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Asia’s brews: Emerging force to reckon with

Source:Ringier Food / FPMJ

Date Published:3/22/2015 06:03:59 PM

Ignatius A* analyses key emerging markets that can provide growth and procurement opportunities to global beer brands
THE global beer market is expected to reach $137.4 billion in 2015 with a CAGR of 6.3% from 2010-2015. The growth of global brewers however has hit a sour note in the Western world and growth rates have stumbled in the US and European markets.
The rise of craft brewing poses a new challenge to traditional brewers, causing a spike in demand and cost of barley and hops. In the US, craft brewers are forecast to account for 12% of beer volume in 2015. 
With the industry being highly competitive and consolidated in the western market, brewers are looking to emerging markets in Asia. But competition is also intense in the region where cheaper local products are strong. 
Asian Beer Market Forecast (2014-2020)
Sustaining growth rate and procurement efficiency 
One key issue faced by global brewers is the decreasing acreage of barley in the US and EU. To mitigate this risk, companies can shift barley procurement base to nascent markets – India and Argentina and Algeria. 
Global brands can expand their presence in India, Viet Nam and South Korea, which offer growth opportunities and provide easy access to key raw materials and services. Key features of these markets include: untapped market potential; young population; local barley procurement opportunities; predominant usage of returnable packaging, and relaxing of stringent regulations.
Shifting barley procurement base
As the acreage of barley decreases, prices have risen and so brewers look to other sources for continued supply. A few global players have started procuring from India and Argentina. These destinations can also serve as export hub in the future. In addition, proximity to key emerging markets is expected to keep logistics cost competitive. The procurement cost analysis affirms the competitive edge India and Argentina hold over the EU market.
The India market 
Beer in India accounts for 13% of alcoholic beverages market, although it has been registering strong growth rates over the years. Though the market is highly regulated, with the right strategy, companies can reap saving and returns in the long run. 
India Beer Brands by Market Share
Source: Outlook Business 
Local demand for beer is driven by a growing young population with high disposable incomes. The United Breweries accounts for about 53% market share. In the past, global players, with the exception of SABMiller, have not been able to gain foothold for reasons such as complex regulatory system and the lack of efficient distribution network. 
Booming local barley market
The barley market has been showing considerable improvement, with more farmers taking up the crop, thanks to global companies like SABMiller. SABMiller partnered with the Government of Rajasthan in 2005 to improve the barley supply chain in India and has been closely working with farmers. It is planning to source 100% local barley for its Indian operation.
The Indian beer market is dominated by returnable glass bottle packaging and holds one of the well-established returnable glass bottle systems in the world. Returnable glass bottles are expected to keep the packaging cost (which contributed to 45% of total production cost) low since using returnable glass bottles cuts packaging cost by nearly 50%.
Indians like their beer strong. Strong beers account for 85% of the market. This key segment is dominated by Indian players, with United Breweries as the top player.
Global brewers’ product offerings are dominated by lager (mild) beers, which limit their reach in the market. To improve their market share, they have to produce stronger beers. Carlsberg has done this with the launch of the Elephant, whilst SABMiller announced plans to re-launch Fosters strong beer. 
Increasing per capita beer consumption in India is driven by the younger population with higher disposable incomes. This has also given rise to the premium beer segment which is fast-growing at a rate of 49%. International brands like Heineken and Ab InBev dominate.
Due to various government regulations, there are few retail outlets selling alcohol in India. The government of Maharashtra has separated beer from dark spirits in a move that will enable beer to reach more outlets. Retailers do not require special license to sell beer as in the case of dark spirits. More states are expected to follow, thus enabling beer to reach more consumers.
Viet Nam and low-cost beers
Next to China and Japan, Viet Nam holds the third biggest volume for beer in Asia. Unlike in India and South Korea where other alcoholic beverages constitute a sizeable portion of the alcoholic beverage market, beer accounts for 98% share of the market.
Vietnam Beer Brands by Market Share (2012)
Source: Euromonitor  
Viet Nam beer is forecast to grow 12% -15% until 2015 and 8% during the period 2016-2025. Beer volume stood at 3 billion litres at the end of 2012 and is expected to double by 2020 as favourable market conditions prevail. State-owned enterprises SABECO and HABECO lead the market.
Bia hơi (low-cost fresh beer) dominates the Vietnamese market with a share of 40-45%. Premium beer, which accounted for 12% in 2009, has made huge strides over the years and now account for 20% of the market. The growth can be attributed to the rapid urbanisation, a young population and high disposable incomes. The premium segment at the end of 2012 grew by 18%, and is expected to sustain double digit growth rates as consumers are ready to pay for more. The mainstream segment registered 8%.
Most malt needs are imported from the EU and Australia since Viet Nam’s production capacity of 35,000 tonnes per year is not enough to satisfy the local market. Australia’s share in malt imports increased following Free Trade Agreement between the two countries in 2009. With malt requirements increasing, many producers have set up shop to serve not only India but markets in neighboring Southeast Asia as well. In 2013, Australia-based Interflour opened a malt plant with a capacity of 111,000 tonnes.
Despite exorbitant taxes on imported beer brands, these are performing well and have formed a niche segment. Beers with an import price of VND 7,000-7,400 retails between VND 34,000-43,000 per bottle after a variety of taxes have been imposed.
In addition to importing beers and selling in retail, global brewers like Heineken have entered the draft beer segment. Though the segment has limited reach, brewers invest for many reasons, the most important one being, to target the affluent who are key consumers of premium beer. Global brewers believe increasing the brand value will translate into higher sales. 
Malt beers gaining strength in South Korea   
South Korea Alcoholic Beverage Share by Volume (2011)
Source: USDA 
South Korea’s beer market is set to grow at an annual rate of 2% during the period 2012-2022. The duopoly of OB and Hite-Jinro which account for 97% of the local market as well as the high cost of investment have kept the local brewers and new entrants at bay.  This has resulted in a lower diversity of products. Meanwhile, changing consumer preferences are spurring demand for 100% malt beers. This has resulted in the imported beer market exploding.
Most beers produced in South Korea are not made from 100% malt. For a mild taste, barley, corn and rice are used in the beer. But mild beers are losing their market share since the younger population prefers 100% malt beers. This trend can be evidently seen in the increase in the number of craft and micro brewers across the country. AB InBev through its wide portfolio of beers can effectively leverage the trend to generate revenue.
Phasing out import tax  
Korea employs a complex tax regime for imported beers and this has resulted in retail prices of beer being nearly 150% of its imported value. As a part of the government’s steps to boost economic activities, Free trade agreements have been signed with the US and the EU. By 2018, beers imported from these countries will be tax free. Phasing out of import tax is also expected to increase competition since more than 50% of the total beer imported will be tax free by then.
Korea imported beer market  
Now with the import taxes set to go in a phased out manner, the already increasing imported beer segment is expected to drive the growth of the industry, with the global brewers taking a major chunk of the premium segment of the market.
* Ignatius A is a lead analyst with Beroe Inc, a global provider of customised procurement services specialising in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. He specialises in tracking various categories in the beverages space.  
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