Last fortnight, south african breweries (SAB) acquired Miller Brewing from Philip Morris for $5.6 billion (Rs 27,440 crore), and in the process became the world's second-largest beer company, after Anheuser-Busch, the makers of Budweiser. And there could be more action on the acquisition front from SAB: it is now reportedly eyeing another global beer major Scottish & Newcastle (S&N), which could result in the creation of a SAB-Miller-S&N brewing powerhouse.

The repercussions of a SAB-S&N alliance will instantly be felt back at home. Reason? Vijay Mallya's United Breweries (UB) has S&N as a 26 per cent partner. A global partnership between S&N and SAB could well provide the South African brewer with a toehold in the UB camp, which today dominates the Indian beer market with a marketshare of just under 40 per cent.

There's scope for further consolidation too in the 70-75 million case (a case is typically 12 bottles) Indian beer market. Shaw Wallace, which controls 27 per cent of the beer market, has decided to bring in a strategic ally into the brewing business, by selling a 26 per cent holding. SAB, along with Heineken and Carlsberg, is in the race for this holding too. Clearly, recent activities in the Indian beer market are more than just froth.

UB, which has been on a shopping spree in recent times could soon find itself going toe-to-toe, eyeball-to-eyeball, mug-to-mug, with SAB. Throw in Shaw Wallace, which is in the news for its efforts to find a strategic partner- read that as global strategic partner-for its beer business into the script and the result is a heady cocktail of competition and more competition.

UB's Vijay Mallya has decided it's worth sacrificing short-term profitability on the alter of long-term competitiveness.

Battle Of The Beer Barons

Since its entry into the Indian market 21 months ago, SAB has been on an aggressive acquisition spree, picking up 9 million cases of capacity in regions ranging from Uttar Pradesh to Bangalore to Rajasthan to Aurangabad. UB may still be king by a long way, with a total capacity of 63 million cases, but the sheer speed at which the newest entrant into the Indian beer market is moving, coupled with the alliances taking place overseas, should have the Indian beer baron worried.

As things stand today, the battle for the beer bottle appears to be a two-horse race: not so much between the current No 1 and No 2-UB and Shaw Wallace-but between the No 1 and SAB. Industry sources don't rule out the Chhabria company eventually exiting the beer business to focus totally on liquor.

There's Mohan Meakins with a 12 per cent share, but it's only a matter of time before SAB, which already has 7 per cent of the market in the bag, creeps ahead. Another MNC in the race, Foster's India, is moving cautiously, which explains why it has only a 2 per cent share. However, the company's recent aggressiveness in Delhi-the market, quite literally, is flooded with the Australian beer-puts a whole new slant on its articulated strategy of seeking opportunities.

The regional players control a vital 13 per cent, and indeed could be ideal takeover candidates for both SAB and UB. SAB for its part is convinced that the acquisition route is the quickest way to race ahead of the pack. As Richard Rushton, Managing Director, SAB India, puts it: "Consolidation through acquisitions is important in India because setting up a greenfield brewery, despite the advantage of brewing the beer you know, proves uneconomical in the long term."

So is UB worried? Well, yes and no. Ravi Nedungadi, President & CFO, UB Group, is aware of SAB's reputation of injecting economies of scale into the brewery business. But he feels the Indian market is a different mug of beer. "To squeeze out efficiencies from the far-flung breweries of India is not possible... (what's more) they do not have a class brand... so we are confident of taking them on and winning," adds Nedungadi.

SAB's Richard Rushton is convinced that the acquisitions route is the quickest way to race ahead of the pack.

The unique nature of the Indian markets is not lost on Rushton. He concedes that making small breweries won't be easy. That's why he's talking about "critical mass, so that costs can be brought down and the brand developed at the front end."

The battle may be one of just words as of now, but it will soon wean its way into the beer drinking markets of the country-which can only expand.

For, the scope for increasing consumption of beer in India is enormous. In the US and China, for instance, consumption of beer stands at 220 and 215 million hectolitres, respectively.

In India, it's still just 5.5 million. The good news, though, is that the domestic market is growing at 10-12 per cent per annum, even as most developed countries have reached stagnation levels.

So although UB may be head and shoulders above the rest, the potential for growth that exists in the domestic market can easily tilt the scales in favour of a new brewer in town.

Of course, increasing beer consumption won't prove the easiest of tasks, thanks to high prices, distribution hurdles, and consumer perception. As Deepak Chaudhuri, Director, Shaw Wallace Breweries, observes: "In view of the high unit price of beer, a large chunk of beer consumers have turned to hard liquor leading to stagnation in the industry."

In India, then, beer competes with hard liquor, which isn't quite the case in developed markets, or developing markets like China, where it is largely up against soft beverages for share-of-sip.

Also, beer is not too economical to transport, which explains why manufacturers prefer to have a brewery close to market. Explains Pradeep Gidwani, Managing Director, Foster's India: "Every state in India levies different taxes, resulting in small, inefficient breweries across key markets, and since moving inter-state is not possible, it is not profitable to bank merely on a handful of units." For example, a 650 ml of Foster's in a Maharashtra vend costs Rs 50 and the same retails in Delhi for Rs 35.

Foster's Pradeep Gidwani is looking for strategic and focussed growth opportunities across the sub-continent.

On An Acquisition Spree

All these bottlenecks haven't deterred UB from hitting an acquisition trail of its own. It has little choice, for it has to pre-empt SAB. Mallya too, like Rushton, isn't keen on greenfield projects because of the longer gestation period involved, which could go up to two years-which is a long time in the beer business.

UB hasn't been afraid to put its money where its mouth is, by pumping all of Rs 100 crore into acquiring the Chennai-based Empee Breweries.

Clearly, Mallya has decided it's worth sacrificing short-term profitability on the altar of long-term competitiveness. His beer company made a Rs 56-crore loss last year, which the CFO attributes largely to the acquisitions. "In the past two years we have made investments of nearly Rs 350 crore in acquiring additional capacity," explains Nedungadi.

Mallya needs to mop up as much capacity as he can. For, if No 2 Shaw Wallace falls in the hands of a global major, UB's numero uno position would, at a stroke, come under threat. Shaw Wallace, meanwhile, is on its own expansion spree, going after only capacities, not brands. Over the recent past, the Chhabria company has amassed seven wholly-owned breweries and 14 contract manufacturing units.

Says Chaudhuri: "We have entered into contract arrangements with a number of brewers nationally to roll out our brands." The thinking at Shaw Wallace is that, in view of the ban on liquor advertising, it makes more sense to increase the volumes of existing bestsellers and thus capture a larger chunk of the market. That explains why Haywards 5000 has been able to grow by 35 per cent last year.

The Importance Of Alliances

Shaw Wallace, though, has realised that tying up with a global beer major makes more strategic sense than slugging it out against the MNCs without a partner. And it's not alone in sUBscribing to that train of thought.

There's Mount Shivalik Industries too that has taken a similar tack by opting for a strategic tie-up with Stroh's International. Reaffirms Monish Bali, Director (Marketing), Mount Shivalik, which makes Thunderbolt, a popular strong beer brand in North India. "It is impossible to fight foreign players unless you have deep pockets and so we've tied up with Stroh's." He doesn't fail to add: "From all accounts, it seems UB is the only local brewer who has what it takes to pose a formidable challenge to the MNC brigade." With some assistance from a MNC, Scottish & Newcastle.

Internationally, beer is a highly evolved business and therefore, demand-led. Brands flank across borders and people know the beer they're drinking. In India, where the market is still at a nascent stage and highly fragmented, demand orientation seems a long haul. For the moment, capacity is the name of the game. And SAB and UB are worthy contenders for the biggest draught of Indian beer.

-with additional inputs from Venkatesha Babu