Big Brewers Pour Into Emerging Markets

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India: While India is a small beer market today, it is growing rapidly and has tremendous long-term potential, with a compound annual growth rate of about 6% since 2001. There are high barriers to entry: The market is highly regulated and heavily taxed by state governments (there are 28 states in India). Each state has full control over beer legislation, state excise rates, and policies regarding production and sale of beer. The distribution of beer follows one of three systems: government distribution (65% of distribution), auction market (15%), or free market (20%).

Under the government system, the state controls pricing and distribution within its territory. Under the auction market system, the government auctions licenses for alcohol sales in the area under its territory. The free-market system benefits both beer companies and end consumers, because the price is market-determined. The governments of Punjab and Haryana recently changed from the auction system to the free-market system, leading to tremendous growth in sales.

Other barriers include interstate beer movement restrictions, limits on brand entry, and costs for advertising, pricing, and acquiring brewing licenses. Per capita consumption remains low, although sales have increased since 2004 with the growth in the Indian economy and resulting higher disposable incomes among the youth. Moreover, more than 50% of the population is of legal drinking age, and this age group likely will grow further.

The market is highly concentrated, with two companies controlling more than 85%: United Breweries (unrated), the maker of Kingfisher, also has a joint venture with Scottish & Newcastle, that together controls close to 48% of the market; SABMiller holds an almost 38% share.

Eastern Europe

Growth is expected to continue. The Russian beer market is the world's fifth-largest, and one of the fastest-growing, almost doubling in size over the past five years. Health concerns about locally made spirits, tax changes, and the increasing influence of Western lifestyles on younger drinkers are underpinning the growth in beer consumption. Indeed, consumers increasingly are turning to beer, especially premium international brands.

In Russia, as in the similar Baltic markets and Ukraine, the pace of growth is slowing as these markets mature but should continue to expand 5% to 8%. We expect further growth as a number of developing markets enter the European Union.

Latin America

Markets are concentrated, with high barriers to entry. In Latin America, beer consumption should continue to grow at solid rates of 5% to 10% across the region, based on currently lower per capita consumption compared with mature markets. Markets generally are highly concentrated within each country, with high barriers to entry (e.g., distribution, logistics, culture, and market position). As a result, most attempts by the large players (e.g., AmBev and FEMSA Cerveza) have not yet proved profitable.

Still, some geographic expansion aimed at increasing export revenue generation is likely. In addition, companies will continue to focus on portfolio enhancements to keep up with the market dynamics and customer preferences, so the premium market presents good opportunities for growth. Moreover, potential opportunities exist across the consumer goods sector (e.g., beverage companies forming alliances with food companies), which could leverage market presence, relationships, and distribution capabilities.