Opportunities abound for brewers in developing markets, where consumption rates are significantly lower than the more mature markets. The global average per capita consumption of beer is 22 liters per person, far below the European average of 78 liters. Sustained economic growth, with rising disposable income levels that foster greater consumer confidence, is and will remain the primary factor for emerging markets to continue to increase consumption levels. Latin America currently is a fast-growing market with exceptional potential, thanks to it young age median, and good cultural acceptance of beer.
As a result of heightened emerging-market growth, multinational investment remains strong, as the leading global players look to build considerable portfolios in less-developed markets of Asia Pacific, Central and Eastern Europe, and Latin America. Still, in such markets, governments may regard alcohol consumption as a public health issue and abruptly decide to increase duty levels to curb consumption or the pace of its growth. Such an effort is currently taking place in the Russian Federation, where we expect duties on beer to double in 2007. However, the increased level, at about 5% of the average consumer price, will still remain well below the typical level for mature markets (e.g., 32% in the Britain).
Not all have low beer duties: Turkey's duty rate is in line with the harsher European regimes, such as Norway or Sweden, where duty accounts for more than 50% of the consumer price of beer. Turkey's tax rate also increased abruptly, doubling within the three years ended in 2006, slowing the growth of the market. Nevertheless, taxes on beer typically are only a fraction of those on distilled spirits in any given market. Changes in the tax environment are most likely, in the long run, to affect certain South American markets (especially Colombia, Peru, and Panama) as they benefit from more modest duty levels than Mexico or Brazil, although their tax environments currently are stable.
Demand is rising, but pricing is an issue. According to Euromonitor, the region's emerging markets experienced steady growth in beer volume driven largely by China, even though two of the three largest markets, Japan and South Korea, remained weak. Volume growth reflected the continued expansion in beer consumption in the region's less-developed sales areas. The continued expansion and increasingly influential Chinese economy was central to this growth. Rising demand for premium and imported lager can be linked directly to the generally upbeat financial environment, with consumers increasingly willing to trade up. Economy lager also performed well, highlighting the price sensitivity of the emerging Asia market.
China: China is the largest beer market in the world. However, it is complex and can be described as a collection of regional markets. Despite a wave of consolidation in recent years, the market remains highly fragmented with more than 500 breweries across the country. The Chinese beer market has grown tremendously in recent years on a combination of factors, including a huge amount of foreign investment in the market, an increased level of consumer spending, and government economic reforms. China's beer market grew nearly 15% in 2006, the third consecutive year of double-digit growth. While beer production in China has expanded over the past few years, the lack of a marketing and promotional culture and inadequate distribution systems have made it difficult for brewers to exploit the potentially vast market of new consumers and still fairly low per capita beer consumption.
Most international beer companies—including Anheuser Busch (BUD; S&P credit rating, A)—have invested in the Chinese beer market during the past few years, with the goal of building a national brand and distribution network. Still, the price of beer remains low, although the relatively affluent urban consumers are becoming more aware of brands, because the country's populous rural poor are extremely price-conscious. This will make the goal of building a national brand more difficult to fund internally given the expected significant amount of marketing investments needed. Although China holds boundless potential, foreign brands need to find the right strategy to be successful in this challenging domestic beer market. We expect further investments in China and that multinational beer companies will continue to focus on improving mix, specifically the premium beer category, which is expected to continue to grow faster than cheaper beers as consumers trade up to branded offerings.
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.
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.
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.
Brazil: The Brazilian beer market continues to present significant growth potential compared with more mature markets (e.g., Western Europe), both in terms of per capita consumption (49 liters per year, compared with the European average of 78 liters) and in the development of the premium segment (6% of total beer sales, compared with 15% in the U.S. and 33% in France). We expect continued economic stability in the country, and with it, decreasing unemployment rates, a greater transition of informal workers to formal/contracted jobs, and higher credit availability at lower interest rates (a relevant growth factor for both durable and nondurable goods consumption in Brazil). This should result in further progress in several aspects that affect beer consumption in the local market. These gradual improvements in consumers' purchasing power and disposable income should continue to support above-average beer volume growth rates in the next few years.
We expect AmBev (ABV) to remain the dominant player in Brazil (with market share in the 67% to 70% range), as competitors struggle against its very efficient operations and strong portfolio of brands. However, the market should remain highly competitive over the next few years, as FEMSA Cerveza attempts to establish a footprint after the 2006 acquisition of Cervejarias Kaiser Brasil from Molson Coors (TAP; BBB), which was followed by significant investments in operations and marketing (including the launch of a new brand). Other small players, such as Cervejaria Petrópolis (unrated) and Grupo Schincariol (unrated), will continue to seek ways to further improve their portfolio and brand positioning.
Chile: Although the Chilean beer market is relatively small compared with other markets in the region, it continues to present attractive growth potential in terms of per capita consumption (33 liters, vs. 90 liters in Spain) and in the development of premium brands. In 2006, beer consumption increased by about 14% (measured in liters, compared with 2005) and about 6% during the first quarter of 2007, continuing the growth trend started in 2003.
Despite increased competition, Compania Cervecerias Unidas (CU) is expected to remain the dominant player (with about an 89% market share). In 2006, CCU's beer volume sales increased by 13.1% in Chile and 12.9% in Argentina. We expect pressures over margins to continue, mainly on a more aggressive strategy from Cerveceria Chile (part of AmBev), the second-largest player in the market.
Mexico: The Mexican market is the world's eighth-largest by volume and also is essentially a duopoly market: Grupo Modelo (unrated) controls more than one-half of the market, and FEMSA's share is about 44%. From 2002 through 2006, the Mexican beer market had a compound annual growth rate of 3.4%, and we expect it continue at that level given the large young population, relatively low per capita consumption (estimated at 54 liters per year), and the developing economy. In the near term, brewers will focus on improving customer relationships across the distribution network, adjusting pricing policy to maximize revenue generation, and providing continuous innovation of products.
Industry participants will continue to focus on the growing U.S. Hispanic market, particularly in the southern U.S. An example includes Grupo Modelo's new joint venture with Constellation Brands (STZ; BB-) to import and market Modelo's Mexican beer portfolio throughout the U.S. and Guam for 10 years. We believe the U.S. market will continue to provide growth opportunities, but will also remain a challenge because of the differences in market dynamics.