (million ltrs) % Growth

Volumes grew by 13.8% in 2010 to reach a volume of 1,687.4 million liters. CAGR for period 2006-2010 was 14.4%

Market Characteristics
Market Segmentaion
0% 8%
Standard lager 91.8% Premium lager 8.2% Ales, stouts & bitters 0.0%

Market Share
United Breweries Limited 42.4% SABMiller 22.8% Mohan Meakin Limited 5.3% Others 29.4%

Low/no alcohol 0.0%

92%

Specialty beer 0.0%

Data source: Datamonitor

Data source: Datamonitor

Porters Five Forces

Porters Force Buyer Power Strength Medium Reasons Supermarket chains are able to negotiate very strongly on price But producers can also differentiate their products quite Buyer strongly Power

Supplier Power

Medium

5 4 Non-vertically 3 integrated Degree of Supplier businesses 2 rivalry Power 1 Independent barley growers 0

can find alternative markets

New Entrants

Medium

New to entry are high. Barriers Substitutes Entrants But new entries can happen through differentiated products.
source: Datamonitor Main substitutes areData spirits and wine. Switching costs are not high for

Substitutes

Medium

Major Beer Brands in India

Refreshing beverage represents lifestyle choice for Indians. Tuborg is famous for easy to drink, low flavored pilsner beer with its transparent bottle. A Danish companys with Pilsner Beer, a pleasing mix of bitter and sweet . Toasted malti-ness and mild fruitiness of this pale gold lager. This Aussie lager is full-bodied, malty and eminently drinkable. Haywards 5000 is brewed with the choicest of malts and hops lending itself to a unique flavor. Fresh, light taste with transparent bottle Known for great taste and innovation.

BEER CONSUMPTION IN INDIA

Key market players

Key Market Players

MYSORE BREWERIES

Major brands of Mysore Breweries

Knockout Bengal Premium Pals Premium Seven Stars.

It has two breweries in Aurangabad and Bangalore, with a total capacity of 450,000 hl. Mysore Breweries was to set up its third brewery in Andhra Pradesh, the fastest growing beer market. Mysore Breweries and Singapore-based subsidiary of Heineken NV, Asia-Pacific Breweries, which manufactures the popular Tiger brand, are exploring the chances of setting up of a joint venture.

Haake Beck

Haake Beck, entered India through a technical tie-up between Brauerei Beck of Germany and Indian Him Neel Breweries, through a 0.15 mn hectolitre plant at Himachal Pradesh ( at an investment of Rs 550 mn).

Haake Beck is sold in non-returnable, lightweight, takeaway 650 ml and 330 ml glass bottles, an innovation where recycled bottles has been the norm. UBs two beer brands, Kingfisher and Kalyani Black Label, enjoy one-third of the market. Kingfisher alone commands 18% of the market. Shaw Wallace, Mohan Meakin and Mysore Breweries also enjoy a significant market presence.
Cobra Beer had acquired a brewery in Bihar and currently sells beer in India from that unit.

UNITED BREWERIES

United Breweries group acquired a 65% stake in the Mumbai-based Associated Breweries & Distilleries (ABD), producers of London Pilsner beer.

With this acquisition, UB has protected the western Indian market from South African Breweries (SAB), which has already made its presence felt in north India by taking over Narang Industry's brewery in UP.

United Breweries is expanding the capacity of its Nacharam brewery in Andhra Pradesh to 220,000 hl. It has also acquired majority control over beer manufacturing Inertia by raising its stake to more then 51% from 31%.

OTHER BRANDS

Carlsberg Breweries based in Denmark had decided to bring two of its brands, Carlsberg and Tuborg to India. It launched Bengal Premium, a lager beer. Shaw Wallace is launching its Royal Challenge beer in cans. Kingfisher beer from UB is already available in cans. Australian Beer Company Fosters launching of premium lager beer in India is targeting 15% growth in sales. Recently the company launched Amberro in India. Foster's premium lager mild claims to enjoy good market shares in several states. Foster India has evinced interest in introducing Foster's other international brands including Crown Lager, Foster's Ice, Subzero, Carlton Cold and Victoria Bitter.

80 per cent of beer sale in India is of strong beer while 20 per cent is of mild beer. In north, Punjab and Haryana account for only five per cent of beer consumption in the country. Southern markets were way ahead in the beer sales.

Beer market segmentation and growth forecasts

Market Segmentation
GEOGRAPHICAL
North

CONTENT

12%

East

2%

West

37%

South

49%

Demography

The Miller Brewing Company, world's third largest producer of beer, had made plans to invest over $150 mn with Mohan Meakins as a joint venture partner.
The plan included five breweries. LowenBrau Buttenheim entered the Indian market with a subsidiary, LowenBrau Buttenheim India, with local promoters. Interbrew, the world's second largest brewery was planning to enter the country in view of the emerging growth opportunities in the sector. It was scouting for a partner and was in negotiations with various brewery majors like Mysore Breweries, a regional player in Karnataka that owns the Knockout brand of strong beer, for collaboration and marketing alliance. In north, Punjab and Haryana account for only five per cent of beer consumption in the country.

Beer Industry 2013 & ahead

SABMillers sales jumps 20% in FY13 to Rs 3,349 crore. Carlsberg eyes 10% of Indias beer market in couple of years. The Beeronomics report, however, forecast that consumption will rise to 2.6 litres, a 13% growth in volume, by 2016. Mintel expects India's retail beer market, worth more than 200 billion rupees last year, to more than double by 2017 to 430 billion rupees, with volume growing 36 percent. Carlsberg India, which is fast expanding its presence in the Indian beer market, is further beefing up its product portfolio.

BeerA lucrative Market

Indian beer market is valued at INR 41 billion for the year ending 31st march 2010 and it is expected to grow at 17.2% for the next year.

Apart from providing strong growth, India also provides attractive profit margins due to the consolidated nature of the industry.
The top two beer players in India account for about 75 per cent of beer sales in India and the industry stands a chance to see more consolidation in the near future.

Growth Rate of Beer Industry

Consumption in India has increased into double digits in last decade. The nation enjoys a consumption rate that stands at 1.7 Litres/Year/Person, and a Compound Annual Growth Rate (CAGR) of 10 per cent over the last 5 years. Swiss financial services firm, UBS, estimates the Indian beer market recorded revenue CAGR of 27% between FY02 and FY12 to $2.2 billion. Indias Business Standard says that nations beer industry sold between 250 and 260 million cases in 2011. And according to ValueWalk, the Indian beer industry is growing at a rate of 15%.

Future growth rates

Beer mix today is approximately 60 percent lager beer and 40 percent strong beer. The strong beer market grew at 8-10% during the year at the expense of lager beer. The market is now skewed towards strong beer with more than 60% of the market being strong beer market. 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%.

Optimistic future of Beer Industry

1.

India has predominantly a warm/hot climate

2. The beer-drinkers in the country are much younger than the average beer-drinker elsewhere in the world. This makes them more likely to carry the brand with them for a lifetime. 3. Increasing exposure to beer and wine drinking, mainly due to media and consumer mobility. 4.Entry of international players. All these factors combined make the scenario very promising for beer industry and are 'in sync' with their strategy for India.

Beer Consumption and Distribution (Real & projected)

Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2014-15 528 565 632 676 723 770 820 875 930 985 1320 Kls

Geography

Market Share%

North

12

East

West

37

South

49

Why invest in Beer industry???

Investment Opportunity in Beer Industry

Industry analysts say tax and levies on beer are anticipated to fall over the next 2 to 3 years, driving down retail prices by 25 to 50%. It is estimated that beer will sell for Rs 15 to Rs 20 per 330 ml can and Rs 20 to Rs 30 per 650 ml bottle in the coming year with the reduction tax and levies. At present the per capita consumption is 0.7 litre per annum, but industry experts predict that this may rise to around 20 litres in the next 10 years. Considering the expected increase in consumption and the current growth trends, the future of Indian beer market looks bright and seems set for continuous double digit growth in the coming years.

Key growth drivers

Growth factors
Huge market potential

Entry of international brands

Rising income levels Increasing popularity among youngsters

Regulatory Environment

High tax structure

Key Growth Drivers

Huge market potential Impact

The population and current consumption trends are expected to boost the beer sales in India. Nearly 28% of Indian population live in urban areas which comes close to the population of USA. Urbanization is happening at a very fast pace and about 40% of the total population is expected to live in urban areas by 2020. People in India are relatively younger when compared with global average. About 50% of the Indian population would be under 30 years even in 2015.

Key Growth Drivers

International Ventures In Beer Industry

Many foreign beer manufacturers have entered or plan to enter the Indian beer market with their product line. The market is set to flourish with 15 new breweries and 10 international brands in the next 3 years. With the global markets experiencing low or stagnating growth and focus shifting to India, the Indian industry is expected to witness fast growth in the coming years. International players Brands
Stella, Artoi palone Tiger, cannon10000, Barons Upcoming or recent ventures in beer industry

Asia Pacific Breweries Anheuser-Busch InBev Carlsberg

Key Growth Drivers

Rising Income Levels

India is one of the most attractive consumer markets in the world with about one-sixth of the global population. The rising income levels has a direct positive impact on beer sales in India. Also, urban consumers who are more exposed to the western culture socialize with beer. The growing income levels particularly in the urban earning class is a potential market for beer manufacturers in India.

Key Growth Drivers

Increasing Popularity

In India, growth of beer sector has seen record growth of 90% whereas average growth rate for other alcoholic drinks has been 60% Beer market has doubled from 12.5 million hectare liters in 2007 to 23.3 million hectare liters in 2012 States like Haryana and Punjab have shown tremendous growth figures since the replacement of auctioning system with licensing system. India has predominantly hot climate so beer is becoming a popular drink throughout the country.

Key Growth Drivers

Low per capita Beer consumption

Indian per capita beer consumption is very low compared to global average

Key Growth Drivers

1. Young population India has amongst the youngest population in the world. 60% of the population is under the age of 30. Further, over 50% of the population is in the working age of 22-54.

2. Rapidly growing consumption Beer is increasingly acceptable as a social drink and the urban youth in particular favors it as the preferred alcoholic beverage. Per capita consumption of beer is 1.5 liter and has been growing at over 15% in the last few years.
3. Home grown brands Even international giants like SAB Miller and Carlsberg have not been able to grow their own brands significantly. SAB Miller leveraged its acquired Indian brands like Haywards, Knock Out and Royal Challenge to become a leader in the industry.

Key Growth Drivers(Contd..)

Changing lifestyles: A deep-seated traditional social aversion to alcohol consumption has been a traditional feature of the Indian society. However, as urban consumers become more exposed to western lifestyles, through overseas travel and the media, their attitude towards alcohol is relaxing. Social habits are undergoing a transformation as mixed drinks are becoming more popular. The greatest evidence of this trend is the increase in beer consumption among women. More and more women are consuming beer the penetration in metropolitan areas is almost twice as high as the penetration in other large cities implying that the greater tolerance towards alcohol consumption in metropolitan areas facilitates the consumption of beer. With increasing urbanisation, this acceptance is only going to rise.

Key Growth Drivers(Contd..)

Reduction in beer prices: The Indian consumer typically values an alcoholic beverage on the basis of its 'kick' factor versus its price. The following two factors therefore, affect the market for beer. Firstly, as most states do not have a differential tax structure based on the alcohol content.

Limiting factors

Limiting Factors To Growth

The Indian liquor market is characterized by very high regulation. The liquor industry is a State subject and hence subject to laws in each state. This means a company has to have licenses and permissions to operate in each state. Hence, there are very few players who are truly National. Independent Licenses are required to produce, bottle, store, distribute or retail all liquor products. Licenses to produce and bottle are particularly scarce and contract manufacturing is a wellestablished market entry strategy.

Limiting Factors To Growth

FDI 100% FDI is permitted in the alcoholic beverages sector. A foreign entity can invest in an Indian business through the automatic route, provided the required licenses are in place. In some cases where the investor is an Indian entity with foreign owners (Eg: SAB Miller India), the investment would require clearance from the Foreign Investment Promotion Board (FIPB). FDI approvals are issued on the basis of a particular licensed capacity and any further increase in capacity will require FIPB again. Taxation is high, Price is controlled Excise duties, sales tax, VAT and various intermediary margins contribute bulk of the retail price. To give you an idea, the typical manufacturer/ brand realizations are below. In most states, the government tightly controls the retail price of liquor. In many cases, a tender process is used to determine prices and volumes that will be bought by the distributors.

Segmental Analysis

Segmental Analysis of Beer Industry

54

Segmental Analysis of Beer Industry

Beer market has been segmented into :

Strong beer Standard beer

Premium beer

Share of Different segments

premium 1%

Standard 45%

Strong 54%

Categories of Beer

Major Categories of beer

Lager:

It is stored for a specified period before being bottled or canned. Pilsner: A type of lager beer, it is light with 3.0-3.8% alcohol and has a medium hop flavor. Ale: Top fermented, this kind of beer has distinct hop aroma. The alcohol content is around 45%

Stout:

Dark with burnt flavor and strong malt aroma; it is heavily hopped and contains 5-6.5% alcohol. Porter: This is less dark than stout, even less hopped and is somewhat sweet. Alcohol content is around 5%.

Creamy Ale:

A highly carbonated beer that is produced by a combination of Ale and Lager. Malt: A strong flavored, high alcohol content beer that ranges in flavor and colors.

Competitive Drivers

Competition Drivers

Price

Price does not vary much in a segment for different brands.

Hence price is not a major area of competition

Cost

High costs are associated with production and sales of beer Every state has a different tax structure for liquor

Supply chain

Contract farmers for growing Barley Dedicated local breweries for fermentation near every major market

Competition Drivers
Distribution

Interstate distribution is expensive. Good distribution network is required to sell your product in the cluttered market.

Segmentation

Competitors continuously segment and sub segment the market based on the changing tastes and preferences on the consumer.

SAB Miller contracts 10,000 farmers in the northern Indian state of Rajasthan to grow barley. Foster's, which is branded as Australian is brewed in India. Heineken bought a 37.5% interest in India's largest alcohol company, United Breweries. It will hugely benefit from its strong distribution network. High regulatory barriers force foreign giants to enter into Joint Ventures For example, a JV between Anheuser-Busch InBev and the RK Jaipuria Group, handles the marketing of Budweiser. United Breweries benefits from 28 breweries spread across the countrys 28 states. That tops the 13 that SABMiller uses and Carlsbergs five.

Key Performance Parameters

Key Performance Parameters

Role of Prices Current Prices & Expected Hike in the future.

Cost of Procurement. Cost Management & Integrated Financial System. Integrated Inventory Management Systems. Distribution Network . Time to Market Products & Extensive Advt.

Role of Prices
Pricing power is a concern for the sector. Most state governments permit price hikes only once a year. The sector also faces progressive taxation, which further dissuades price hikes, as this attracts higher taxes.

A few companies are using a premiumization strategy to pass on the volatile prices of molasses and glass, thereby improving realizations.

Distribution Network
The traditional distribution system in the brewery industry involves a three-tier structure with delivery enabled through value-added distributors

The distributors merchandise, sell, and deliver the product to the end consumers.

This structure often creates a conflict of interest between the value-added distributors and the beer manufacturers. The manufacturers profits from increased sales is at the expense of distributors margins whereas distributors could profit by selling products at higher profit margins, which forces the manufacturer to cut or optimize their own costs

The conflicting interests of manufacturers, distributors and retailers coupled with government regulations force manufacturers to revaluate their supply chain systems to address some of the following challenges:

Address commodity price volatility Manage expanding portfolio of multiple variants of different products/stock keeping units (SKUs) and eliminate non-profitable variants Provide higher service levels demanded by distributors and retailers Comply with government regulations in batch management and traceability requirements Accurately understand the complexities of working in emerging markets and the high cost to serve variation between urban and rural markets

Dynamics of the industry

Price
Price does not vary much in a segment for different brands Hence price is not a major area of competition The beer industry does not have evidence of price wars Beer prices have increased, but that is mostly due to inflation The increased prices are industry wide and not company specific

Cost
High costs are associated with production and sales of beer Every state has a different tax structure for liquor

Supply chain
Contract farmers for growing Barley Dedicated local breweries for fermentation near every major market

Distribution
Interstate distribution is expensive. Good distribution network is required to sell your product in the cluttered market.

Segmentation
Competitors continuously segment and sub segment the market based on the changing tastes and preferences on the consumer.

Other factors of dynamics

Complex distribution systems with conflicting interests

Continually increasing retailer power

Product safety issues

Demographic and lifestyle changes

Fierce competition

Consolidation and globalization

Complex distribution systems with conflicting interests

Often in the beer industry, manufacturers use value-added distributors to merchandise, sell, and deliver the product to the end accounts This structure often creates a conflict of interests between beer manufacturers and distributors because: Beer manufacturers profit from increased sales at the expense of distributors margins Beer manufacturers historically have had higher returns and lower capital requirements Beer distributors historically have had lower returns and higher capital requirements for distribution networks Beer distributors push their customers towards the brands with the highest profit margins

Complex distribution systems with conflicting interests(contd.)

Beer distributors continue to consolidate in an attempt to offset margin pressure through cost reduction. Specifically, size helps them to: Spread fixed costs over greater volume Make larger investments in warehousing and distribution equipment

Contain the costs of acquiring new customers

Increase customer loyalty

Beer manufacturers continue to develop new products and packages, which increases the operational complexity for distributors, often requiring them to make additional capital investments

Demographic and lifestyle changes

There is significant concern regarding a forecasted decline in core beer consumers, defined as people age15-34

This age group is regarded as the major force behind the growth in the alcoholic beverage
industry

In addition to age and demographic concerns, increased awareness of caloric intake and

carbohydrates has hit the beer industry particularly hard

While this trend has spurred some innovation, the industry as a whole has been slow to mount an effective response

Thus, due to maturing tastes and greater amounts of disposable income, consumers are
increasingly choosing quality over quantity, resulting in an overall shift toward premiumpriced beers.

Retailers power continuously increases

Worlds dominant retailers are demanding better service and shorter order-to-delivery cycles from beer companies This is dramatically reshaping the industry, forcing beer companies to become more efficient, while taking pricing power out of their hands The dual need for improved supply chain agility and cost-efficiency is challenging suppliers to revaluate the ways in which they plan and manage their supply chains They are constantly searching for approaches that will help them achieve the rock-bottom prices and increased efficiency The growth of private-label products is encouraging manufacturers to take a number of steps to compete more effectively

They are turning to innovation and new product introduction to achieve real differentiation and growth
Branded manufacturers are also looking to get closer to the consumer and trying to better understand the in-store consumer experience by monitoring the execution of in-store activities.

Fierce competition
Competition is growing due to the following factors:
Falling consumption in mature markets Constant demand for new products and packaging Industry consolidation, which has significantly raised the bar for the scale needed to compete Growth of private label products. Managing Competition

Consolidation and rationalization, driven by opportunities for costcutting through operational improvements or elimination of redundancies
The acquisition of small, high-growth companies in emerging markets by industry leaders

Consolidation and globalization

Because of tough competition and slow growing future prospects, both beer manufacturers and distributors are turning to mergers and acquisitions to fuel growth
Size, for both the beer producer and distributor, has also become an increasingly important means of offsetting retailer power, helping suppliers to obtain a strong position within the distribution chain and to gain prime shelf space

Key focus areas to manage the dynamics

Revenue Protection And Enhancement

for example, as driven by product and packaging innovation, differentiated
quality, improved product availability, better management of customer relationships, and increased control over the distribution channels

Cost Reduction/Margin Improvement

for example, through improved operational efficiency, lower labor costs and the capture of operational synergies from acquisitions

Improved Asset Utilization

for example, through reduced inventory levels of beer held in cold storage, faster turnaround of re-usable transit packaging in the supply chain, and better control over field assets

Regulatory/Assurance
for example, through demonstrating quality by participating in retailer assurance schemes and assisting trade customers in achieving full compliance with new traceability legislation.

EXAMPLES FOR DYNAMICS

SAB Miller contracts 10,000 farmers in the northern Indian state of Rajasthan to grow barley. Heineken bought a 37.5% interest in India's largest alcohol company, United Breweries. High regulatory barriers force foreign giants to enter into Joint Ventures United Breweries benefits from 28 breweries spread across the countrys 28 states. That tops the 13 that SABMiller uses and Carlsbergs five.

Foster's, which is branded as Australian is brewed in India.

It will hugely benefit from its strong distribution network.

For example, a JV between AnheuserBusch InBev and the RK Jaipuria Group, handles the marketing of Budweiser.

KEY SUCCESS FACTORS

BRAND HOLDS THE KEY

BEER

IS A CONSUMER GOOD

BRAND

SALIENCE IS IMPORTANT FOR BUILDING A STRONG AND SUSTAINABLE MARKET POSITION

STRONG

BRANDS LEAD TO CUSTOMER LOYALTY

ALLOW

THE OWNERS TO CHARGE PREMIUM

GEOGRAPHICAL DIVERSITY
PLAYERS

WITH NATIONAL PRESENCE ENJOY COMPETITIVE ADVANTAGE HELPS WITHSTAND ANY CHANGE IN STATE POLICY

DIVERSITY

SALES

TO CANTEEN STORE DEPOT OF THE DEFENSE SERVICES, WHICH ACCOUNTS FOR INSTITUTIONAL BEER SALES IN THE COUNTRY, IS ESSENTIAL FOR BUILDING STRONG MARKET POSITION

PRESENCE ACROSS SPIRITS AND PRICE BANDS

DIVERSIFIED

PRESENCE ACROSS DIFFERENT SPIRITS AND PRICE SEGMENTS PROVIDE COMPETITIVE ADVANTAGE TO RESIST IMPACT OF CHANGES IN CONSUMER PREFERENCES
IT

HELPS COMPANY TO RESIST DOWNTURN IN A PARTICULAR SEGMENT

SIZE OF OPERATIONS
SIZE

OF OPERATIONS HELPS REDUCE DISTRIBUTION OVERHEADS

IT

ALSO INCREASES A PLAYERS BARGAINING POWER WITH DISTRIBUTOR

HELPS

IN STATES WHERE DISTRIBUTORS CONTROL PRICE AND ALSO THE BRANDS THAT WILL BE SOLD

AVAILABILITY OF PRODUCTS TO CUSTOMERS

BREWERS

MUST MAKE THEIR PRODUCTS READILY AVAILABLE TO WHOLESALERS OR THEY WILL SWITCH TO OTHER KEY COMPETITORS
THIS

WILL HELP THE BREWERS REMAIN COMPETITIVE

INNOVATION OF NEW PRODUCTS

THE

DEVELOPMENT OF NEW PRODUCTS MAY CREATE A NEW DEMAND

IT

CAN ALSO HELP TO RETAIN REPEAT CUSTOMERS WHICH CAN BE A KEY TO SUCCESS WHEN THE OTHER COMPETITORS DO THE SAME

STANDOUT NEW ADVERTISING

NEW

BETTER

AND INTERESTING WAYS TO PROMOTE PRODUCT HELP PEOPLE REMEMBER PRODUCT

HELPS

COMPANY DIFFERENTIATE PRODUCT AND NOT GET LOST IN THE MIX

CUSTOMER LOYALTY
CUSTOMER

LOYALTY IS AN IMPORTANT COMPETITIVE ADVANTAGE

THIS

ENSURES THAT COMPANY WILL BE LESS LIKELY TO SWITCH TO ANOTHER COMPANY FOR A SIMILAR PRODUCT

ADJUSTABILITY TO DEMAND
THE

COMPANY SHOULD HAVE THE ABILITY TO MAINTAIN AND TWEAK CAPACITY

THIS

CAN HELP THE COMPANY TO EITHER LOWER OUTPUT IN TIMES OF LOWER DEMAND OR RAISE OUTPUT IN TERMS OF HIGHER DEMAND
THIS

CAN HELP GENERATE REVENUES TO THE COMPANY THAT WOULD OTHERWISE GO TO ITS COMPETITORS

EFFICIENT DISTRIBUTION CHANNELS

THE

COST OF DISTRIBUTION IN BEER INDUSTRY IS ONE PRIMARY CONTRIBUTORS OF COST

THE

COST FROM DISTRIBUTION CAN SIGNIFICANTLY IMPACT THE PRICE WHICH CAN RESULT IN THE CUSTOMER CHOOSING THE COMPETITORS PRODUCT

BEING ETHICAL AND MAINTAINING A GOOD NAME/POSITION

BY

TAKING GOOD ETHICAL STAND ON ISSUES, A COMPANY MAINTAINS A GOOD NAME THROUGH ITS SUPPLIERS, CUSTOMERS AND EMPLOYEES
THIS

HELPS THE COMPANY TO DEAL WITH THE FACTORS FROM ARISING WHICH MIGHT LEAD TO FACTORS OF LAWSUITS AND MISSED OPPORTUNITIES THROUGH THE PEOPLE IT DEALS WITH

CORE STRENGTHS

CORE STRENGTHS
STRONG

ENTRY BARRIERS PROTECT INCUMBENT

PRICE

HIKES LIMITED TO ONLY ONCE A YEAR OF BRANDS WITH STRONG SUB-SEGMENTATION STRATEGY

EXPANSION

HIGHER

PROFITABILITY AND LESS COMPETITION FOR COMPANIES SELLING COUNTRY LIQUOR NUMBER OF SKUS

LIMITED

CHALLENGES

STRONG ENTRY BARRIERS

BAN

ON ADVERTISING OF BRANDS ONLY AT POINT OF SALE

PROMOTION

BRAND

CREATION THROUGH ADVERTISING LIMITED DOMESTIC PLAYERS MAINTAIN MARKET LEADERSHIP BRANDS HAVE DIFFICULTY IN BRAND CREATION

HELPED

FOREIGN

REGISTRATION WITH CSD

15%

OF BEER SALE OCCURS AT CSD MILITARY CANTEEN TAKES APPROXIMATELY 9 MONTHS

REGISTRATION

COMPANY

UNABLE TO REGISTER WITH CSD UNABLE TO ATTRACT LARGE NUMBER OF CUSTOMERS

CSD

PRIMARILY RESPONSIBLE FOR GROWTH IN SOUTH INDIA, WHICH ACCOUNT FOR 59% BEER CONSUMPTION

OTHER CHALLENGES AND IMPEDIMENTS

India predominantly a hard spirits market

Beer a minority preference for those who consume Beverage Alcohol Per capita consumption of beer mere 3% of global average
Indian beer industry plagued with myriad of tax and levies

IMPORT DUTIES ON INTERSTATE TRANSFER

SELLING

BEER ACROSS STATES ATTRACTS HIGHER EXCISE DUTY THROUGH QUOTA SYSTEM REDUCES THE QUANTITY BEING IMPORTED

IMPORT

BEER

MANUFACTURES COMPELLED TO SET UP DISTILLERIES IN EVERY STATE STATE TAXES RESULT IN HIGHER PRICES

HIGHER

DISTRIBUTION-KEY ENTRY BARRIER

GOVERNMENT

ACTS AS DISTRIBUTOR IN TAMIL NADU, KERALA AND NEW DELHI

IN

UTTAR PRADESH, ANDHRA PRADESH AND KARNATAKA DISTRIBUTION SEMI-CONTROLLED BY GOVERNMENT

DISTRIBUTION

IS FREE IN MAHARASHTRA AND GOA

STATE

GOVERNMENTS OF GUJARAT, NAGALAND, MANIPUR AND MIZORAM HAVE BANNED SALE OF BEER

DISTRIBUTION STRUCTURE IN INDIA

LIMITED SKU
ONLY

FIVE SKU ALLOWED IN BEER CREATION CAN BE DONE THROUGH DIFFERENT PACK SIZES COMPANIES CAN LAUNCH GIFT PACKS AND FESTIVAL PACKS AGAINST LAUNCH OF DIFFERENT SKUS HAS RESULTED IN LOWER BRANDING

MARKET

CONSUMER

PROHIBITION

POWER

LIMITED SKU ALLOWED

CHANGING DEMOGRAPHICS
INFLATION VOLATILE

LEVEL HAS BEEN VOLATILE, IN THE RANGE OF 1% TO 12% IN THE PAST FOUR YEARS

REAL INCOME GROWTH RATES WHICH IMPACT THE CONSUMPTION PATTERNS

VOLATILE PER CAPITA INCOME GROWTH RATES

GOVERNMENT REGULATIONS
HIGH

LEVEL OF TAXES AND LEVIES RESULT IN 65% OF THE CONSUMER PRICE

REGULATIONS

PERTAINING TO MANUFACTURING PROCESSES(GRAIN BASED OR MOLASSES BASED)

EVERY

STATE HAS A DIFFERENT REGULATION(INCLUDING THOSE ON DISTRIBUTION) AND TAX RATES FOR THE INDUSTRY
RESTRICTION

AND LEVIES ON INTER-STATE MOVEMENT

GOVERNMENT REGULATIONS : IMPACTS

HIGH

LEVEL OF TAXES AND LEVIES AND LESS CONTROL FOR COMPANIES OVER DISTRIBUTION SYSTEM MEAN LIMITED PRICING FLEXIBILITY
LOW

MARGIN LEVELS CAPACITIES WITH HIGH OVERHEADS AND POOR ECONOMIES OF

FRAGMENTED

SCALE

RESTRICTION

ON ADVERTISING RESULTED IN SURROGATE ADVERTISING

GOVERNMENT REGULATIONS:IMPACTS
HIGH

BUDGET FOR PROMOTIONAL ACTIVITIES AND COMMISSION TO RETAILERS

DISCOUNTS

ACCORDING

TO THE INDIAN CONSTITUTION, THE STATE SHALL ENDEAVOR TO BRING ABOUT PROHIBITION OF CONSUMPTION OF INTOXICATING DRINKS
BEER

INDUSTRY ONE OF THE LARGEST CONTRIBUTOR TO STATE REVENUES

STATE GOVERNMENT REGULATIONS

DIFFICULT

TO ENFORCE PROHIBITION AGAINST THE NATURE OF DEMAND FOR BEER

SINCE

HUGE POWER SUBSIDIES AND FIFTH PAY HAVE WEAKENED STATE FINANCES, STATE GOVERNMENT CANNOT AFFORD TO LOSE THIS REVENUE CONTRIBUTOR
STATE

GOVERNMENTS UNLIKELY TO LOWER CONTROLS ON MANUFACTURING AND SELLING BEER IN SHORT TO MEDIUM TERM

CHALLENGES FOR MANUFACTURERS SUPPLY CHAIN

Address commodity price volatility
Manage expanding portfolio of multiple variants of different products/ (SKUs) and eliminate non-profitable variants Comply with government regulations in batch management and traceability requirements

Accurately understand the complexities of working in emerging markets and the high cost to serve variation between urban and rural markets

INTER -STATE TRANSFER FEES ON MOLASSES

MOST

STATES HAVE LEVIED TAXES ON IMPORT OF MOLASSES PROFITABILITY FOR BEER MANUFACTURES DISTRIBUTION AT THE DISCRETION OF STATE GOVERNMENTS

LOWER

LICENSE

Distribution channel characteristics

Road to beer market in India

The unrestricted import of alcohol has been allowed by the Indian government for more than five years now.

The number of Beer importers has increased from about 35 a couple of years ago to nearly 80 and will soon touch 100 if one considers the many new arrivals, plus the old ones who had stopped importing due to stringent laws, heavy duties and a restricted market, now expanding at over 30% a year.

Distribution Restrictions
The Barriers to import remain high. The bonded warehouses are the initial barriers, requiring considerable financial investment and bank guarantees. Excise bonded warehouses and a license is required in each state. Brands have to register each label individually, and pay a hefty annual license fee.

These two restrictive measures set a sufficient barrier to new entrants, who are generally forced to use the services of existing bonders.

The commission payable for these two services alone varies between 10-20% of the cost of wine.

This affects the viability of the small importer, who is obliged to rent these services. Yet, the new importers are making a place for themselves: At the break even of 1200-1500 cases sold annually, there are few exits and the number of importers is steadily going up, even though the market isnt big enough for everyone to thrive.

Distribution Pattern
Sales are controlled by each state individually. More states are allowing sales through easier channels like supermarkets, while stores that sell only wine and beer are given cheaper licenses.

The states of Maharashtra, Karnataka, Haryana, Goa and Punjab have a liberal retail policy, paving the way for continuous growth through these channels.
Delhi is still restrictive.

Such policies are likely to change the market trends, with the retail sector expanding during the current year.

Each state requires wholesalers to have their own excise license.

The importers and distributors must sell their products through these wholesale licensees. The state of Haryana allows retail sales through a license issued annually through the drawing of lots, but the retailer must buy through wholesalers who have to get a separate license.

With giants like UKs Berkmann Cellars, UB, and Diageo entering the market, and Indian beer producers like Champagne Indage and Sula stepping up imports, the distribution hierarchy is expected to undergo an overhaul.

RECENT NEWS IN BEER INDUSTRY

Recent Events in Beer Industry

Carlsberg to expand its beer portfolio in India: -> The company has announced the launch of Kronenbourg- its signature French premium beer.

-> Carlsberg India has the following beer portfolio:

Carlsberg Green, Carlsberg Elephant, Tuborg green, Tuborg strong, Tuborg Booster strong, Palone 8.

Today , Carlsberg India is the third largest brewer in India.

Carlsberg India has achieved the market share of 7.8 market share on YTD.

In the first phase of its launch Kronenbourg will be available across 14 cities including Delhi, Mumbai, Kolkata and Bangalore and Hyderabad, Chennai, Gurgaon, Chandigarh and Ludhiana, Amritsar, Thane, Pune, Goa and Pondicherry.

Indian Beer industry poised to grow 20 times

The Indian beer industry is expected to grow 20 times in the next 20 yrs. In view of changing lifestyles, burgeoning middle class, and government policy to promote low alcoholic drinks in India. Cobra Beer had acquired a brewery in Bihar and currently sales beer in India from that unit.

More Tipplers take to premium beer in India

Premiumisation seems to be the overriding trend in the liquor business in Tamil Nadu. The development is perhaps most clearly illustrated in the beer segment, where demand for premium brands is growing faster than their regular counterparts. Consumers, even in tier-III markets, prefer premium brands, say industry sources.

Industry sources say, irrespective of alcohol strength, consumers prefer premium beer for its improved quality and taste.

According to sources in the State-owned TASMAC (Tamil Nadu State Marketing Corporation), the monopoly wholesaler and retailer of liquor, on an average 29 lakh cases (12 bottles of 650 ml each) of beer are sold in the State every month. Premium brands alone account for close to 40 per cent of sales.

The retail price of a bottle of 650 ml premium beer is Rs 100, as against Rs 80-90 in the case of regular beer.

Tamil Nadu adds fizz to brewers sales, clears beer export

Tamil Nadu excise department has allowed export of beer brewed in the state across the country and the world.

Tamil Nadu was the only state that prohibited import and export of alcoholic beverages.
The state has also granted breweries permission to package beer in cans rather than glass bottles they come in now.

Carlsberg eyes 10% of Indias beer market in couple of years

The India arm of Danish brewer Carlsberg is eyeing a 10% share of the country's 2.1-billion-litre beer market in the next couple of years by pushing its strong lagers into more cities, especially in key states like Andhra Pradesh and Maharashtra. Carlsberg is currently the third largest brewer in India with an estimated 6% share, but is still far behind its two larger rivals, United Breweries (UBL) and SABMiller.

Strong beer overpowers milder version in the Indian market

While Americans and Europeans prefer their beer to be light on alcohol content, Indians have traditionally been partial to a stronger brew, a preference thats become further accentuated of late along with an improvement in the image associated with such beverages.

The domestic market for strong beer grew faster in 2013 than in the past three years due to new product launches by foreign brewers and increasing sales of market leader Kingfisher Strong.

Strong beer, with alcohol content of more than 5%, now accounts for more than 83% of all beer sold in India, up from 80% last year, according to industry executives.

The Indian preference for strong beer led Carlsberg, Fosters maker SABMiller and Anheuser-Busch InBev to launch brands tailored specifically to the market over the past two years. They include Tuborg Strong, Carlsberg Elephant and Budweiser Magnum, priced at par or higher than Kingfisher Strong.

Diageo moves Supreme Court against High Court order on United Spirits deal

UK spirits company Diageo on Monday argued before the Supreme Court that a foreign investor's acquisition undertaken after all permissions cannot be declared "null and void", challenging a Karnataka High Court order setting aside its acquisition of 6.96 per cent stake in United Spirits from UB Holdings.

Both Diageo and United Breweries have challenged the Karnataka High Court decision. The creditors of Kingfisher including BNP Paribas, Avions De Transport Regional GIE and SBI had challenged the sale in the face of several winding up petitions pending against the UB Group.

Major Brands venturing into Indian Market

INTERNATIONAL PLAYERS Asia Pacific Breweries Anheuser-Busch InBev Carlsberg BRANDS Tiger, Cannon-10000, Barons Budweiser, Stella Artois, Becks, Leffe Carlsberg, Tuborg, Palone

Sample Duties: Import Duty on beer: 100% basic , 10% surcharge; SAD: 4% Sales Taxes: 45% , 5 % cess , ( State Subject). Excise Duty: Rs: 4/- bulk litre in Karnataka ( State subject).

Export policy

Export Policy of Beer

The export policy of beer may continue for the year 2013-14 with the same terms and conditions approved by Indian government. A) There shall be separate label registration for export items with the legend Not for sale in India . B) A separate Provision for warehouse to be made for the storage of export items.

C) For export brands the manufacture have to pay the additional license fee of Rs. 1 lakh.
D) The export fee shall be Rs.2/- per LPL of beer. E) It has been decided to ensure that breweries should utilize their capacity to the full and surplus produce will be allowed to export.

-> Importers and authorized representatives of foreign distilleries/company will register themselves with Ministry of food Processing in India.

-> All the shops having valid license and lift the Imported Beer after paying composite registration charges to the concerned authority.

Cost and profitability analysis

FEASIBILITY STUDY

The main goal of feasibility study is to assess the economic viability of setting up a brewery.

The study will provide a thorough analysis of the business opportunity, including a look at all the possible roadblocks that may stand in the way of a successful brewery set up.
The outcome of the feasibility study will indicate whether or not to proceed with the proposed brewery project.

Following are some points which should be addressed in course of doing the feasibility study:

Defining company, resources, skill, level of expertise, deficiencies, challenges Pros and cons of selected marketing strategy Reasons of selected technology and equipment Initial or preliminary design Potential of targeted market and production capacity, location (Where will the facility be located relative to the potential customers), logistics

Site plan, building layout, different processes to be followed,

Capital cost estimate Construction/equipment set up cost estimate

contd.

Operating cost estimate (This includes the daily costs involved in running the business, such as wages, rent, utilities, and interest payments on outstanding debt etc.) Financials analysis, profit & loss, balance sheets, alternative/variable cost analysis

Based on the estimated revenues and costs, what is ROI (return on investment), tax considerations.

License fee for breweries

SR. NO.

ESTABLISHMENT COSTS
PRODUCTION CAPACITY(in bulk litres) ANNUAL LICENSE FEE(Rs. Lakhs)

1
2 3 4

UPTO 120,00,000
120,00,001 TO 180,00,000 180,00,001 to 400,00,000 400,00,000 and above

60
80 110 180

Bottling fees

@RS. 6 per BL of beer manufactured @RS. 7 per BL of beer manufactured of brands other than the own brand.

Application fee (non refundable)for grant of licence for brewery RS. 75000/Application fee for Label Regd.: Beer per Brand RS. 20000/Import Fee on BEER RS. 10 per BL

Maximum Retail Price (MRP) will be displayed on each bottle of BEER. The vendors will issue Cash Memo on demand to the consumers, failing which the vendors shall be penalized with fine up to RS.10000
The MRP shall be decided on the principle of landing cost + all taxes /duties + OSBC Margin. + Retailer Margin. While the landing cost will be decided by the price fixation committee and OSBC margin will be decided by OSBC Ltd., the retail margin on beer should be 25%.

EXCISE DUTY
SR. no. 1 BEER Beer made in India STRENGTH Up to 5% v/v Above 5%v/v EXCISE DUTY 25 /BL 25 /BL 25 /BL Up to 5%v/v Above 5%v/v Up to 5%v/v Above 5%v/v Up to 5%v/v Above 5%v/v Up to 5%v/v 25 /BL 25 /BL 25 /BL 25 /BL 25 /BL 25 /BL 25 /BL

2 3 4 5 6

Beer imported from Foreign Countries Draught Beer Diet Beer Canned Beer Breezer Low Alcoholic Beverage

Operating costs

From the Profit and loss account we can see that the major costs for the company arises from:

Cost of material consumed Other Expenses

Operating costs (contd.)

Material Consumed has been further subdivided into:

Raw Material Consumes Cost of packing material

The cost of packing material is almost double the cost of raw material consumed. This highlights the importance of good packaging in the industry in order to sell the products. Good packaging is also essential to preserve the quality of beer as it may get affected with exposure to adverse climatic conditions.

COST STRUCTURE
Administrative , 8%

cost structure
Raw Material, 15% Raw Material packaging packaging, 45% labor Marketing

Marketing, 20% labor, 12%

Administrative

Although direct advertisement of alcoholic beverages have been banned in India, but the companies have been promoting its products to subtle and indirect advertisements like event sponsorships. Selling & Distribution expenses is also high as product distribution and availability plays a crucial role in the final sale. Sales Promotion expense of 604 crores definitely stands out. It is clear indication of the substantial amount of money spent by beverage companies on sales promotion.

CURRENT MARKET GROWTH

In the last 5 years, the total beer market has seen a 10% CAGR Average Indian drinker consumes - 1.7 litres of beer a year. (Hong Kong- 22 litres, China37 litres, US-74 litres) Beer's key consumer . young adults and professionals aged 18 - 40 years Beer in metal cans is growing faster than beer in bottles The premium beer segment is currently growing at the rate of 49% and is the fastest growing segment within the Indian beer market, driven by urbanization and the increase in disposable income. Growth is coming from markets other than the metros with UP, Rajasthan, Bihar growing faster than the industry average.

CURRENT MARKET GROWTH

Football and music are the top marketing platforms for beer brands. For instance, Carlsberg's association with English Premier League and Heineken's with Champions League.

A new breed of bars has been mushrooming in Indian metros - Beer Cafe and Pint Room, among others. Restaurants and high-end clubs offer extensive premium beer menus and host beer festivals.

PROFITABILITY
NAME Sales Turnover(i n CR.) 3903.14 8585.10 1258.39 528.52 Net Profit(in CR.) 172.21 320.80 77.28 34.19 Profit Margin(%) 4.36 3.68 5.99 6.45 Total Assets(in cr.) 2810.82 9747.84 1447.60 433.39 ROA

United Breweries United Spirits Radico Khaitan Globus Spirits

54.33 488.70 54.79 120.90

PROFITABILITY

We see that most players in the industry operate around 4-7% net profit levels. The only company whose profits and ROA seems to be standing out is Globus Spirits which primarily operates in rural markets and sells locally made liquor. Globus Spirits also has a monopoly market in its market segment and therefore the higher profitabaility. The major competitors to Kingfisher Beers are foreign made liquors like Bud, Tuborg etc. and therefore the prices have to be competitive.

PROFITABILITY

In spite of recessionary trends registered in the Indian economy, the countrys beverage market is likely to experience double-digit growth in 2013. The market owes its rapid expansion to a number of factors, including the swelling middle-class, increasing disposable incomes, changing lifestyles and rapid urbanization.

PROFITABILITY
WE are optimistic for a continuous growth and profitability of BEER industry because of the following reasons:

India has predominantly a warm/hot climate The beer-drinkers in the country are much younger than the average beer-drinker elsewhere in the world. This makes them more likely to carry the brand with them for a lifetime. Increasing exposure to beer and wine drinking, mainly due to media and consumer mobility.

All these factors combined make the scenario very promising hence strategy for every beer company in India should be in sync with above factors.

COMPETITIVE STRATEGY OF A KEY PLAYER:UB

Competitive strategy of UB

Investing behind the brand

Leveraging aspirational properties in fashion and sports Football: Kingfisher East Bengal

Formula One: Force India

Fashion: Kingfisher swimsuit calendar

Competitive strategy of UB
Building brand equity for the future
Selective launch in key metros: Mumbai, Delhi, Bangalore, Kolkata and Goa Gradual roll-out based on: 1.Perfect execution

Targeted Distribution Premium Visibility Cold & Fresh Stock management

2.Driving awareness & be part of the conversation.

Strong focus on digital media

3.Set benchmarks at every touch-point - Quality over quantity

K2 bottles World class PoS materials

4.Leveraging UBL strengths in market

Competitive strategy of UB

Manufacturing network across all major states

Unique brewery footprint In line with the requirements of a complex regulatory framework

18 owned breweries and 10 contract breweries

Closeness to market a critical success factor Freight costs

Import and export duties

Freshness Ability to manage contract brewers in key states

RISKS AND MITIGATION

Identified Risks

Infrastructure Political Tensions Input sourcing Trade Restrictions Currency

Regulatory and legal issues Labor issues Corruption

Infrastructure Risks

Indian Roads

80% of traffic is crammed into 3% of available roads Reliability problems Widespread power outages

Power Requirements

Water Requirements

Increasing depletion of surface and ground supplies

Pollutant contamination

Infrastructure - Risk Mitigation

Roads - Risk reduction

Reduce distance to market Build brewery in the Navi Mumbai Two distribution centers in Mumbai and Pune

Power - Risk reduction

Purchase backup power generation equipment

Water Supply - Risk reduction

In-house, reverse-osmosis filtration systems

Political Tensions Risks

Pakistan - Kashmir border conflict

Long-running dispute over the Indian States of Jammu and Kashmir in Northern India

Both Pakistan and India have tested nuclear weapons

Progress towards normalizing relations

Muslim - Hindu Tensions

Rise of Hindu fundamentalism following ascent of Bharatiya Janata Party (BJP) in 1991 2002 Gujarat Riots - Over 1000 dead or missing

Political Tensions - Risk Mitigation

Brewery location

Far from Jammu and Kashmir However, State of Maharashtra is next to Gujarat Unknown premium amount Normally obtained as riders on property insurance

Prudent to obtain terrorism and political violence insurance

Put plans in place to protect employees in case of political violence or turmoil Physical plant and distribution network security Consider creating a business continuity/security office to oversee security and monitor security situation

Input Sourcing Risks

Brewery requires periodic resupply of raw materials

Malted barley, water, hops, sugar Glass bottles and aluminum cans

Production may come to a halt without raw material availability Expected demand for hops may outstrip domestic supply Except for hops, agricultural commodity prices may be artificially low due to imported products

Input Sourcing - Risk Mitigation

On-site storage facilities for barley, hops and sugar mitigate against minor disruptions Obtain long-term contracts with local producers Purchase future contracts

Barley, sugar and wheat futures are traded in NCDEX Indian commodities exchange

Contract with alternative sources outside India in case of local disruption

Trade Restrictions Risks

Agricultural sector is suffering from crisis due to low commodity prices

60% of population is supported by agriculture Market restructuring could cause further political instability Weighted average tariff rate was 14.4 percent in 2005 Some agricultural import tariffs are as high as 115%

Non-tariff barriers include:

Excessive bureaucracy Import taxes

Trade Restrictions - Risk Mitigation

Import tariffs are only relevant when domestic supplies are not available Currently, domestic agricultural prices are low due reduction of trade barriers At this time, no suggested additional action recommended

Currency Risk

Indian economy is currently in a rapid growth phase.

GDP for past 3 years > 8%

Wages have increased 15%-plus for skilled workers.

Corporate and personal borrowing up 28% over past 12 months. Overall demand for goods has increased and surpassed supply.

GDP is US$1,103 billion, 12th largest economy in the world. In terms of purchasing power parity (PPP), India has the world's 4th largest GDP at US$4.156 trillion.
Increased wealth = consumption & competition increase.

February 2007: Referred to as Overheating Economy.

Currency Risk

Current inflation comfort zone between 5 and 5.5%.

June 2007, inflation is at 4.8%. Down from 6.9% in January. Rupee at a current 9 year high vs. U.S. dollar.

Spot rate as of 7/17/2007 = 40.230 rupees per dollar

Cuts in fuel taxes and import duties. Ban on wheat exports has help soften food prices.

RBI inflation goal is between 4 and 4.5%.

Raised bank reserve ratio to 5.5%. Raised interest rate % to to 7.75% on April 24, 2007.

Currency Risk

Past/Future Outlook

India has had two major financial crises : 1966 and 1991.

Caused by large out of control trade deficits and shrinking foreign exchange reserves. Solved by a forced devaluation of the rupee.

Rupee appreciation will lead to less exporting, so to avoid another financial crisis, RBI needs to curb spending and borrowing.

Currency Risk Mitigation

Closely watch Indian economy.

Increase the cost of capital.

Hedge risks in the options market with excess capital.

Regulatory Risks

In early 1990s alcoholic beverage industry open to foreign investment.

Foreign shareholdings in industry were restricted to a maximum of 74%. Entry into India was exclusively through the joint venture route.

January 2006 India approved a major rationalization of FDI policy.

Helps avoid multiple layers of approvals required in some activities. 100 % FDI in manufacture of alcohol under the automatic route is allowed. Subject to licensing from state governments where the unit will be set up.

Entry into brewery sector through automatic approval route

Under automatic route, approval of the RBI is required. Government set up the Foreign Investment Implementation Authority (FIIA). Facilitates quick translation of (FDI) approvals into implementation. Helps FDI investors obtain necessary approvals. Sorts out operational issues with various Government agencies to solve problems.

Regulatory Risks Continued

Foreign capital is freely allowed to be repatriated.

Includes capital appreciation, profits, and dividends.

Taxes must be paid before repatriation. Any company incorporated in India is considered domestic, even if foreign owned.

Domestic corporate tax rate = 33%.

Potential Risks

Lightened regulations may cause potential market saturation in the brewery sector. Immediate competition with large brewers already present.

United Breweries- 50% market share

SAB Miller- 37% market share Budweiser and Crown Beers of India- 5% market share goal

Regulatory Risks Continued

Regulatory Risk Mitigation

Focus on brand naming company image.

Register a trade mark to avoid brand duplication.

Current registration is good for 7 years.

Focus on developing in new areas and markets.

Labor Risks

National Sample Survey Organization survey

Equal to approximately 42% (of 1.1 billion) of Indias population.

56% of rural males and 33% of rural females 57% of urban males and 18% of urban females in the labor force. 10%

in formal economy, 60% self-employed, 30% casual workers.

Current Indian unemployment is at 7.8%.

If unemployment increases, demand for beer decreases. Labor force is growing at 2.5% annually, employment is growing at only 2.3%.

Approximately 2.5 million employable college graduates emerging every year.

Pressure to transfer agricultural land to higher productivity industry.

Manufacturing has generated jobs for many of the less educated who are squeezed out of agriculture.

Labor Risks Continued

Rigid Labor Laws Labor market changes have not kept pace with the country's economic liberalization program begun in 1991. Current Laws:

Any company employing more than 100 workers cannot fire people without government permission. Labor commissioner in the government has to be notified of every single person working on the night shift. No worker to work beyond 75 hours of overtime a quarter.

< or = 46.25 hours per week. Risk Mitigation Treat workers fairly through fair compensations and treatment. Clearly understand labor laws to avoid government intervention. Keep good rapport with involved labor unions.

Corruption Risks

*2007 Index of Economic Freedom - The Heritage Foundation

Corruption Risks Continued

Corruption is perceived as widespread.

India ranks 88th out of 158 countries in Transparency International's Corruption Perceptions Index for 2005.

Ranked 72 in 2001, 73 in 2002, and 83 in 2003.

India study estimates the monetary value of petty corruption in 11 basic services like education, healthcare, judiciary, police, etc., to be around Rs.21,068 crores in 2005.

Equivalent to $4.7 billion U.S. dollars.

Reasons for widespread corruption:

Lack of transparency and accountability in the system

Lack of an effective corruption reporting mechanisms

Lack of honesty in officials in the Government Acceptance of bribe as a way of life, custom and culture Ineffective judiciary

Poor economic policies

Corruption Risks Continued

Mitigation of Corruption Risks

Establish a system of checks and balances for all executives and directors.

Require multiple approvals and signatures for major decisions.

Adhere as closely as possible to the Foreign Corrupt Policies Act of 1977, a U.S. federal law.

Most recently amended in 1998. Requires any company associated in the U.S. to have an adequate system of internal accounting controls.

Conduct third party audits to ensure sound business practices.

THANK YOU