It was the first broadside in a battle that is about to turn nastier.
A few days after SABMiller India managing director Richard Rushton signed a deal with the Chhabria family-controlled Jumbo Group in Dubai, which gave him control over Shaw Wallace Brewery, UB Group chairman Vijay Mallya issued a statement which said that the deal was not in the best interests of the minority shareholders of Shaw Wallace.
More important, Mallya made light of any threat arising to his beer business from the alliance. "It places SAB as the second largest brewer in India, though significantly smaller than the market leader UB Group which sells approximately 40 million cases per annum, produced at 18 owned breweries and six contract breweries spread all over India," Mallya's statement said, adding : "I hope that the reckless and wasteful promotional expenditure by SWC in a futile attempt to chase UB volumes will be replaced by a more prudent marketing strategy."
A few weeks before the SABMiller-Shaw Wallace deal was announced, Mallya had told Business Standard that he had sounded out the Chhabria family to bury the hatchet and work together to develop the market.
Sources close to the Chhabrias admitted that such feelers had been received, though no concrete steps had been finalised.
But the day Mallya came out with his statement, the Jumbo Group hit back in a style reminiscent of its founder, the late Manohar Rajaram 'Manu' Chhabria.
A group spokesperson said: "Over the past few years, the robust growth of Shaw Wallace's beer business has left Mallya confused and confounded. Rather than fight Shaw Wallace imaginatively in the market, Mallya has used every trick in his bag to stall the progress of Shaw Wallace, including the formation of the beer joint venture."
Obviously, Mallya's peace initiative was grounded before take-off. Jumbo Group sources insist that Mallya is rattled at the alliance between Shaw Wallace and SABMiller which has thrown up a player with a 35 per cent share (27 per cent from Shaw Wallace and 8 per cent from SABMiller) of the Indian beer market, not very far from UB's 40 per cent.
This, the sources add, is just the beginning of the challenge to Mallya: "Unlike UB, we have a very strong portfolio of strong beer (Haywards 2000 and Haywards 5000 from the Shaw Wallace stables and Knock Out from SABMiller's) which is the fastest-growing segment of the Indian beer industry."
The statistics do suggest that strong beer sales have outstripped mild beer sales in the last few years. While the beer market was split 51:49 in favour of mild beer in 1997-98, it became 63:37 in favour of strong beer by the end of 2002-03.
Clearly, the growth in the beer market is being caused by strong beer which is perceived as more value for money by the consumers. And leading the charge for SABMiller-Shaw Wallace in this segment is Haywards 5000. With sales of over 15 million cases in 2002-03, it is the largest brand in the strong beer market.
The joint venture also gives SABMiller enough brewing capacity all over the country to launch Castle, its flagship beer brand.
"The joint venture has led to the formation of a beer entity having a vast infrastructure of 22 breweries in its ambit which includes 11 contracted units. SABMiller's Castle in the mild segment has been growing in popularity across the markets it has been launched in India. SABMiller's growth constraint has been manufacturing capacity. But that constraint has now been removed," Jumbo group sources said.
Interestingly, three of the four breweries acquired by SABMiller before its alliance with Shaw Wallace are located in the states of Karnataka and Rajasthan where Shaw Wallace did not have any brewery.
To be sure, the stakes are high for both the parties. The Indian beer industry is all set to touch the 100 million case sales mark in the current financial year. This represents roughly 20 per cent growth over the last year's sales figure of 82 million cases.
The beer industry, which has been growing at a lacklustre pace of 2 per cent to 5 per cent per annum for years, finally showed signs of excitement last fiscal with a growth of 15 per cent.
And nobody knows the Indian beer market better than Mallya who took over the reins of the group in 1983 when he was still in his twenties after his father, Vittal Mallya, died.
UB's 18-million case Kingfisher is the largest selling beer in the country. He has often outsmarted his rivals in business. He had beaten SABMiller in the race for Associated Breweries, for instance.
To cash in on the rise of strong beer, UB has extended the Kingfisher brand to this segment as well. It is worth noting that for over a year now, Mallya has been looking at ways and means to give a big boost to the equity of the Kingfisher brand.
He has tied up with the Bangalore-based San Motors to roll out the Kingfisher Storm sports car, though Mallya recently told Business Standard that he has told the company that it needs to make some improvements in the car before receiving any financial support. He had also tried to get the India Fashion Week rebranded the Kingfisher Fashion Week.
The UB Group has also tied up with the UK-based Scottish & Newcastle. The multinational company will bring in Rs 450 crore (Rs 4.5 billion) in the UB group which would be converted into an equity stake within the next five years.
While S&N proposes to invest Rs 250 crore (Rs 2.5 billion) into the demerged beer business of UB through a combination of preference shares of Rs 200 crore (Rs 2 billion) and a loan stock of Rs 50 crore (Rs 500 million), it is planning to pick up a 40 per cent stake in Millennium Alcobev, another UB group beer company, with the remaining Rs 200 crore.
This infusion of funds promises to give UB considerable financial muscle. By adding money raised through some real estate deals to the S&N investments, the group has become debt-free.
This not only curtails the group's annual interest outgo, but also gives it the option of raising low-cost debt (interest rates have been falling, remember) to bankroll acquisitions or expansion plans in the future.
It is worth remembering that SABMiller had first initiated talks with Mallya for a possible joint venture. But things didn't work out and Mallya tied up with S&N.
"The chemistry was better with the S&N brass. I could just lift the phone and talk to any of the top bosses there," Mallya said.
SABMiller's Rushton is unwilling to say why the talks fell through. However, he admits that it is SABMiller's policy to enter into an alliance only when it has full management and operational control.
Things would have been different had things worked out between Mallya and SABMiller. It seems the two were destined to be in warring camps.
