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One To One Untitled Document

Ravi Nedungadi,
President & Chief Financial Officer,
United Breweries

United Breweries Ltd (UBL), the holding company of the UB Group, is the leader in beer with a marketshare of over 40 per cent. But the company's performance last year was nothing to write home about. Sales dipped by 4.8 per cent to Rs 247 crore and post-tax profits declined by 9.8 per cent to Rs 11 crore. The current year's performance indicates that the company is gradually recovering. In an interview with Rajani Sinha of myiris.com, Ravi Nedungadi, president and chief financial officer of UBL, spoke about the company's plans and prospects. Ravi Nedungadi is a chartered and cost accountant by profession. He joined the UB group in 1980 as corporate treasury. In 1997 he returned to India, after 15 years with UB International Ltd, to head finance at McDowell & Co. Ltd( the flagship of UB group). In 1999, he was elevated to the President & CFO of the UB group. He has keen interest in music, reading and cricket.
  04th December 2000

What is the status of the beer industry in India?
Historically, the Indian beer industry has been quite small compared to the spirit industry. This is not the situation elsewhere. This is because of government levies and taxation policies. In India, licensing and taxation of potable alcohol is a state subject. The total revenue from this industry works out to an average of 17 per cent of state governments' revenues. As state governments are able to tax this industry directly, they have the tendency to tax heavily. The treatment meted out both to beer and spirit as one unified category subject to the same level of rigorous regulations and taxation has made beer uneconomical. Typically, in an upcountry market, a bottle of beer may cost between Rs 60 and Rs 70. Against this, spirits are available at lower prices.

Your comments on the performance of the beer industry last year.
In many ways, last year was the worst in several decades. The industry actually saw flat, or even a mild negative growth. Capacity utilisation in the industry was below 60 per cent. Even large companies, including those from the UB group, went through very difficult times. However, buoyancy is returning this year. Sales have gone up by 27 per cent in the six months of the current fiscal and we expect this growth to be sustained.
We are urging the government to make the policy for beer distinct from that of alcohol or spirits on the grounds that beer has a lower alcohol content and is consumed by youth. Today more people are going for cheap alcohal because they find beer uneconomical. In a way government is encouraging consumption of hard alcohal by treating beer and spirit the same way. In contrast, world over beer is much less regulated than spirit. It is openly available in groceries and supermarkets. We believe deregulation of the beer industry in India is inevitable and when that happens, the industry will definitely grow.

What is the consumption pattern of alcohol and beer in India?
In India, beer is preferred by youth. Though 60 to 65 per cent of consumers start with beer as their first drink, they shift to hard alcohol by the time they nudge 30. Moreover, consumption of spirits and beer is not entirely a social phenomenon in India. A lot of people drink alone. These people are looking for value for money. In this category, value for money translates into how much fizz one gets from consumption. Obviously, thanks to a lower alcohol content, the fizz is lower in beer compared to spirits such as whisky and rum. This is causing depression in the beer industry.

There is a discernible shift in demand towards strong beer. What is the potential for growth in this segment?
Traditionally, strong beer has been growing much faster than mild beer. Strong beer constitutes 55 per cent-plus of the overall beer market. However, if delinking of beer and spirit happens, and if beer gets taxed on the basis of alcohol content, this trend can be reversed.

How will the delinking of taxation of spirit and beer help?
The beer industry will not improve if the government does not delink taxation of spirit from beer. State governments have begun moving in this direction. Uttar Pradesh has taken the lead here. It has not only delinked taxation; it has also opened up the distribution network. So, today in UP one can buy beer from the supermarket. As a result of this policy, consumption of beer has gone ballistic in UP, which has pulled up the state's revenues. Similarly, Delhi, where various government agencies controlled the retail outlets, has now permitted each company to set up its own retail outlet. After seeing the buoyancy in revenue caused by the radical changes initiated by UP, we feel that more states will follow. Though the excise policy for beverage and alcohol has not been announced by Maharashtra this fiscal, one of the items which is under serious consideration is delinking of beer and spirits and opening up the distribution network. In fact one of the ministers of Maharashtra has made a statement to this effect.

What factors helped sales to increase by 26.8 per cent in the six months ending September 2000 when compared to the corresponding period of the last fiscal.?
Beer is a highly cyclical product, just like soft drinks. Put differently, consumption of beer is linked to weather conditions. People drink beer during summer. Last year, the soft drinks industry did not do well. Even Coke and Pepsi reported declines in sales because of mild and somewhat wet summer. This year, summer was normal and hence demand for beer was greater. Moreover, revenues from places such as Uttar Pradesh and Maharashtra helped the topline bulge in the current fiscal. We introduced a new brand called Kingfisher Strong during July-August(1999) in UP.
Strong beer is unique to the Indian beer industry. Through strong beer the industry is responding to meet customer aspirations for value for money. Typically, strong beer is not very palatable. Actually, UBL has been among the last of the companies to enter the strong beer segment. Originally, strong beer came from small companies such as Mohan Meakins. In the market, there are local brands available in this segment.
We wanted to launch a brand under the Kingfisher umbrella. Being an international brand, we did not want to tamper with it. So we took enormous pain, hired an Irish brewer who worked with us for a couple of years to perfect a strong brew and this was launched as Kingfisher Strong beer. It is a genuinely strong beer and you have a good taste as well. This brand has made significant inroads wherever it was launched. During last year, we had budgeted for a million cases and during the first quarter of this year we have already sold 1.1 million cases. So, we can say that Kingfisher Strong has very strongly contributed to the sales of UBL.

While the operating profit of the company has increased by 19 per cent to Rs 13.4 crore in Q2 (ending September 2000), the net profit has decreased by 18 per cent to Rs 3.3 crore, when compared to corresponding quarter of the last fiscal. What are the reasons?
Apart from being a brewer, UBL is also the holding company for the UB group. That means, UBL is an active investment holding company, which trades in stocks and shares. So, what happens in a particular quarter may be driven by external circumstances, which are not entirely within our control. If we calculate the profits of the company by excluding the other income (which has decreased from Rs 20.7 crore to Rs 11.2 crore in Q2) we see operating profits of Rs 2.1 crore in Q2 when compared to losses of Rs 9.5 crore in the corresponding quarter of the last fiscal.
Last year, along with the disadvantage of wet summer months, we also saw the entry of two multinational players, San Miguel and Fosters, into Maharashtra. Both these brands positioned themselves, not in the premium imported product segment, but in the local products segment. There was a time when Fosters was considerably cheaper than Kingfisher. As it does not make much sense in this industry to sell from one state to another because of all kinds of duties, Fosters had set up a large brewery in Maharashtra and resorted to aggressive pricing in order to capture the market. Kingfisher was left with no choice but to reduce the price as well.
The current status is that Fosters has not grown after the initial flush. They sell around 40,000 cases per month. On the other hand, we sell around 1,25,000 cases per month. We have also been able to roll back some of the discounting. So, we can say that the combination of underutilisation of capacity and entry of two new brands following the market gain strategy pulled our profits down last year.

What is your long-term brewery strategy considering high freight costs and import-export levies involved in inter-state movement of beer?
We strongly believe that in the near future the beer market is going to open up. Currently, as the beer industry is going through a rough phase, the other players are willing to sell and since we have the capability to pass through this phase we are consolidating our position. We are aiming for a market share of 50 per cent.
We feel that we need to have brewing capacity in each state. Localised manufacturing is extremely important in the beer industry because freight costs are high and there are import-export levies in interstate movement of beer. We are in the process of tying up with a large number of breweries across the country. This is not only to enhance our capacity but also because we do not want the breweries to go into the hands of any prospective MNC entrant. We have recently acquired a 65 per cent stake in Associated Breweries Ltd and 13.3 per cent in Inertia Industries Ltd. I would like to add that we have not yet finished our acquisitions.

What are your plans for your non-core business?
We want to have a transparent structure. We are planning to segregate our brewing operations from other operations, which include all investment activities, including real estate. Soon, we will announce what we propose to do with our real estate business. We have already put our non-core business of pharmaceuticals for sale. We are in talks with three parties for the sale of this business and a buyer is likely to be finalised shortly.

What is the problem with your proposed JV with Carlsberg?
We want to have a foreign brand in UBL. We began talking to Carlsberg, because it has a good brand recall among Indian consumers, compared to a few other European brands. As far as American companies are concerned, they were excluded on the grounds that when it comes to taste Indians prefer European products to American products. Discussions with Carlsberg have been going to and fro for two reasons. One, if we enter into any joint venture with only a brand marketing or brand licensing arrangement, then there are chances that once UBL puts all its marketing and distribution muscle behind it and spends money to achieve critical mass, the JV partner could walk away. To avoid this, we want Carlsberg to bear all the marketing-related and brand-related expenses. The alternative that they offered was to take a stake in UBL. But, until the segregation of our operations takes place, we are not in a position to discuss this matter with them. Neither is Carlsberg interested in our other operations apart from brewing. So, the appropriate time could come when we finalise on the segregation. Meanwhile, discussions are also going on with other international brewers. So, I cannot say for certain that we will be tying up with Carlsberg.

What do you have to say about the recent government decision to ban beer/alcohol advertising?
The banning of beer/alcohol advertising will work to the advantage of UBL as it will make the entry of new players into the market difficult. We have well-known brands so it won't make much difference to us. Moreover, we are already following surrogate advertising as a norm. We are also moving from surrogate advertising into real activity that generates value over time. One of them is Kingfisher mineral water. We feel that mineral water is set to become a very large business in the country. We have tied up with several franchisees and we are looking at some tie-ups, which will make our mineral water a substantial entity. Apart from giving us a legitimate advertising platform, we expect this will also generate genuine value over time.
Another way we advertise is through sponsoring sports and fashion events. We are also attempting to translate these sponsorships into properties. Football is very popular in certain parts of the country and so rather than sponsoring football events we have actually acquired a 50 per cent stake in one of the leading football clubs in East Bengal. Similarly, McDowells, our sister company, has acquired a 50 per cent stake in Mohan Bagan. What we are trying to do is this: rather than throwing money down the drain through sponsorships, we are trying to make it through the process of acquiring property. Similarly, Kingfisher has instituted the National Fashion Awards to be associated with the world of fashion. We also have a line of Kingfisher clothes and lifestyles. We have engaged in-house designers for this purpose.

Are you planning to launch new brands this year?
Our objective is not to use our mega brands to compete with other brands. Last year, we did a mistake by lowering our prices to compete with Fosters. We do not want to repeat this mistake. Our proposal is to have another company in the group which will take on such offensive strategies. UBL will be primarily focussing on core brands which include Kingfisher, Kingfisher Strong, UB Export Large and Kalyani. On the other hand, our subsidiary Millennium Alcobev will be taking on the flanking strategy. There are brands such as Charger and Bullet, which are owned by UB but have been licensed out to Millennium Alcobev. They have introduced another brand called Zingaro. So, you may see one or two new brand launches this year. Launching new brands is a speculative proposition, especially because of high promotion costs. Consumer communication is very expensive because of the ban on advertising.
Since introduction of new brands is a problem, we are also contemplating introduction of beer under well known labels like McDowell and Bagpiper.

Can you summarise your strategies?
I can summarize our strategies and plans by saying that we believe very strongly that the Indian beer market is set to explode. We are positioning ourselves in such a way to ensure that we tie up sufficient capacities by whatever arrangement possible to prepare ourselves for this future boom in demand. We are in the process of expanding our own breweries, wherever it makes sense. Apart from contract brewing, we will acquire strategic stakes in other companies in order to tie up capacities to meet this demand. We also believe that the whole discounting phenomenon will disappear and that should lead to increased profitability. Thirdly, UBL is committed to complete corporate reorganisation during the next fiscal and this should delink brewing from other activities. As a group, we are committed to dispose of our non-core assets. For us, non-core is anything that is not directly or indirectly related to our beverage alcohol business.