Jul 12, 2015

Asia beer battle bubbles up with Heineken's return to Myanmar

Heineken quit Myanmar almost 20 years ago amid international sanctions and condemnation of the country's then military rulers. Times have changed and the Dutch brewer is back — to face a tough commercial battle with a company linked to the still-influential generals.

The opening of a new Heineken manufacturing site on Sunday will mark the latest salvo in what is a brewing Asia beer war. It comes two months after the launch in Myanmar of Denmark's Carlsberg and marks the latest effort by a western consumer company to cash in on the country's transition from no-go zone to coveted new market.

"It's very clear when you look at the region that Myanmar is one of the unusual territories where there is a huge potential for growth in the beer industry," says Roland Pirmez, Heineken's president for Asia Pacific. "Of course all the international players are looking at the market."

The race between the two European brewers — the world's third- and fourth-largest by sales — underscores the importance of first-mover advantage in one of the world's most promising territories for beer. The dominance of Myanmar Brewery, which enjoys a market share estimated at more than 80 percent, means it will not be an easy country to crack.

"Breaking into a market in which the incumbent is a state-owned monopoly is difficult and can be expensive," says Javier Gonzalez Lastra, an analyst at Berenberg. "Heineken should be prepared to make losses initially, with a view to making money over the long term, because Myanmar has huge growth potential."

Myanmar is the latest front to open up for beermakers in Southeast Asia, where Heineken and Carlsberg are battling for dominance despite turbulence in countries such as Indonesia. The region is attractive because of its young population, a welcome antidote to sluggish European markets where the brewers' sales are more exposed than those of their larger global rivals, ABInbev and SABMiller.

Heineken has shifted its focus from eastern Europe to Asia after its S$5.6 billion payment in 2012 to buy out 58 percent of Asia-Pacific Breweries from its joint venture partner. The stakes are arguably higher for Carlsberg, which has seen its big emerging market bet on Russia turn sour after economic decline and the imposition of sanctions by the west.

The prize in Myanmar is a market where Heineken estimates average consumption is just 3 liters per person a year, not even a 10th of the figure in Vietnam. Heineken's $60 million brewery near Yangon, Myanmar's biggest city, has the capacity to expand from an initial 30 million liters a year to 100 million liters, or almost 2 liters a person for each of the country's more than 51 million people.

Carlsberg, whose own brewery cost $75 million, said of its rival's opening: "There's probably room for both of us."

Both companies' expansion plans are ambitious, given that even a local beer can cost 50 cents or more — a significant chunk of an average income of a few dollars a day. But Heineken — which, like Carlsberg, is operating in a joint venture with a local partner — says the long-term prospects make it worth waiting between three and six years for a return on capital, in a market where alcoholic drink imports are still highly restricted.

"If they don't invest now then the market could get divided up between two or three of their competitors and they will find themselves having to rely on imports," says Francois Sonneville, a Rabobank analyst.

The challenge is heightened by the looming presence of Myanmar Brewery, which now manufactures at the site Heineken left behind during its previous tenure. Myanmar Brewery is 45 percent-owned by Union of Myanmar Economic, an opaque conglomerate that has close ties to the military and is in a protracted legal struggle to buy out its joint venture partner, the Singapore-based and Thai-owned Fraser and Neave.

Heineken has devised a bespoke drink to compete on price with its Myanmar beer, a best-seller at Yangon's ubiquitous beer stations. The new brew, named Regal Seven, after the workers who built the foundation for the factory, is intended as a stepping stone for what the company hopes will be a relatively quick migration to the more expensive Heineken brand.

Bruising battles in Asia are nothing new to the European brewers: Heineken had a big fight to win control of Asia Pacific Breweries, while Carlsberg's joint venture in Thailand with Thai Beverage ended acrimoniously in 2005.

"It's not the first time for us that we face this kind of leading company and competitors," says Heineken's Mr Pirmez. "It will be tough – but fair."

Source: CNBC