20, 21 e 22 de junho de 2013 ISSN 1984-9354
MEASURING INDUSTRY CONCENTRATION IN BRAZIL’S BEER SECTOR - 1997-2012
Élisson Telles Moreira (PPGE - PUCRS) André Ricardo Stramar (PPGA - PUCRS) Fernando Valentim Pardo Eisele (PPGA - PUCRS) Helio Roberto Mathias Damiani (PPGA - PUCRS)
Resumo Objetiva-se neste trabalho analisar o grau de concentração do setor de cerveja do Brasil entre 1997 a 2012. Trabalha-se com medidas de concentração para análise da competitividade do setor. Os índices Herfindahl e Entropia de Theil indicam que essa indústria é altamente concentrada. A indústria cervejeira do Brasil caracteriza-se por um oligopólio altamente concentrado e a tática de competição principal é feita por meio de marketing e diferenciação de produtos. Por fim, isto tende a impactar negativamente na entrada de novos competidores que queiram crescer para além de suas fronteiras e segmento de mercado.
Palavras-chaves: industrial organization, concentration indices, oligopoly, beer industry
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Introduction
The concern about the possibility of excessive market concentration in the beer industry in Brazil began from the constitution of the American Beverage Company – AmBev in 1999. The company was created from the merger of two former rivals, the brewers Brahma and Antarctica. At the time, the economic environment of the industry, in the country and world, was conducive to the creation of the company. After economic liberalization in Brazil, there was a need and incentive for the formation and strengthening of large national companies – “The Champions”. With the globalization movement, there was an increase in international competition in the beer market. Traditional companies such as Anheuser-Busch, USA, and Heineken, Netherlands, went shopping in the 1990s, as a measure to reduce the exposure to their home markets –, already saturated. Soon, mergers and acquisitions, for this industry, represent an attitude that seeks to: (1) increase the variety of products in its portfolio with the objective of the risk reduction in the face of consumer choice, (2) achieve economies of scale to become more competitive compared to the rivals, and (3) go in search of the most attractive markets that have high growth in demand for beer. In this sector, as in many others, companies that do not enter in order to continuously grow, certainly it will be acquired by rivals. It is observed that economic power, obtained by merger, via associations or mergers, may bring harm or benefits to economic agents. Regarding to the damage, it is emphasized fundamentally the unfair price increases and, consequently, loss of social welfare due to reduced competition. With respect to the benefits accrued, it’s examined the gains from economies of scale, increase productivity and value creation to the organization. Thus, with this dual analysis, it can be inferred about the viability or necessity of a larger enterprise. The practice of anticompetitive conduct and the exercise of market power are the basis of the analysis of antitrust regulation and policy. In Brazil, specifically, there is the Lei 8.884/94 described to regulate mergers, ex-ante and ex-post. As for the focus ex-ante, it analyzes the behavior of the participants of the competitive process. The punishments in this
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case are of order against the repressive acts that harm the competitive process. Ex-post side, there is a standard preventative against the formation of more concentrated market structures. Competition is a fundamental environment for the analysis of company strategy (Schneider et al., 2009). The debate about the impacts of industrial concentration and effects on the competitive sectors of the economy are studied by several articles. The main studies are divided into analyzes through econometrics (Seixas, 2002; Cysne et al., 2003; Turolla et al., 2006), concentration indices and Structure-Conduct-Performance (SCP) model (Oliveira et al., 2010; Coelho Jr. et al., 2010; Ferreira; Gomes, 2006; Rocha, 2010), Porter’s Five Forces model (Quintella; Costa, 2009; Torres; Souza, 2010, Ribeiro et al., 2010) and computer simulations (Guerriero, 2008). The main objective of this study is to investigate the concentration of beer industry in Brazil from 1997 to 2012. Specific objectives were proposed: a) conduct a brief description of the main characteristics of the sector, and b) analyze the degree of competition in the sector via concentration indices. The article is divided into four main sections. The first part presents the theoretical framework. The second part presents the methodology. In the third, demonstrate the results. Finally, the last section concludes.
Theoretical framework
Industrial Concentration in the economic literature
The type of industry that is less competitive is the monopoly: there is only one firm in an industry. And the type of industry more competitive is the perfect competition: there are many producers, each representing a tiny slice of the market. Most Brazilian industries are between these two extremes, cement, banks and supermarkets industries are examples of uncompetitive sectors (Concha-Amin; Aguiar, 2005). There is a literature on various measures of concentration that serve to check the degree of market competition. Therefore, more concentrated mean less competitive. Thus, a monopoly is the market's most concentrated.
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One way to measure this is to look at the market share of the four largest firms, the CR(4) or the Herfindahl index (H). There are several other indices (Bikker; Haalf, 2002). The importance of these indices is in its ease to capture structural aspects of the industry. Industrial concentration, thus, is a concern for the whole society, since the degree of concentration in a market provides an indication of the ability of the market for goods and services to operate efficiently. So when there is a significant concentration, monopoly power is granted to firms in the market, and this power is often exercised with detrimental effects to consumers. Concentration measurements are very important to consider the problems of imperfect competition brought by oligopoly and monopoly, and by taking into account the application of antitrust policy to encourage competition. These measures thus provide an indication of the ability of the largest control prices and exclude competition. In the capitalist system, a robust competition is seen as a factor that leads to production efficiency, lower costs and lead to better products for consumers (Picard, 2009). The imperfect competition rather unbalances the economic system and brings all the benefits to the dominant firm, so governments usually intervene with antitrust and anti-cartel measures when the concentration reaches high levels. The following presents the methodology of the work.
Methodology
The present study this is an applied and exploratory research. Part is a study of the measurements of industrial concentration – quantitative side – and describing the characteristics of the beer industry in Brazil – a qualitative side. It is used concentration measures to capture the degree of competition in a given market. The higher the concentration, the lower the competition between the companies. Thus, the different indicators consider the market shares of the agents according to different criteria.
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First, the concentration ratio of order k is classified as a partial and positive index of concentration, i.e., it requires only information of the biggest companies in the industry and does not use behavioral parameters. In this study, we opted for CR(4), hence, it is intended to estimate the parameters for the four largest companies in Brazilian beer industry: AmBev, Brasil Kirin, Heineken Brasil and Petrópolis. In that statistical inference is considered k, the number of companies in the industry, S the total sales volume, and qi the share of sales of i- nth company, i = (1,2,3,4, ..., n), thus:
(1)
The market share (MSi) which measures the portion attributed to the company i is given by:
(2)
It’s observed that and . The higher the index value, the greater the market power exercised by the k largest companies (Resende; Boff, 2002). The mathematical formula of the concentration ratio of order 4 of the market is:
(3)
Since MSi is the total sales of the i-nth enterprise market. Now, the Herfindahl (H) is a summary measure much used to estimate market concentrations. It is calculated by adjusting the market share of each competing firm. The number originated of the H estimation may be from 0.20, a perfect competition, and 0.7, a monopoly (Guidelines, 1997). Mathematically, this ratio is expressed as follows:
(4)
This index is calculated as the sum of squares of the relative sizes of the companies that make up the industry. It is based on the total number and size distribution of firms in an
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industry. Thus, the higher the H, the higher the concentration, and thus lower the competition between producers (Resende & Boff, 2002; Smith Jr. & Castro, 2010). Finally, the entropy index Theil (T) is a measure indicated by Theil (1967). Emerges from the analysis of the possibility that an event X is p. If there is confirmation of the event, the degrees of surprise emerging vary in the opposite direction to p. Therefore, the content of the message f(p) is inversely proportional to p. It uses a logarithmic function to describe the process of decreasing:
(5)
T is interpreted as a measure of concentration. Be pi the participation i-nth company. Entropy tells us that the expected value of the information content of a message that tells us that given industry sells x amounts to a consumer, the sale was effected by the i-nth firm. Thus, the higher the market share of the company, the lower the degree of surprise coming from the message. T is an inverse measure of concentration. If we replace pi for the market share of firm i, we have:
(6) If the value obtained is close to zero, the market concentration is at maximum. Data for the estimates are from Nielsen for the period 1997 to 2012. The reason for choosing this time period is to capture the impact on the beer market before and after the merger Brahma- Antarctica. The variables in question are the industry's total sales and individual sales of each of the participating companies. Below, we analyze the results.
Results and Discussion
Brazilian beer market
The locus – product/region – is the space where the contenders are inserted, i.e., is where the competition for market occurs. In Brazil, Pilsen is the most consumed type of beer
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by Brazilians (Ferrari, 2008) –, since Brazil has a tropical climate, so there is a preference for types of beer lighter and refreshing. According to Nielsen Research Institute (2012), this type of beer accounts for 98% of the Brazilian market. This beer is a clear, golden color, pleasant taste and smooth. It has low alcohol content between 4.5% and 5.5% g.l. It uses like standard packaging, bottles with a capacity of 600 milliliters and aluminum cans with 350 milliliters. The Brazilian beer market is one of the strongest in the world in terms of production growth; with particular emphasis on the Northeast region. Brazil has a population of almost 200 million inhabitants, is currently second in the world by market prospects for demand growth (Bjørnstad; Normann, 2011). The consumption per capita is lower than many European countries and is continually expanding. So from that point of view, it can be inferred that the market is highly attractive to large international players. The fastest growing segment in Brazil is of premium beers made by craft breweries, microbreweries, and also by large companies; mostly with imported brands. In 2012, the sector grew by about 18% (Nielsen, 2012), being the highlight of the year in the industry, with the launch Budweiser brand in Brazil for AmBev. This new panorama of the Brazilian beer market is due to the change in consumer preference –, since, there was an increase of income in recent years. The fixed costs of Brazilian breweries are high, since there are investments in plants, equipment and employees. Because of these high fixed costs, large breweries sector seeking to operate at full capacity to achieve economies of scale and maintain, in the case of AmBev, a strict control of all production costs, the famous Zero Based Budgeting (ZBB) making the EBITDA, the company’s cash flow generation, one of the largest in the beer industry worldwide. This increases the rivalry in the sector, given that each firm seeks to produce and sell more products and go in search of markets with high growth rates, such as the case of the pioneering work of Schincariol brewery in the Northeast in the 1990s, where he became a leader. The Brasil Kirin brewery (former Schincariol), Japanese capital, was founded in 1939 in Itu-SP. It began with the manufacture of soft drinks, only in 1989 began to brew. It is the third largest brewer in Brazil today. The production is performed in twelve plants. The company employs about 10,000 employees. Your audience is made up of the classes "A", "B", "C" and "D". Its main products are: Nova Schin, Glacial, Primus, Baden Baden, Eisenbahn, Cintra and Devassa Bem Loura.
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The Petrópolis brewery was founded in 1994 in the city of Petrópolis-RJ by a former employee of the Schincariol. It is only major brewery with national capital. It is the second largest brewer in Brazil –, position reached at the end of last year. The production is performed in five factories. It employs around 2,500 employees. The company’s public is formed by the classes "B", "C" and "D". She owns the following products: Itaipava, Crystal, Petra, Lokal, Princess Black and Weltenburger Kloester (Imported). Heineken Brasil entered in the beer business in the country in 2010 with the acquisition of FEMSA’s beer subsidiary in Brazil, owner of Kaiser Brewery. The company already had an agreement with the former Kaiser in the 90s; an agreement for the distribution of the Heineken brand and a small minority stake in the company. Actually, it is the fourth largest brewer in Brazil. The production is performed in eight factories and utilizes the distribution system of Coca-Cola. It employees 2,300 people. The company’s public is formed by the classes "A", "B", "C" and "D". She owns the following products: Sol, Kaiser, Heineken, Bavaria, Xingu, Santa Cerva, Kaiser Summer Draft, Amstel Pulse and Dos Equis. And finally AmBev was formed in 1999. It was constituted by the merger of the two largest national breweries at the time, Brahma and Antarctica –, the Brazil’s industry pioneers. It has more than thirty plants and an extensive distribution network throughout the country. There are approximately 32,000 employees in Brazil. It is one of the best companies in the world in terms of value creation. It has a strong presence in South America, Central America and Caribbean and Canada, too. The product portfolio consists of: Antarctica, Brahma Chopp, Skol, Bohemia, Antarctica Original, Stella Artois, Budweiser, Caracu, Kronenbier, Serramalte, Polar Export, Leffe, Hoegaarden, Franziskaner, Patricia, Norteña, Quilmes and Liber.
1.1.1 Analysis of complementary and substitute goods
Beer accounts for about 80% of all beverage alcohol consumed in Brazil (Camargo & Barbosa, 2009). Other alcoholic beverages that compete with beer are wine, liquor, cachaça, whiskey, vodka and others. Wollf (2010) found that consumer preference has, firstly, by Beer, about 50%, followed by cachaça and then the wine. Although the beer is still the main consumer choice, wine and liquor increased in recent years.
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Some brands of beers are strategically positioned to compete directly with each other, as is the case in Antarctica SubZero, the Kaiser and Crystal for the low segment, and Stella Artois, Budweiser, Heineken and Eisenbahn for premium segment. Therefore, one can say that these products are perfect substitutes. Another important strategic issue in this sector are the “fighting brands”, i.e., the repositioning of Antarctica and Brahma brands to prevent the growth of Nova Schin in Sao Paulo, and the launching of Brahma Fresh to the northeastern market in order to capture the market of Nova Schin. So, this is a strategy that aims to reduce or eliminate competition. Breweries of all sizes are impacted by these substitutes and they need to adjust their prices or make additional marketing efforts to give consumers additional incentive to increase consumption of beer in face of these drinks substitutes. This tends to reduce industry profitability. While the best beers can be repositioned at a higher level, these substitutes may pose a threat to this segment of the beer; everything will depend on the sensitivity of the price of consumer products. It can be inferred that good complement to the beer in Brazil is football –, because the country has a hot climate and have tradition in soccer culture. Because of gains in levels of consumption of wines and spirits and higher taxes on beer in 2012, the threat of substitutes can be considered average.
1.1.2 Analysis of input suppliers
The most important inputs are imported, like hops, barley and yeast. It depends on international commodity prices and import duties. Since corn and water abound in Brazil; these are the basic inputs for the production of beer. The costs of producing beer in the world based on a large brewery are divided into: packaging (28%), taxes (25%), sales and marketing (17%), manufacturing (15%), malt (8%), hops (1%) and other ingredients (6%) (Bjørnstad; Normann, 2011). It is observed that the suppliers sector of aluminum cans is somewhat concentrated, with the Crown, the Latapack-Ball, Latasa among others; unlike bottles industry, concentrated in the company Verallia and Owen-Illinois. AmBev has a modern electronic auction system for the purchase of their inputs –, what reduces total cost, plus the fact produce their own caps, bottles and labels. To the Big Four, the volumes of ingredients purchased from outside
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could be a threat because they can suffer with currency fluctuations or decrease in the production of these materials in their home countries. For barley, there are many producers in the South region. The only problem is the unstable climate of the region which can lead to a fall in supply from one period to another. AmBev has a control over the entire production chain, with exclusive contracts to the molds used in the Brazilian meat industry, with factories near the barley production centers such as malting plant in Passo Fundo-RS. Craft breweries who buy a few ingredients and sometimes, some of them may lead to special bargaining power for the supplier. In general, providers have limited pressure on the price and supplier power can be considered low.
Degree of industry concentration
The process of competition in the beer market in Brazil can be divided into three phases in a retrospective logic (see Table 1): Phase 1 (1997 to 1999) – This period was characterized by the peak of the rivalry between brewers Brahma, Antarctica and Kaiser. In 1998 it was the best year of Kaiser with 23% market share. In 1999, it was announced the merger of Brahma and Antarctica, appearing AmBev. This period was characterized by the consolidation of the Skol beer brand as the more consumed by Brazilians. Phase 2 (2000 to 2005) – This period was characterized by the consolidation of AmBev not only in Brazil, but also in other countries such as Uruguay, Argentina, Paraguay, Peru and Panama. In 2004, the fact that got the greatest impact, however, it was the merger between Belgium’s Interbrew with AmBev creating the second largest brewery in the world. Also remarkable it was the dramatic fall in market share of Kaiser. The reason may have been the lack of touch with the Brazilian market of the new owners, the Canadians of Molson Brazil, who took over the company in 2002. In 2003, Schincariol launches the Nova Schin Brand and the following year the company has its best year in its history. Phase 3 (2006 to 2012) – This period can be characterized by the emergence of new international players in the market. In 2006, AmBev assumes control of Cintra. There CADE
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process and the company had to sell the brand to Schincariol. In 2007, FEMSA Cerveza takes control of Molson Brazil. It launches in Brazil the Sol brand that was unsuccessful. In 2010, Heineken bought a controlling stake in FEMSA Cerveza, and it brings together the battered Brazilian operation. There was in 2011, a Kaiser re-branding with a new logo and formula. In 2012, Kirin Brewery of Japan takes control of Schincariol. And currently, Petrópolis brewery has established itself as the vice leader of the industry, with the emergence of Itaipava brand. Table 1 - Four important competitive periods for major breweries in Brazil - Market- share (%) Firm/Year Brahma Antarctica Petrópolis Kaiser Schincariol Cintra
1997 48,00 24,00 1,00 17,00 6,00 0,30
1998 48,00 24,00 1,50 23,00 8,00 0,50
1999 49,00 18,00 1,80 21,00 8,00 1,00
Firm/Year AmBev Petrópolis Molson Brasil Schincariol Cintra 2000 69,00 2,40 18,00 9,00 1,30 2001 68,00 2,30 17,00 10,00 1,20 2002 68,40 2,30 15,40 9,60 1,60 2003 67,20 3,20 13,30 11,10 1,70 2004 66,20 3,60 10,90 13,10 1,60 2005 68,30 5,20 8,90 12,60 1,40
Firm/Year AmBev Petrópolis FEMSA Brasil Schincariol 2006 68,40 5,70 8,50 12,70 2007 67,70 8,30 7,60 12,30 2008 68,70 8,50 8,30 11,10 2009 70,00 7,20 9,60 11,60 Heineken Brasil Firm/Year AmBev Petrópolis Brasil Kirin 2010 68,80 9,50 8,10 12,00 2011 68,50 10,60 8,20 11,20 2012 68,50 10,80 8,50 10,60 Source: Nielsen, 2012. Author's elaboration. Note: The colors indicate the consolidation of industry.
Table 2 analyzes the evolution of concentration indices CR(4), and Herfindahl and Theil Entropy Index. The first index is a percentage, second and third in absolute value in logarithms. It can analyze, primarily, through index concentration ratio, the beer market in
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Brazil is highly concentrated. This can lead to a loss of competitiveness in the sector (Wood Jr.; Caldas, 2007). It is shown that the four largest companies control, an average of the last 15 years, around 95% of the market in a contingent of approximately 200 breweries in Brazil (Nielsen, 2012). Ceteris paribus, a high concentration indicates a low rivalry, even though other factors also corroborate. In the present study, we observed that the CR(4) ratio, Herdindahl and Theil differ with regard to the degree of concentration of the brewery in Brazil for the period before and after the creation of AmBev. The reason for the difference lies on the technical limitations of the CR(4); since it adds only the participation of the four largest firms in the industry. Thus, the Herfindahl synthesizes more accurately the evolution of concentration in this market. According to the results estimated by CR(4), there was a slight decrease in concentration in this sector. In 1997, the four largest firms had a market share of 95% and, during the period, remained steady until reaching 98.4% in 2012. One of the causes for this increase is the reduction of the number of competitors through mergers and acquisitions. It is observed that from 1997 to 1999, there were two major companies in this sector. Thus, the index captured the effects of Herfindahl shares of both companies. The Theil and Herfindahl, for that brief period, was approximately -0.03 and 0.32. Already since 2000, the Herfindahl index rises sharply exceeding the range of 0.50. Besanko et al. (2006) describe an industry that has a Herfindahl index between 0.2 and 0.6 is considered an oligopoly –, that fact is what happens in Brazil’s beer industry. It can be inferred that the level of 0.32 between 1997 and 1999, a time before the creation of AmBev, is close to the range of monopolistic competition, this industry has a high concentration. In recent years, 2005 to 2012, there is a concentration process more pronounced. Proves itself, so that AmBev has concentrated excessively the beer market in Brazil; and as the resulting impact of this action, there is a reduction of competition. This highly concentrated oligopoly works with differentiated products, i.e., Skol Beats, Amstel Pulse and Kaiser Summer Draft aimed at young audiences and rave and focus on marketing via competition. This differentiation is done by means of packages, colors, flavors and new brands –, a decoy for the consumer. Therefore, the largest firms not aspire to compete via price, because their ability to compete in this way is limited –, due to the existence of perfect substitutes – which can erode profit margins in the industry. Instead of competing on price, large firms trying to develop
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brand loyalty through a massive marketing program and, in some cases, cultural adaptations, i.e., the Polar Export brand with strong appeal to the gaucho culture in Rio Grande do Sul. In 2011, the four largest firms in the sector spent about R$ 1.2 billion on advertising, Petrópolis and AmBev breweries match for more than half that amount (Meio & Mensagem, 2011). The beer is highly perishable. Thus, with the competitive pressure to grow and increase production to achieve economies of scale and thus sell the product as fast as it possible, the rivalry within the industry rises.
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Table 2 – Industry concentration of the top five breweries in Brazil (%) - 1997-2012 Firms/ Concentration Years – (%) Index 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Brahma 48,0 48,0 49,0 Ambev 69,0 68,0 68,4 67,2 66,2 68,3 68,4 67,7 68,7 70,0 68,8 68,5 68,5 Antarctica 24,0 18,0 18,0
Brasil Kirin* 6,0 8,0 8,0 9.0 10,0 9,6 11,1 13,1 12,6 12,7 12,3 11,1 11,6 12,0 11,2 10,6
Petrópolis 1,0 1,5 1,8 2,4 2,3 2,3 3,2 3,6 5,2 5,7 8,3 8,5 7,2 9,5 10,6 10,8
Heineken Brasil** 17,0 23,0 21,0 18,0 17,0 15,4 13,3 10,9 8,9 8,5 7,6 8,3 9,6 8,1 8,2 8,5 Cintra 0,3 0,5 1,0 1,3 1,2 1,6 1,7 1,6 1,4 1,5 ------Others 4,0 2,5 2,2 4,0 2,5 2,7 3,5 4,6 3,6 3,2 4,1 3,4 1,6 1,6 1,5 1,6 Theil -0,05 -0,03 -0,04 -0,01 -0,02 -0,04 -0,05 -0,06 -0,05 -0,04 -0,04 -0,03 -0,01 -0,01 -0,01 -0,01
CR(4) 95,0 97,0 96,0 98,4 97,3 95,7 94,8 93,8 95,0 95,3 95,9 96,6 98,4 98,4 98,5 98,4
Herfindahl 0,32 0,32 0,32 0,51 0,50 0,50 0,48 0,46 0,49 0,49 0,48 0,49 0,51 0,50 0,49 0,49
Source: Nielsen, 2012. Author’s elaboration. * Under the name of Primo Schincariol Brewery until 2011. ** Under the name of Cervejarias Kaiser Brazil until 2002, Molson Brasil until 2007 and FEMSA Brasil untill 2010.
Consumers have the option of choosing other goods, such as wine, cachaça and other spirits. Thus, switching costs are average for consumers, and again, the rivalry rises. Finally, the exit barriers in the industry are high, due to high investment in specialized equipment, i.e., machinery and special kegs for microfiltration, which are characterized by being sunk costs for the organization. So, although the rate of concentration of the industry is high, the high fixed costs, high exit barriers, low switching costs along with the perishable nature of the product, makes the rivalry in the industry high. Investment in equipment, pavilions, ingredients, recipes and resources to produce a plant six to eight million hectoliters per year is at least R$ 600 million (Camarotto, 2012). Still, this does not result in a significant barrier due to tax incentives of states and niche strategies of competitors. The differential of the beer industry in Brazil is the way the product is distributed, the speed and scope –, thus, a good location and logistics system are key factors for increasing profitability. Once a new plant is built, it will have a few additional uses –, there is the possibility of joint production of soft drinks in some plants, what can bring economies of scope. And as the concentration ratio of the industry is high, firms have substantial financial resources to invest in marketing, acquisitions or otherwise discouraging potential entrants. Thus, the barriers to entry in this industry are high for a major operation and a strategy of regional or national scope. Now the entrance with a niche strategy is relatively easy. Just have the entrepreneurial attitude, knowledge of the processes of brewing and between R$ 200,000 to R$ 5 million available for investment (Zuini, 2011). This is evidenced by the appearance of over 200 craft breweries in the last 10 years. The microbreweries are supported by loyal local consumers. They offer a product with unique taste and aroma, which is characterized as a differential in these companies. Consumers have responded well to this type of craft beer and the industry has grown steadily. However, large firms, which have substantial resources, have contributed to discourage the entry of new breweries that have big ambitions. Overall, the attractiveness of the sector depends on a good strategic planning for those who decide to enter. A great opportunity to enter the sector by major international player it would be by the acquisition of Petrópolis. One reason is the high per capita consumption growth of the Brazilian market and, on the other hand, it is the only brewery that is not tied to a giant with global operations. Investments in equipment, pavilions, inputs and processes are a major barrier to entry in the category of large breweries. While this segment of the industry obtains high levels of
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sales and profits, the high concentration of the four largest firms in the industry makes this segment unattractive to an investor with limited resources. However, this is different for the group of small breweries and microbreweries acting such as regional Belco, Krill, Conti and Malta, at Sao Paulo state, Cerpa, at Pará state, Frevo, at Pernambuco state, Colonia, at Paraná state, Kilsen, at Santa Catarina state and Dado Bier, of Rio Grande do Sul. A low amount of investment is sufficient for entry. And as the demand in the premium segment in Brazil is high, combined with changing tastes and increased consumer income, it tends to have higher profit margins. The act of producing a local or regional becomes dependent on the creation of an identity, a brand. It is difficult to build loyalty in this segment as many consumers of class "A" and "B" would rather try several craft brands. However, with the growth of craft breweries and industry evolution, brand loyalty can come to develop and take root in the mind of the consumer. The economy of scale achieved due to huge production capacity ensures the majors the possibility of obtaining high profit margins, these companies can invest in new plants and equipment, invest heavily in marketing or even acquire small, as in the case of the brewery Eisenbahn of Santa Catarina, São Paulo's Baden Baden, the Nobel’s Pernambuco and Rio’s Devassa, purchased by Schincariol between 2007 and 2010 – a clear change of strategy of the Itu’s based brewery, in search of higher margins and market diversification. Therefore, small breweries with their scarce resources cannot afford to make such expenditures.
1.1.3 Analysis the actions of the government in the industry
Taxes account for 55.6% of the final price of beer in Brazil (IBPT, 2012). This can lead to reduced investment by breweries and fall in consumption by consumers. A tax differentiation in favor of microbreweries could give a new contouring on the competitiveness of the sector for the coming years. These companies operate with a minimum scale and higher cost compared to majors of the industry. While they use 80% malt, the majors use only 20%, a fact that tends to raise its costs. And the legislation also allows the use of corn, the limit is 45%, but most large breweries goes beyond this value in order to reduce costs (Mardengan et al., 2013). The
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microbreweries follow the German Purity Law, what guarantees them top quality, but with a higher cost. There is still much room to grow, just see that in England the premium beer market accounts for 45% of the sector (Bjørnstad; Normann, 2011). Another point against for craft breweries was the Lei Seca –, a law that it was implemented by the Brazilian government to deter the consumption of alcohol by drivers. This is likely to have a greater impact on these companies. Thus, they should be treated differently in one way that encourages sustainable development. The regulations should be more severe. As noted the government was conniving with the formation of a major player in Brazil, what increased market concentration. The tax issue may have weighed in favor because a larger company tends to generate more taxes. The fact that the incentive to create major trusts in recent years, clearly favored by the BNDES, at the financial side, and CADE, at law side, has been a problem in Brazil. This all leads to the reduction of the welfare of the market, because it creates a highly concentrated sector, with the possibility of formation cartels with direct negative effects on the consumer.
Conclusion
This article sought to highlight the industry concentration of beer market in Brazil. The results indicate a highly concentrated market power in the four firms with a Herfindahl index of about 0.50. Estimates point to a more concentrated market in the period following the creation of AmBev. The industry leader has applied tactics that aim to stop or hinder the entry of new competitors. Even being a company with almost 70% of the market, AmBev made the purchase of the brewery Cintra in 2007, where the biggest interest was in just the pavilions and equipment. Another method is to introduce a package of 630 milliliters, for Skol in Rio de Janeiro, and Bohemia, in Rio Grande do Sul, suspended in 2010 by determination of CADE. In 2003 the program was instituted “Tô Contigo” (I'm with You) which aimed to loyal the points of sale through advantages. This led to the exclusivity of the AmBev’s brand portfolio
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and limited the sale of competitors' brands. In the end, the company took a big fine and the program was suspended. One caveat may be placed with the formation of the Associação Brasileira da Indústria da Cerveja (Brazilian Beer Industry Association) – CervBrasil – in 2012, with the participation of only four major of the beer industry. This movement aims to protect the interests of big breweries and disseminate some information. But one question remains: to what extent this association will not become over the next few years in a cartel? Why were not invited the other competitors in the market for this association? The limitations to the study are the small amount of disaggregated data about breweries, brands of products, markets and distribution systems. It was used for this article data from Nielsen Research Institute released into the area of academic study. It is noted that the disaggregated data by beer brands and monthly Brazilian states are not available to everyone. Alternatively, it is suggested for future work, a more detailed analysis about the industry concentration. Therefore, it should include the impact of transaction costs, innovations, economies of scale and scope and product differentiation in details and regional issues that affect consumer preference.
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