The Battle Of The Bottle

It's an industry that's been frothing over with action. And for the first time, it's not just biggies Vijay Mallya and Manu Chhabria who are trying to make each other punch drunk in the Rs 2,000 crore beer market by gulping down the smaller players.

Take a look at what the foreign players are brewing. Within one month of getting permission from the Foreign Investment Promotion Board (FIPB) to set up shop in India, South African Breweries (SAB, maker of Castle beer) has swallowed two breweries.

The first was the breweries division of the North-based Narang Industries, controlled by Delhi-based Devin Narang, followed by Associated Breweries, a closely-held company of the Mumbai-based Irani family and the owner of brands like London Pilsner and San Miguel.

 

In fact, SAB's tie up with Narang came as a blow to Vijay Mallya, whose United Breweries (UB) is the largest player in the country's beer market, as Narang was a UB bottler.

Even as SAB was adding the final touches to its acquisitions, Brauerei Beck of Germany was preparing to acquire a stake in Himneel Breweries which produces Haake Beck beer under licence from the German company. Himneel is fully-owned by the Delhi-based Khemka family which has interests in the glass industry. At the moment, it is not clear whether or not the German company will acquire a controlling stake in Himneel.

This comes in the wake of more action. Stroh of the US has ended its four-year long collaboration with Rajasthan Breweries and has tied up with the Mount Shivalik group in the north and M P Distillers in the south. The application of Carlsberg of the US with the FIPB to form a joint venture with UB is expected to go through any day now.

Now look at the homespun beer barons. After completing the takeover of Hyderabad-based Charminar Breweries, Dubai-based Manu Chhabria's Shaw Wallace is known to be acquiring Mangalore Breweries & Distilleries from Bangalore-based businessman A J Shetty.

UB too was in the race for the company. Earlier, Shaw Wallace had signed an agreement with Shetty under which he would produce Shaw Wallace brands from his brewery. This is in addition to the three new greenfield breweries that Shaw Wallace is setting up.

Naturally, Mallya doesn't intend to bottle up his ambition in the beer business either. While sources at the UB office in Mumbai admit that some acquisitions are on the cards, unconfirmed reports say that its subsidiary, Millennium Alcobev, has acquired the Sand Piper brand from Delhi-based Inertia Industries in a Rs 50 crore deal. Inertia Industries managing director Sunil Tandon was not available for comment, a faxed questionnaire to Millennium Alcobev CEO Ravi Jain elicited no response. Tandon had earlier claimed that he had turned down an offer from Shaw Wallace to buy out his brand for Rs 10 crore. Meanwhile, Delhi-based Lalit Khaitan's Radico Khaitan is working overtime to enter the market some time in January 2001 with a slew of its own brands. Whew.

What has precipitated the churning in the industry? Actually, a combination of factors. While the beer market is booming raising the stakes for the larger players and luring new players, the smaller players are getting squeezed out of the competition.

In the past year, the beer market has grown by 12 per cent to 66.3 million cases (of a dozen each). In contrast, the market for Indian made foreign liquor (IMFL, the official name for rum, whiskey, etc) has been stagnating.

There are indications that the pace of growth will pick up in the near future. For instance, about a month ago, the Uttar Pradesh government has allowed free distribution of beer. The state accounts for 3.3 per cent of the country's beer market.

The implications are far-reaching: the control of the liquor mafia on the beer market will loosened and the product will be available in grocery shops also.

"The price will come down by at least 30-35 per cent. More people will shift from IMFL to beer," says an excited Monish Bali, a director with the Mount Shivalik group. As this is bound to increase the state's excise collection, other states are expected to follow suit. Soon.

At the same time, the smaller players, more so those with single-brewery operations, are feeling the heat of the competition. Aggressive marketing by both UB and Shaw Wallace has squeezed their profit margins. It is worth noting that UB as well as Shaw Wallace have very profitable IMFL operations. This gives them the financial cushion to market their beer very aggressively.

Mallya was the undisputed beer king of India till some years ago (see marketshares chart). Then Shaw Wallace, essentially an IMFL company till the early-1990s, got hooked on beer under Ravi Jain, who headed Shaw Wallace before crossing the floor to Mallya.

During the mid-1990s, Shaw Wallace identified strong beer as a potential for growth because consumers perceive strong beer to be more value for money. In retrospect, the strategy has paid off. Its Haywards 5000 is the largest selling brand in the strong beer segment. Also, the strong beer segment is growing faster than the mild beer segment. While it constituted 34 per cent of the market in 1993-94, strong beer accounted for 55 per cent of the market in 1998-99. As a result, its marketshare has zoomed from 8 per cent in 1993-94 to 25 per cent now. Much of the growth has been at UB's cost.

Then, late last year, Mallya struck: Jain left Shaw Wallace and joined UB's Millennium Alcobrev, a company set up to rehabilitate UB's unsuccessful brands like Charger, Bullet, Kalyani Black Label Strong, Flying Horse and Sun Lager.

Mallya queered the pitch by offering to buy out Shaw Wallace's three brands _ Royal Challenge, Director's Special and Haywards _ for Rs 250 crore. Two of these, Royal Challenge and Haywards, are Shaw Wallace's leading beer brands. Mallya made this offer in the courts where Shaw Wallace is fighting a prolonged battle with its creditors.

The rivalry between UB and Shaw Wallace drove the smaller companies to bankruptcy, leaving them with no option but to sell out. "They have huge advertising budgets. We can't match their price and their promotions. The losses have mounted. There is no option but to sell out," reveals a North-based businessman who has put his brewery up for sale.

This seems to have been the case with Associated Breweries too. A profit-making company till 1996-97, it went into the red the next year. Since then, it has been unable to get the froth back into its performance. And at least in one case _ Himneel _, there seems to be pressure from the foreign partner, Brauerei Beck. Says Himneel director C K Khemka: "If you have taken its technology and brand, you have to give a stake." The resigned tone is unmistakable. Khemka says the two are still discussing what stake should the German partner acquire in the company. "It should be clear in a week's time," he says. Brauerei Beck is being advised by PriceWaterhouseCoopers.

At present, the beer industry is licensed. So the most convenient way for a foreign player to enter the Indian market is by way of a joint venture in an existing brewery. This is the route that SAB has taken. Narang had been in touch with SAB for a while. But SAB didn't want to pick up a stake in his Narang Industries as it also had a distillery to make IMFL, a business that didn't interest SAB.

Then the two thought of a smart way out. An application was put up with the FIPB to form a joint venture between SAB (60 per cent), overseas body corporates (25 per cent) and Narang Industries (15 per cent). Instead of putting in cash into the company as his contribution to the equity capital, Narang has turned over its brewery in Uttar Pradesh to the company.

This gave SAB a foothold in the north. But it still needed a production base in the west which is the largest beer market in the country. SAB's search ended with Associated Breweries. It has two breweries: one at Navi Mumbai and the other in Goa. The deal was brokered by Mumbai-based investment bank SSKI. SAB has agreed to fork out $8.2 for a 60 per cent stake, subject of course to the FIPB's approval. Now that's not small beer. Mallya and Chhabria can certainly prepare for some stiff foreign competition now.