Aayush Mardikar

Akshat Gupta

Gaurav BV

Haresh L

Harsh Agarwal

Jitesh Khanna

Jojan V Jose

Nataraj K

Saravanan D

Susmita Dash

2010

Alcoholic Beverages Industry

A ReportBIMTECH

About the Industry

The global alcoholic beverage industry is a multi-billion dollar a year business. Like many other

industries it is seeing a growing shift away from mature markets in North America and Europe to

newer developing regions such as China, India and Russia. Consolidation is also having a huge

impact on what we drink and where we drink it. From Diageo and Pernod Ricard to SABMiller

and Fortune Brands, who are the major players, what are they selling and who's buying what

where. The USD 900 billion global market for alcoholic beverages is experiencing a period of

unprecedented change. While much of the market is still in the hands of small, local enterprises,

truly global players are steadily emerging. There are high-performance businesses and although

they have yet to command the premium from investors that other high-performance consumer

goods companies enjoy, they are well positioned to do so, thanks to highly focused M&A

strategies in key, value-growth markets. The lion’s share of future value will go to a select group

of companies whose product portfolios encompass all three major categories of alcoholic

beverage— beer, spirits and wine.

Plainly, the path to future success lies in being global—but with a focus on the right markets and

the right categories. The alcoholic beverages industry offers few opportunities for organic

growth. The notoriously high costs of distribution and brand building have created huge barriers

to entry—hence the importance of acquisitions. Consolidation continues apace as aggressive

acquirers seek to demonstrate that they can wring value out of the companies they buy,

especially if they have paid a premium. Yet the market remains very fragmented. Diageo, which

is by far the biggest spirits company globally, accounts for less than 10 percent of the total

industry. Like many others, the alcoholic beverages industry is also feeling the effects of

dramatic shifts in demography and lifestyle. Today’s drinkers are more affluent and

sophisticated. Encouraged by restrictive legislation, they also are increasingly health conscious.

These consumers demand premium products—preferably products they can customize—and

they are willing to pay a premium for them.

The trend to drinking less but paying more is not restricted to developed markets. Aspiring

urban, middle-class drinkers in several Asian countries, Eastern Europe and parts of Latin

America are also slowly trading up and will account for an increasing share of value growth in

the future. There are, to be sure, wide variations globally in these megatrends. Western Europe,

where aging populations and a high number of financially independent female drinkers power

the premiumization trend, must be managed for value, rather than volume growth. Meanwhile,

Eastern Europe, which combines high growth with rising levels of disposable income, offers the

potential for both, as does much of Asia. With few exceptions, premiumization has yet to make

much impact in Latin America. Yet Brazil and Mexico are already among the largest and most

profitable markets for beer and spirits in the world. Moreover, the region is home to some of the

key emergent global brewers, Brazil’s giant InBev and Mexico’s Modelo among them.

Some leading businesses have created partnerships and alliances with other companies in the

industry to build the critical mass necessary for distribution scale and efficiency in key markets.

Heineken USA, for example, has struck a deal with the Mexican brewer FEMSA Cerveza to gain

an edge in that market. Heineken USA will benefit from greater scale and from the broader

portfolio of brands, which will allow the company to increase its leadership in the import

segment. And Anheuser-Busch uses third parties—including Heineken companies—to brew and

sell its leading brand, Budweiser, under license in Italy, Russia, Argentina and Spain, among

other countries.

Leading businesses are also keenly aware that in-market scale is even more important than global

scale in delivering economic profitability and that they need relevant capabilities to achieve it.

For brewers this means, in effect, creating a global market of key local brands that deliver high

market share and drive profitability. SABMiller, for example, is a top brewer in 35 of its 50

markets, most of which are dominated by one brewery—a powerful position indeed, since

profitability in brewing is so highly correlated with scale. Ownership of the principal high-value

local brand also captures the universal drift to premium products. Thus, by building a strong

portfolio of premium brands that can be tailored to consumers in each market, leading distillers

derive a similar advantage. Diageo, for example, ensures that consumer-centric brands like

Smirnoff underlie each of the spirits categories— whiskey, gin, rum, tequila, liqueurs and vodka

—in which it has critical mass. Meanwhile, Constellation Brands has been rapidly building up its

premium wine portfolio through acquisitions that include California’s Ravenswood Winery and

Australia’s largest wine producer, BRL Hardy. In an industry where distribution costs are

inordinately steep and so much consumption takes place outside the home, high-performance

businesses are distinguished by their ability to control the route to the consumer. These leaders

ensure the availability of their products and brands to target consumers in the outlets of their

choice—whether off-trade (hypermarkets, supermarkets, convenience stores) or on-trade (bars,

nightclubs, restaurants). And they can do so because they can connect directly with their

customers.

Types of Alcoholic Beverages (Major Products)

Brandy

The word "brandy" comes from the Dutch word "brandewijn," which literally means "burned

wine." Brandy originated in the Mediterranean region in the seventh century. Made from fruits, it

is broken down into three categories: grape brandy is made from fermented grape juice from

crushed grape pulp or skins; pomace brandy is made from pressed, not crushed, grape pulp, skins

and stems left over after the production of wine; and fruit brandy, which is all brandy that is

made from fruits other than grapes. (Fruit-flavored brandy is not the same--it is a grape brandy

flavored with another fruit.) Brandy has an alcoholic content of about 40 to 50 percent.

Scotch

Whiskey (spelled with an "e" in Ireland and the United States, and without an "e"--"whisky"--

everywhere else) covers a broad range of distilled spirits. There are nine basic types, and each

type has dozens of varieties with various flavors. Finding your perfect whiskey can be quite an

adventure. Scotch whiskey comes in two types: single malt, which is a unblended whiskey from

a single batch, and blended whiskey, which is a blend of multiple malts (anywhere from six to 30

or more).

Vodka

Vodka is a distilled beverage and one of the world's most popular liquors. It is composed

primarily of water and ethanol with traces of impurities and flavorings. Vodka is made from the

fermented substances grain and potatoes.

Vodka’s alcoholic content usually ranges between 35-50% by volume; the standard Russian,

Lithuanian, and Polish vodkas are 40% alcohol by volume (80 proof).

For such a liquor to be denominated "vodka” governments establish a minimum alcohol content;

the European Union established 37.5% alcohol by volume as the minimum alcohol content for

European vodka. Vodka is traditionally drunk neat in the vodka belt — Eastern Europe and

Nordic countries — and elsewhere. It is also commonly used in cocktails and mixed drinks, such

as the bloody Mary, the screwdriver, the sex on the beach, the White Russian, the vodka tonic,

and the vodka martini.

Rye

Rye whiskey is a distilled beverage with a minimum of 51 percent rye grain. The other

ingredients can be corn and/or malted barley. However, these regulations only apply to rye

whiskey made in the United States. Rye is also made in Canada, and since the regulations do not

apply there, Canadian Whiskey does not have to contain any rye at all. Most rye whiskey is made

in Pennsylvania and Maryland. Rye whiskey is used in many cocktails, such as the Old

Fashioned, the Manhattan and the Whiskey Sour.

Bourbon

Bourbon is another distilled spirit whose content is regulated by law. Bourbon must be a

minimum of two years old, be at least 80 proof, be made from at least 51 percent corn and be

aged in charred, new oak barrels

Rum

Rum is a distilled alcoholic beverage made from sugarcane by-products such as molasses and

sugarcane juice by a process of fermentation and distillation. The distillate, a clear liquid, is then

usually aged in oak and other barrels.

The majority of the world's rum production occurs in and around the Caribbean and in several

Central American and South American countries, such as Dominican Republic, Guatemala,

Colombia, Venezuela, Jamaica, Trinidad and Tobago, Puerto Rico, Brazil, Belize, Guyana and

Cuba. There are also rum producers in places such as Australia, Fiji, the Philippines, India,

Reunion Island, Mauritius, and elsewhere around the world.

Light rums are commonly used in cocktails, whereas golden and dark rums are also appropriate

for drinking straight, or for cooking. Premium rums are also available that are made to be

consumed straight or with ice.

Rum plays a part in the culture of most islands of the West Indies, and has famous associations

with the Royal Navy (where it was mixed with water or beer to make grog) and piracy (where it

was consumed as Bumboo). Rum has also served as a popular medium of exchange that helped

to promote slavery along with providing economic instigation for Australia's Rum Rebellion and

the American Revolution.

Beer

Beer is the world's most widely consumed and probably the oldest of alcoholic beverages; it is

the third most popular drink overall, after water and tea. It is produced by the brewing and

fermentation of starches, mainly derived from cereal grains—most commonly malted barley,

although wheat, maize (corn), and rice are widely used. Most beer is flavored with hops, which

add bitterness and act as a natural preservative, though other flavorings such as herbs or fruit

may occasionally be included. Some of humanity's earliest known writings refer to the

production and distribution of beer: the Code of Hammurabi included laws regulating beer and

beer parlors, and "The Hymn to Ninkasi", a prayer to the Mesopotamian goddess of beer, served

as both a prayer and as a method of remembering the recipe for beer in a culture with few literate

people. Today, the brewing industry is a global business, consisting of several dominant

multinational companies and many thousands of smaller producers ranging from brewpubs to

regional breweries.

The basics of brewing beer are shared across national and cultural boundaries. Beers are

commonly categorized into two main types—the globally popular pale lagers, and the regionally

distinct ales, which are further categorized into other varieties such as pale ale, stout and brown

ale. Beer forms part of the culture of beer-drinking nations and is associated with social

traditions such as beer festivals, as well as a rich pub culture involving activities like pub

crawling and pub games such as bar billiards.

Wine

Wine is an alcoholic beverage, typically made of fermented grape juice. The natural chemical

balance of grapes is such that they can ferment without the addition of sugars, acids, enzymes or

other nutrients. Wine is produced by fermenting crushed grapes using various types of yeast.

Yeast consumes the sugars found in the grapes and converts them into alcohol. Different

varieties of grapes and strains of yeasts are used depending on the type of wine being produced.

Although other fruits such as apples and berries can also be fermented, the resultant wines are

normally named after the fruit from which they are produced (for example, apple wine or

elderberry wine) and are generically known as fruit wine or country wine (not to be confused

with the French term vin de pays). Others, such as barley wine and rice wine (i.e., sake), are

made from starch-based materials and resemble beer and spirit more than wine, while ginger

wine is fortified with brandy. In these cases, the use of the term "wine" is a reference to the

higher alcohol content, rather than production process. The commercial use of the English word

"wine" (and its equivalent in other languages) is protected by law in many jurisdictions.

Wine has a rich history dating back to around 6000 BC and is thought to have originated in areas

now within the borders of Georgia and Iran. Wine first appeared in Europe at about 4500 BC in

the Balkans, and was very common in ancient Greece, Thrace and Rome. Wine has also played

an important role in religion throughout history. The Greek god Dionysus and the Roman

equivalent Bacchus represented wine, and the drink is also used in Catholic Eucharist ceremonies

and the Jewish Kiddush.

Gin

Gin is a spirit whose predominant flavor is derived from juniper berries (Juniperus communis).

Although several different styles of gin have existed since its origins, gin is broadly

differentiated into two basic legal categories. Distilled gin is crafted in the traditional manner, by

re-distilling neutral spirit of agricultural origin with juniper berries and other botanicals.

Compound gin is made by simply flavoring neutral spirit with essences and/or other 'natural

flavorings' without re-distillation, and is not as highly regarded.

There are several distinct styles of gin, with the most common style today being London dry gin,

a type of distilled gin. In addition to the predominant juniper content, London dry gin is usually

distilled in the presence of accenting citrus botanicals such as lemon and bitter orange peel, as

well as a subtle combination of other spices, including any of anise, angelica root and seed, orris

root, licorice root, cinnamon, cubeb, savory, lime peel, grapefruit peel, dragon eye, saffron,

baobab, frankincense, coriander, nutmeg and cassia bark. London dry gin may not contain added

sugar or colorants, water being the only permitted additive.

Regulations on Alcohol in India

The Alcohol Situation in India

Alcohol is one of the commonly consumed intoxicating substances in India. It has traditionally

been drunk in tribal societies, although it has won increasing social acceptance among other

groups, urban males being the prime example. It is easily available and widely used, especially at

festivals such as Deepawali and Holi. At the moment the use of alcohol is infrequent among

women who also tend to resist the habit among male family members.

Between 15 and 20 per cent of Indian people consume alcohol and, over the past twenty years,

the number of drinkers has increased from one in 300 to one in 20. According to The Hindustan

Times, it is estimated that of these 5 per cent can be classed as alcoholics or alcohol dependent.

This translates into about five million people addicted to alcohol.

Of what is actually consumed, the Intake of Indian Made Foreign Liquor (IMFL) is growing at

the considerable rate of 15 per cent a year. The Hindustan Times says that 65 per cent of the

Indian liquor market is controlled by whiskey manufacturers. The state of Kerala stands first in

per capita consumption of liquor at 8.3 litres, followed by Punjab 7.9 litres.

Taxes on alcohol

Alcohol is a significant contributor to government revenues in many states. In most states this

accounts for over 10 per cent of total state tax revenues, whilst in the Punjab this accounts for

over one third.

Policy measures in India

Alcohol policy is under the legislative power of individual states. Prohibition, enshrined as an

aspiration in the Constitution, was introduced and then withdrawn in Haryana and Andhra

Pradesh in the midi-1990s), although it continues in Gujarat, with partial restrictions in other

states – Delhi, for example, has dry days. There was an earlier failure of Prohibition in Tamil

Nadu.

Increasing taxes as a means of reducing alcohol consumption is problematic as it has been shown

to be unresponsive to price change. Tax increases will further add to economic hardship for

consumers and have little or no impact on the reduction in other negative impacts. There would,

however, be an increase in corruption, crime, and the production and consumption of illegal

liquor.

An important aspect of policy is to delay initiation among youth. One way of doing this is to

enforce age limits. The legal minimum age to purchase liquor ranges from 18 years in some state

to 25 years in others. Delhi has minimum age limit of 25 years. So far, the efficiency of

enforcement has not been studied. It has, however, been shown that an increase in the age of

legal drinking from 18 years to 21 years achieves nearly 60 per cent of the effect of prohibition

on alcohol consumption.

Legislation: alcohol advertisement

The Cable Television Network (Regulation) Amendment Bill, in force September 8, 2000,

completely prohibits cigarette and alcohol advertisements. The government controlled channel,

Doordarshan, does not broadcast such advertisements but satellite channels however are replete

with them.

Efforts to counteract the problem

Ministry of Social Justice and Empowerment has been active in this field. In 1985-86 it urged the

establishment of a reduction programme. The ministry co-operates with media and youth

organisations and collaborates with the Ministry of Health and Family Welfare and with NGOs

involved in the problem. The Ministry of Social Justice and Empowerment, in partnership with

the United Nations International Drug Control Programme (UNDCP) and the International

Labour Organisation (ILO), has launched three major initiatives for alcohol and drug demand

reduction.

Non-Governmental efforts have been led by the Indian Health Organisation (IHO), Youth for

Christ India (YFC), Health Related Information Dissemination Amongst Youth (HRIDAY), and

the Student Health Action Network (SHAN).

ALL INDIA DISTILLERS’ ASSOCIATION

In 1953, an all India body of distillers was constituted which was baptized All India

Distillers’ Association. During the Intervening four decades this association has not only grown

in size but has also widened its sphere of activity. At the time of its birth, the association had a

membership of only fifteen whereas the fraternity has now swelled to close to two hundred. The

constituents of the association control more than 80% of the total distillation capacity of the

country. Besides, ten state associations have also been on stituted in Maharashtra, Gujarat,

Karnataka, Tamilnadu, Andhra Pradesh, Madhya Pradesh, Bihar, Uttar Pradesh, Punjab and

Haryana, which are all affiliated to the parent body. It is indeed a matter for gratification that

ours is the sole representative body of the alcohol industry and distilleries., in the country. The

Association has been carrying out a pioneering work with regard to catering to interest of the

alcohol industry and has gone from strength to strength through out all these 54 years, to the

extent that it is now a force to reckon with as far as the alcohol and distillery industry is

concerned. The advent of Ethanol as an ideal blend for admixture 16 with Motor fuel/ petrol has

provided further boost to importance of this industry and the association, in the country’s

industrial scenario. We visualize a bright future for the industry and a much stronger association

in very near future. AIDA is the leading business support organizations for the alcohol & liquor

industry in India and maintains the lead as the proactive business solution provider through

continuous interaction at the constituent members’ level and various government agencies level.

It is therefore now the largest and the oldest apex organization of Indian Alcohol Industry which

stands for quality, industry – Government- Society partnership and to enhance the quality and

productivity of the distillery/ alcohol industry on the whole. AIDA today espouses the shared

vision of the Alcohol / Distillery industry in the country and speaks directly or indirectly for the

entire industry.

POTENTIAL OF LIQUOR MARKET IN INDIA

It is India's potential for whisky -- it accounts for about 60 per cent of the Indian Made

Foreign Liquor (IMFL) market -- and other spirits such as rum and vodka that is attracting the

MNCs to India. They reckon that India is a big and growing mark et with a weakness for spirits,

especially whisky. This is not surprising considering that in the wake of the reforms, as the social

transformation gathered momentum and global consumption patterns get increasingly

assimilated, the country's moral fabric is loosening. Drinking liquor has rapidly gained

acceptance and is no more taboo -- even among the conservative middle-class but whose

attitudes have changed with improved standard of living has improved. Liquor companies have

been quick to latch on to this trend. Groupe Pernod Ricard, the e world's fifth largest producer of

alcoholic beverages, will be introducing new brands for the growing middleclass market. In fact,

the youth, women and middle-class -- overlapping segments – are being targeted by the liquor

companies looking for growth. A good example of this potential is the per capita beer

consumption placed at half-a-liter for India, in contrast to the Czech Republic's consumption of

half-a-liter a day. It is also hardly comparable to the very high levels of per capita beer

consumption on in the developed and some of the developing countries. But the emerging trends

are interesting. Strong beer (alcohol content in excess of 5 per cent), a category non-existent in

developed countries, has been growing at about 15 per cent in India for t he last two years, and

already accounts for 55 per cent of beer consumption. This trend is slated to continue. Thus,

there is significant latent demand and vast scope for growth in liquor consumption, both in the

urban and prosperous rural areas, once the e regulatory environment is relaxed. A little noticed

factor pertains to the gradual, but pronounced, shift of liquor consumers to the organized sector.

The Indian market has traditionally been inclined towards the unorganized sector, which

accounts for two-thirds of the liquor consumption in India. However, maturing tastes and

preferences are making the Indian liquor market more brand-led. This should promote growth in

the organized sector.

INDIAN MNCs IN MARKET

McDowell & Co., a 100-year-old company in the liquor business and a part of the UB

group, together with sister company, Herbertsons, commands 34 per cent of the liquor market.

The local brands have a wide reach too and are focusing on strengthening the network and

logistics to minimize costs. McDowell brands are available in 90 per cent of the retail outlets in

the country, and the company is setting up dedicated and model retail outlets to take advantage

of the unrestricted point-of-purchase advertising. It plans to spend Rs. 18 crores on brand

relaunches. This is expected to further boost brand growth. In 1998-99, the company's brands,

six of which are millionaire brands, grew 24 per cent to 14.5 million cases. Most Indian

companies effectively meet competition from the MNCs by restructuring and

upgrading products, processes and practices to international standards. In recent years, there has

been a spate of product launches and relaunches to improve perceived value through the up

gradation of physical appearance, perception of blend and investment in brand-building. UB has

considered all the elements of the product -- the carton, the bottle, the cap, and the label -- for a

revamp. In their efforts to imp art an international look to their products, local companies are

sharpening their focus on the personality and imagery of their brands with the help of

international agencies. Yet, the MNCs have slowly gained a 10 per cent share in the whisky

market. What is not revealed is the MNCs success in carving out higher shares of about 55-60

per cent and 30 per cent in the super-premium and premium segments respectively. Thus,

Seagram 's Royal Stag and Oaken Glow, and Brown and Forman's Southern Comfort have

overtaken Royal Challenge (SWC), Peter Scot (Khoday) and McDowell Premium. 25 MNCs are

able to leverage the price-quality relationship and the intensive investment in brand-building

through advertising and sampling better than local companies. The local firms appear to exploit

the distribution dynamics more. However, it cannot be overlooked that the local Scotch industry

is small, and both bottled-in-India Scotch and duty-free Scotch account for about one lakh cases

each. Thus, to grow in value and volume, the MNCs will have to enter the regular segment which

accounts for over 40 per cent of the total market and also contain the forays of local majors into

the premium segment. IDI, a 60:40 joint venture between the International Distillers and

Vintners (IDV) and Polychem Distilleries, has introduced Gilbey's Green Label whisky in the

regular segment. On the other hand, SWC, which did not have a significant presence in the

deluxe whisky segment, launched a DSP Black Whisky to fill this gap. It is reported to be

growing in market share. MNCs will come under increasing competitive pressures and

have to be alert. Fetters MNCs face numerous hurdles. Being licensed to produce only grain-

based liquor – the exception being International Distillers India -- which is about four times

costlier than molasses-based liquor produced by Indian companies, the MNCs are confined to the

premium segment and denied a level playing field. The Foreign Investment Promotion Board

(FIPB) subjects the MNCs to a capacity ceiling of 10,000 kl (kiloliters) which some companies,

like the IDI, have cleverly sidestepped by contract manufacture from across the country since

there is no ban on outsourcing. IDI's smooth entry into India and its success as a profit-making

venture, unlike many other MNCs, can be partially attributed to these advantages.

MNCs also face the problem of unfulfilled export obligations arising from the imposition of the

foreign exchange neutrality norm at the time of the FIPB approval and are lobbying for the

relaxation of this condition. Under the norms, the MNCs are required to counter the imports of

alcoholic concentrates and export liquor products in equal amounts. They maintain that the

``Made in India'' tag of their export consignments acts as a barrier. Has it discouraged MNCs that

entered India later? Not really. It has been a valuable experience for them. Fosters from

Australia, which launched its beer in 1998, had sales 26 exceeding expectations in a low growth

market right from the start. It is consider ring an expansion. The beer market, estimated at around

67 million cases, is growing at 8-9 per cent. In the last four years, the strong beer (alcohol

content over 5 per cent) market has been growing at 15 per cent, while that of lager beer has been

sluggish at 5-6 per cent. Local and foreign companies have lost no time in adjusting to this

change in the

consumption pattern. Strong beer is becoming popular due to its value for money.

Challenges facing the industry

A typical challenge in the Asian beverage sector’s fight against corruption is the complex

interrelationship between politics and the private sector. Strong governance is clearly vital for

companies to ensure the integrity of their organizations, relationships with consumers and

government authorities to avoid corrupt business practices.

India has 28 states and 3 union territories. A tangled web of tax and regulations across Indian

states remains a major barrier to market growth in the country. Differing regulations on pricing

and distribution, as well as fluctuating excise charges, foster inefficiency in the alcohol sector

and make it harder for brewers to attract consumers. One could easily produce the amount of

liquor drunk in India with two to four breweries. The reason there are so many is the legislation.

Transporting beer is expensive, so you need breweries in the different states. Each state levies

taxation on alcohol at its own determined rates and excise duties, and controls distribution

channels in its own way. It is a state‐by‐state market and not a national market. Taxes are levied,

often at higher rates in relation to world prices, on all alcoholic products crossing the state

borders. This makes it essential to have production centers in different states. Operators of

outlets like wholesalers, retailers, bars and restaurants, and bonded warehouse operators must be

licensed and should pay the varying state license fees.

Government Regulations and Issues

The brewing industry is subject to extensive government regulations at both the federal and state

levels, as well as regulation by a variety of local bodies. Some of the regulations imposed at the

federal and state level involve production, distribution, labeling, advertising, trade and pricing

practices, credit, container characteristics, and alcoholic content. Federal, state and local

governmental entities also levy various taxes, license fees, and other similar charges and may

require bonds to ensure compliance with applicable laws and regulations. Specific alcohol

taxation (as opposed to more general sales taxes) is primarily a federal and state right although

some states permit some additional local taxation. The brewing industry must also comply with

numerous federal, state, and local environmental protection laws.

Price Restrictions- Price restrictions in many large markets remain a biggest challenge for the

industry. The Government decides the End Consumer Price (ECP), leaving the manufactures

with no say in determining the price of the beer. In a free market economy this has no rationale.

Inadequate Market Infrastructure- The market infrastructure for alcohol in India is inadequate.

For every 21000 persons there is one outlet hampering the availability of beer. In China, for

instance the figure is 300. The highly regulated market hampers beer sales, unlike most

developed countries where beer and wine are not regulated in grocery/ retail stores.

Marketing regulations with advertising: The Cable Television Network (Regulation) Amendment

Bill, in force September 8, 2000, completely prohibits cigarette and alcohol advertisements. The

government controlled channel, Doordarshan, does not broadcast such advertisements but

satellite channels however are replete with them. Further there is ban on telemedia

advertisements of alcoholic beverages.

Sin Taxes

Sin taxes is a term used to describe taxes that are place on items, usually alcohol and tobacco

products. Most often these sin taxes are similar to a sales tax and are added to the price of the

item by the retail agency selling the product. Sin taxes are used by governments for a number of

different reasons. Sin taxes are often used to by governments to help pay for the damage that

society faces due to the perceived effects that long term use of these products can have on

people. When it comes to the alcohol industry advocates of sin taxes on alcohol often like to

point out that the negative effects of drunk driving, need for increased policing to protect society

from criminal activity possibly associated with drinking, and for the medical costs that

governments face from the treatment of alcohol related conditions.

Typical use of sin tax funds include:

Funding of efforts to educate the public about the effects of use of these products.

Funding of health agencies

Promotional materials

Funding of facilities for health purposes

Sin taxes are not seen as universally good even with their potentially positive effect on a

Government’s ability to provide services, improve infrastructure, or balance a budget. Many see

sin taxes as a regressive form of taxation because it has a much larger effect on those that are of a

lower income level. In this case a person who makes $100,000 per year will pay the same

amount of tax on a 12 pack of beer as someone who makes $35,000 per year. To many this

seems to be wholly unfair. In addition to this many feel that the choice to drink alcohol is a

personal choice and society should not have to pay for peoples choices.

Social & Cultural Issues

Throughout history there has consistently been opposition to the sale and use of alcohol. This

opposition to the use of alcohol traditionally stemmed from a moral or religious opposition to the

consumption of alcohol. Today however, increasingly it isn’t a moral or religious reason that

prompts this opposition; it’s the negative medical effects that abuse of alcohol has been shown to

have on the human body. Society is also feeling the effects of alcohol abuse; it is because of this

that Sin Taxes have been levied on alcohol, as an attempt for government to find a ways and

means to profit from the sale and consumption of alcohol. Below, we will examine some of the

issues that are challenges to the beer industry.

Religion

Society has long had people who because of their beliefs feel that the consumption of alcohol

was immoral and should be outlawed. Very few faiths have come out and made the blanket

statement that the consumption of alcohol is not permitted however. In light of that

statement, one of the few religions that has come out and stated that alcohol consumption is

forbidden is Islam. “Intoxicants were forbidden in the Qur'an through several separate verses

revealed at different times over a period of years. At first, it was forbidden for Muslims to attend

to prayers while intoxicated. Then a later verse was revealed which said that alcohol contains

some good and some evil, but the evil is greater than the good (2:219). This was the next step in

turning people away from consumption of it. Finally, "intoxicants and games of chance" were

called "abominations of Satan's handiwork," intended to turn people away from God and forget

about prayer, and Muslims were ordered to abstain from it. This is very significant because a

large part of the population of India, one the fastest growing beer markets in the world practices

Islam. In Middle East alcohol as a whole will always have a very insignificant market. However

in India, with a growing population and growing emphasis on incorporating more of western

society into a very diverse society there is great opportunity for expansion into that market.

However any company that looks to expand in India and other countries in that region needs to

understand and be prepared for significant resistance from the Islamic communities. In addition

to Islam here in America there are factions and groups that are still advocating against the sale or

consumption of alcohol.

Health and safety:

Trauma, violence, organ system damage, various cancers, unsafe sexual practices,

premature death and poor nutritional status of families with heavy drinking fathers are

associated with alcohol use.

Hazardous drinking was significantly associated with severe health problems such as

head injuries and hospitalizations. 15 to 20% of traumatic brain injuries were related to

alcohol use. Thirty seven percent of injuries in a public hospital was due to alcohol.

Seventeen point six percent of psychiatric emergencies were caused by alcohol

Thirty four percent of those who attempted suicide were abusing alcohol

Work place:

Twenty percent of absenteeism and 40% of accidents at work place are related to alcohol.

Annual loss due to alcohol was estimated to be Rs.70 000 to 80 000 million

In a public enterprise, number of workplace accidents reduced to lesser then one fourth of

the previous levels after alcoholism treatment.

Family:

Eighty five per cent of men who were violent towards their wives were frequent or daily

users of alcohol. More than half of the incidents were under the influence of alcohol. An

assessment showed that domestic violence reduced to one tenth of previous levels after

alcoholism treatment.

3 to 45 % of household expenditure is spent on alcohol. Use of alcohol increases

indebtedness and reduces the ability to pay for food and education.

Alcohol abuse leads to separations and divorces and causes emotional hardship to the

family. The emotional trauma cannot be translated in terms of money but the impact it

has on quality of lives is significant.

Science and Medicine

Long term alcohol use has been linked to a number of medical conditions including cancer, heart

disease, diabetes, and liver failure. As long as people continue to abuse alcohol and use it to

excessive amounts there will be continued efforts by the medical and scientific community to

encourage people to decrease their consumption or to quit using alcohol overall. The effect on a

body when extensive use of alcohol is discontinued is well documented and it is these efforts that

persuade science and medicine to continue to educating/pushing for people to discontinue the use

of alcohol.

Opportunities and future growth prospects

Alcoholic Drinks in India

The alcoholic drinks market in India registered strong double-digit volume growth for the second

year in succession in 2007. Favorable demographics in the form of a strong economy, improving

lifestyles and higher disposable incomes encouraged consumer expenditure on alcoholic drinks

over the review period. Increasing deregulation in the form of lower taxes and greater retailing

opportunities for beer and wine through supermarkets/hypermarkets in certain states such as

Maharashtra, West Bengal and Chandigarh further increased the affordability and accessibility of

alcoholic drinks.

Domestic manufacturers embark on global plans

Even as international players set their sights on developing markets such as India for the next

phase of growth, Indian manufacturers increased their global footprint in 2007. Indian

manufacturers stepped up the aggression by not just expanding their product offerings in the

domestic market but also entering into joint ventures, increasingly tapping into international

markets and exhibiting a greater appetite for expanding overseas through the inorganic route. For

example, United Spirits completed the acquisition of major Scotch whisky player Whyte &

Mackay in 2007 and wine manufacturer Bouvet Ladubay in August 2006. Champagne Indage

acquired Australian wine company Tandou Wines, while Radico Khaitan has been building up

its exports in the Middle East and Africa by establishing a joint venture in the UK and United

Spirits has been exporting its brands to China.

UB Group consolidates its lead even as multinationals step up competition

UB Group, the parent company of United Spirits and United Breweries, further established a

firm footing in the Indian alcoholic drinks market in 2006. A number of new product launches,

product relaunches and packaging changes as well as promotional activity surrounding its key

brands, Kingfisher and McDowell’s, ensured yet another good year for the alcoholic drinks

behemoth. Meanwhile, multinationals such as Diageo, Beam Global and Anheuser-Busch rolled

out affordably priced made-in-India products to challenge the position held by UB Group.

Easing regulations allow sales through supermarkets

The legislation surrounding the retailing of alcoholic drinks witnessed some liberalization efforts

in the latter half of the review period. With state governments easing regulations for the off-trade

retailing of alcoholic drinks, the alcoholic drinks industry has much cause for cheer. Maharashtra

has been at the forefront of these changes with retailing of beer and wine being permitted in

supermarkets. The eastern state of West Bengal has also given the green light to the retailing of

beer and wine through supermarkets. Chandigarh also jumped on the bandwagon, with excise

policy changes allowing retailing of wine through supermarkets. Diageo tied up with retail giant

Reliance Retail for the distribution of wine in 2007.

Bright growth prospects for alcoholic drinks

Alcoholic drinks are expected to post a strong performance in the forecast period, riding on

changing demographics, higher disposable incomes, increased social acceptance of drinking

liquor and regulatory changes. With a number of international players slated to launch their

brands in the Indian market, category investment, product availability and promotions are bound

to increase, which will provide a wider range of choices for Indian consumers. Moreover, current

low per capita consumption in India is expected to provide room for growth in the forecast

period.

Major Mergers and Acquisitions

The alcoholic beverages offers an interesting case of a non-science based industry where firms

have grown very large and survived (as the longevity of their brands and products shows) for a

very long time. It is an industry, moreover, whose largest firms have always ranked among the

largest in the world, along with firms from science based industries such as electronics and oil

and capital intensive such as automobiles.

The alcoholic beverages industry offers few opportunities for organic growth. The notoriously

high costs of distribution and brand building have created huge barriers to entry—hence the

importance of acquisitions. Consolidation continues apace as aggressive acquirers seek to

demonstrate that they can wring value out of the companies they buy, especially if they have

paid a premium. Yet the market remains very fragmented. Diageo, which is by far the biggest

spirits company globally, accounts for less than 10 percent of the total industry.

Diageo, for example, ensures that consumer-centric brands like Smirnoff underlie each of the

spirits categories—whiskey, gin, rum, tequila, liqueurs and vodka—in which it has critical mass.

Meanwhile, Constellation Brands has been rapidly building up its premium wine portfolio

through acquisitions that include California’s Ravenswood Winery and Australia’s largest wine

producer, BRL Hardy.

Leading businesses are constantly on the lookout for acquisition opportunities in high value-

growth markets. Witness SABMiller’s acquisitions of Italy’s Birra Peroni, Romania’s Aurora,

Colombia’s Grupo Bavaria and the Chinese division of Lion Nathan—all in the past five years.

A similarly highly focused M&A strategy has boosted Diageo’s share of the global spirits market

and made Constellation Brands the market leader in the wine category. Some leading businesses

have created partnerships and alliances with other companies in the industry to build the critical

mass necessary for distribution scale and efficiency in key markets. Heineken USA, for example,

has struck a deal with the Mexican brewer FEMSA Cerveza to gain an edge in that market.

Heineken USA will benefit from greater scale and from the broader portfolio of brands, which

will allow the company to increase its leadership in the import segment. And Anheuser-Busch

uses third parties—including local Heineken companies—to brew and sell its leading brand,

Budweiser, under license in Italy, Russia, Argentina and Spain, among other countries.

Brands have played a critical role in the evolution of multinationals in alcoholic beverages.

Brands often determined the nature and scope of mergers and acquisitions in this industry and so

help explain the successive merger waves that have transformed it since the 1960s. The firms

that became truly global were primarily those that developed a portfolio of successful brands

recognized in many countries. By acquiring and repositioning such brands, firms were able to

respond to changes in consumption, competition and regulation, to move from familiar to

geographically and culturally distant markets, and thereby to achieve continuous growth and

long-term survival. Standard accounts of growth and internationalization tend to give primacy to

investments in science and technology.

The world’s largest firms in alcoholic beverages, 1960, 1970, 1980, 1990, 1999

(Amounts states in millions of current US$)

References

http://www.accenture.com/Global/Services/By_Industry/Consumer_Goods_and_Services/R_and_I/AchievingIndustry.htm

http://www.wikipedia.org/

http://www.agriculture-industry-india.com/agricultural-commodities/alcoholic-beverages.html

http://www.indireports.com/doc/18709189/Environmental-Scan-The-Global-Alchohol-Industry

http://www. addictionindia.org/.../alcohol-related-harm-in-india-a-fact-sheet.pdf

http://www.indiacompanynews.com/post/view/785/Bright-growth-prospects-for-Alcoholic-

Drinks-in-India/

http://web.bi.no/forskning/ebha2001.nsf/dd5cab6801f1723585256474005327c8/

a6cb7066ea59eda6c12567f30056ef4d/$FILE/C4%20-%20Lopes.PDF