The Race for Developing Markets.
Gold Rush or Dashed Dreams?For better or worse the presentations at the last World Beer and Drinks Forum in Koln, Germany, showed how the leading international brewers are expanding their reach in the developing markets of the world, especially in Central and Eastern Europe as well as throughout Asia. This is bad news for those that fear cultural takeover by America or Western Europe. However it is good news in those countries that now see quality beer production expanding at prices that are affordable to the thirsty masses.
Cultural hegemony is even overtaking the Germans, who like to think that beer is a sacred part of their heritage. Their youth, as youth everywhere, like to rebel against the mature generation. One expression of this as it relates to beer is for them to drink brands that their parents don't. In the trendy discos and clubs a full 24% of beer sales are international brands, double that of 1998. And, as in the U.S., they like to drink their beer in long neck bottles. By doing so they help to build brand loyalty for these international brands at the expense of the traditional German brands that their parents quaffed.
Strength in Central Europe
But it is geography, politics and economics along with demographics that are causing developmental changes in the beer markets of Central Europe. This is especially true for those countries that are on the fast track to enter the European Union: Czech Republic, Estonia, Hungary, Poland and Slovakia. Most of the fast trackers have made a complete turnaround in their politics and economics by becoming democracies with established market economies. The speed of the change has been impressive with sound educational systems creating a motivated and ambitious youth as a driving factor.
The market in Central Europe is almost as big as that of Western Europe. However beer sales are just one third the volume which shows the great potential of this region as their economies rev up to speed. Privatization of the economy is well advanced, trade and the financial sectors have been liberalized and there is healthy competition to march their economies forward. The institutional reforms and economic development of an integrated Europe will further stimulate growth for the front runners of Central Europe that will join the EU in the next phase.
It seems that everyone wants western products in Hungary. However local incomes have been too low for consumers to afford international brands. To circumvent this, foreign brewers are buying many of the local breweries and are investing to improve their quality in order to quickly build their market share. As incomes rise in the years ahead they are counting on a more affluent middle class becoming increasingly upscale in their beer purchases. At that point they will be able to increase the sale of their international brands by selling them through their local breweries' distribution chain.
Heineken already has a 38% market share in Poland. They are developing brands, training people, professionalizing the organization and improving quality and consistency all to reinforce the brand image. This has been made easier by a workforce that already is over 75% fluent in English. By purchasing multiple breweries in these developing countries the new owners are gaining efficiency through economies of scale which, in turn, makes them more competitive in the market. This is the reason behind the fast consolidation in many of these markets. Those that gain share first also gain the efficiencies that make them more competitive and able to gain yet more share. This must be accomplished to insure the dominant first or second position in each market that is required for long-term success.
Alas, the tale is different for the laggards of Central and Eastern Europe. The countries that are not on the fast track to enter the EU have greater economic risk and political instability creating the need for both caution and a longer term perspective. Entry timing into these markets is critical and most international brewers think that now is not the time. However, the opportunity will come, and when it does, those that have judged it correctly will be the ones to profit if they move swiftly and consolidate their position before the competition.
Russia is Less Certain
Shiv V. Khemka, Executive Director of the Sun Group of Companies, states that only fools try to predict the future in Russia. However, he feels that the 1990's have been a good time to take the risk in this expansive market. Breweries, and the economy in general, had supply and quality problems early in the decade. He felt that entering the market at that point with low capital investment could get some breweries back on their feet thus gaining a competitive advantage with improved quality and increased economies of scale.
The Sun Group bought the first of their now eight breweries in Russia and two in the Ukraine almost eight years ago. All were running in the range of 20-30% of capacity. The first phase of activity was to increase sanitation levels by cleaning and painting the breweries. This immediately improved the quality of the beer and its shelf life. At the same time they worked to improve both the packaging and labeling. Before that time up to 70% of the volume in some plants was sold via tanker trucks that filled jugs and bottles on street corners. Now the ratio is 90% bottles and 10% kegs. The second phase of activity concentrated on getting financial controls in place by moving from Russian accounting to IAS and eventually to U.S. GAP and by changing from manual to computer accounting methods.
The third phase of development was to get control of distribution. This was challenging and dangerous. Distribution was mostly in the hands of outlaws who protected "their market" with guns. Wholesale distribution was begin in 1993 but it took two years and numerous security threats to make it work. Then, in 1998, the entire Russian economy was badly shaken by the ruble crisis. High inflation followed along with serious devaluation against most foreign currencies. But the market is stabilizing again and growth in the range of 5-10% is expected in the beer market with per capita expected to grow to 42 liters by 2004.
Due diligence and the ability to judiciously choose your partners is critical when doing business in Russia. Relationships with, and an understanding of, the authorities is also important. In some locations the regional government may be more powerful than the federal branch. In order to be successful it is important to build good relationships ahead of time with all important stakeholders. And then there is the problem of achieving success in Russia: it can bring on a number of legal and tax problems. Since many people and companies avoid paying required taxes the government directs its collection efforts to those companies that it views as successful. But with good accounting, and good relations with the government built up at the start, even these problems can be resolved.
There is a saying in Russia that things are never as good as it was hoped nor as bad as they were feared to be. Doing business in Russia is not for the faint of heart, but this is a good saying to keep in mind for those that do venture there.
China--Beer for the Masses
China has been a magnet for international brewers due to the large size of the market and its great potential. With 1.2 billion people and a per capita consumption of just 15 liters the upside shows fantastic potential. However these per capita figures are misleading, for urban areas are already at twice that level, while their country cousins drink only one-third the amount of their city brethren. But there is no doubt about it--People are drinking more beer in China. Beer's share of the total alcohol market went from 20% in 1981 up to 66.7% in 1997 while per capita grew over 250%.
With or without foreign intrusion there have been a lot of changes in the Chinese market during the 1990's. Consolidation is taking place with the number of breweries falling to 550 in 1997 from 813 just five years earlier. In that same period the number of breweries producing over one million hectoliters increased almost five fold to 41. The volume of the top ten brewers increased by 145.5% to 35.1 M Hi while their market share climbed almost five points to 18.8%. Along with this growth and consolidation are the serious near term problems of excess capacity, which is in the range of 60-90 million hectoliters, and over competition. Further consolidation and the closing of older, less efficient plants will help to curb these problems in the years ahead. However, now there is a major paradox in the world's second largest beer market. in volume terms, China's breweries account for the majority of global growth but low revenues per hectoliter mean that there is little profit potential. Consolidation does continu e to gather pace but it is still a very fragmented market.
While 28 international premium brands are fighting for market share, it is the local Chinese brands that hold 96.5% of the market. A huge price differential is the key. International brands are priced anywhere from two to five times that of the local brands. But relatively low volumes due to high pricing coupled with their high level of investment insures that few, if any, international brands are making money. It was faulty strategy that caused this dilemma. In retrospect, buying local brands appears to be a more effective strategy but now time is running out and the locals are playing this game very seriously. Green-field foreign breweries have high capital requirements while joint ventures with local brands have much lower capital requirements and, therefore, better profitability.
The object is to improve quality and increase economies of scale with a relatively low level of investment. This can be done via joint venture and by investing only judicious amounts of capital to produce beer "good enough" for the current market rather than trying to produce a world class product. This permits competitive pricing that can grow market share and produces profitability in line with the investment. While localizing value in this way, tiered pricing can be adopted to segment the market. Premium brands command anywhere from 10-80% more in price which is more acceptable in the market than the two to five fold increased demanded by international brands.
Taking control of distribution is the next strategic step, for distribution is the biggest bottleneck in the system. Infrastructure development in China has long lagged the growth in manufacturing. It is recommended that breweries employ a sales team to monitor and "shadow manage" distributors to help build their business skills. Distribution has not yet specialized with the current focus being on delivery and price. Margins and drop sizes have been too low to support enhanced services and the system is currently ill suited for promoting distributor loyalty. Concentrating on a local market arid working with the distributor helps to increase the brewery's share of the distributor's business which, in turn, gives the brewery increased leverage with the distributor. Breweries can also build distribution strength by directly serving emerging key accounts.
More people are advising that investors in China consider alliances, The market may be too big and challenging to go it alone. Potential allies include not only breweries but other food and/or beverage companies. The idea is to achieve success quickly in order to maintain corporate support of the Chinese investments and to attract top flight local talent.
The forecast for China's beer market in 2010 predicts a volume of 280 M Hl. This growth of almost 100 M Hl will make it the largest single market in the world. The number of breweries at that time is expected to contract to just 100 from 550 today. Per capita consumption is expected to be up by one third to 20 1 which still leaves room for further growth. It is the domestic premium brands that are expected to gain share to 18% from just 4% now. And imported brands are predicted to settle at just 2% of the market. International brewers who expect to make it big in China should be partnering with the locals if this forecast holds true.
Go to the Growth
Though developing markets all have their inherent risks, there is little alternative choice for the large international brewers who are committed to continually seeking growth. The developed markets of North America and Europe are expected to resume some growth in the next decade but the real action will be in the developing markets. It will be necessary to properly manage that risk by selecting the right strategy for each market and to properly predict and act on the best time for entry. No doubt R[ddot{u}]diger Ruoss' next World Beer and Drinks Forum, scheduled for September 18-19, 2001, in Munich preceding Drinktec lnterbrau, will shed further light on these, and other topics of interest.
Bill Siebel has 28 years experience in the brewing industry, and was the long-time chairman and CEO of the Siebel Institute of Technology of Chicago, IL.
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| Author: | Siebel, Bill |
|---|---|
| Publication: | Modern Brewery Age |
| Geographic Code: | 4E |
| Date: | May 8, 2000 |
| Words: | 2212 |
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