In this paper, the concepts of potential market and global market are analyzed as a basis for strategic market decisions with long-term perspectives when evaluating the implementation of a business in a certain geographical area. On this conceptual framework, the methodological tool to evaluate a commercial decision is proposed, for which the case of the brewing industry in Peru is taken as a reference.
Abstract
In the present work the concepts of potential market and global market are analyzed as it bases for strategic decisions of market with perspective of long term when the implantation of a business in certain geographic area is evaluated. On this conceptual frame the methodologic tool sets out to evaluate a commercial decision, for which it is taken as reference the case from the brewing industry in Peru.
Introduction
In the development of investment studies, market analysis is vital to ensure the soundness and commercial viability of an investment option. All subsequent construction of the business plan depends on its results.
A failure to appreciate the future development of the market can be catastrophic for the investor; so that analysis tools are required to ensure a good foundation for the business decision. Obviously, the entrepreneur or analyst will use the tools available according to the nature and size of the project under analysis.
Potential Market and Global Market
The use of the concepts of potential market, global market (real market) and target market and their full use and interpretation will provide the necessary strength for decision-making in market aspects.
Text box: This concept provides a magnitude of the future demand for a product, taking into account the relative position in relation to countries with a similar level of development, and that with the application of certain marketing strategies, greater consumption can be promoted, obviously also, provided that the purchasing power of the population improves.
This means that the total market demand for a product has not expanded in relative terms in proportion to its population. This situation can be measured with the per-capita demand in each region or nation.
In relative terms, an economy can present two positions as established in Figure 1 below.
The relative comparison illustrates that in position 1 the country configures an important unsatisfied demand, which in practice is not covered due to the following factors: relatively high price for the purchasing power of the average population, more affordable substitutes, little competition of the bidders on the price side, absence of strong marketing means to increase the purchase or its effects are blocked by the low purchasing power of the market. But if the pressure of some of these factors is modified in some way, the risk of entering this situation is manageable; it is also possible that more than one investor may enter. Market obstacles imposed by the established producer can be surmountable and business promising.
The case is different in position 2, entering these markets is highly risky, if you do not have a solid economic capacity to sustain possible “wars” with the competition in operation.
Per-capita beer consumption in Peru, Latin America and the World
At present, the UCP Backus & Johnston has been in the Peruvian market for more than 140 years, having passed its ownership from Peruvian hands to the control of Grupo Bavaria de Colombia.
In addition, Backus is the leader in the production of beers since it controls all the plants distributed in the country with the brands: Cristal, Pilsen, Cusqueña, Arequipeña and San Juan., With a total installed capacity of 10.3 million hectoliters (1), of of which the Ate plant represents 5 million hectoliters of capacity. As of December 2003, the use of the group's capacity amounted to 61% and of the Ate plant to 71%. Table 1 shows the market share profile of the most important beer brands as of December 2003:
| Table 1 Profile of Beer Brands in the Peruvian Market | |||||||
| Brand | Crystal | Pisen Callao | Cusqueña | Arequipeña | Pisen Trujillo | San Juan | Others |
| Participation (%) | 56.1% | 20.²% | 9.3% | 5.0% | 4.9% | 1.8% | 2.3% |
Throughout the 1996-2001 period, white beer production was reduced by 28%, increasing in 2002 by 17%, achieving a production of 606 million liters; Similar behavior is reflected in the production of dark beer with a decrease of 64% in said period, and a slight growth in 2002 of 1%, year in which the production was 10.4 million liters, as can be seen in the figure Four.
According to figure 5, per capita consumption was 30 liters (lt) in 1993, 31.8 lt in 1996, decreasing steadily to 19.7 lt until 2001, which shows the drop in total sales as a result of the recessive cycle that experienced the economy. In 2003 there was a recovery to 22.4 lt.
It is recognized by specialists that the reason why Peruvians do not drink so much beer is basically because of the price of the drink. Indeed, the strong relationship between lower price and increased consumption has been demonstrated, as is the case with the traditional 620 ml beer. The Maximixe company (2) confirms that the demand for this drink in Peru is elastic; which means that a decrease of 1% in the price reflects a significant increase in consumption. Indeed, the same source notes that, "… a study showed that if current beer prices were reduced by 18%, the market would grow by 30%." So according to this study, it means that the elasticity has a value of 1.67.
In the Peruvian case, when you drink a 620 ml bottle of beer, you are paying 27.8% of ISC, that is, 1.45 nuevos soles for each store price of 3.50 nuevos soles before the IGV. According to Backus executives (3), the ideal is for this tax to be reduced to one third, which would significantly increase demand. They say “… in 2000 the ISC was reduced and sales grew by more than 12%”.
Another factor that makes the market look very appetizing is the study carried out by Grupo Apoyo (4). According to their figures, 50% of alcoholic beverages consumed in Peru are of informal origin, while the other 50% of the market is covered by beer (44%) and formal spirits (6%). Likewise, a recent study by the research company CCR (5) indicates “… Peruvians between 18 and 35 years of age prefer beer, and that this product is the one that is sold the most in wineries”. CCR executives believe that the entry of a new brand to the market will definitely increase consumption figures due to the novelty and the influence of advertising.
Competition in the Peruvian market
The main attraction that the Brazilians represented by the AmBev business group of Brazil saw in the Peruvian market was that the per-capita consumption of beer per year is only 22 liters, when less than ten years ago close to 35 liters had been registered, and in 1987 it grew to 42.
AmBev's management (6) points out that Peru has the most expensive beer in South America, adding that this situation is due to the existence of only one player on the field, in addition to high taxes. He also highlights that the competition will cause the market to set lower prices as happened in the case of cell phones, although he warns that he cannot say how much it will decrease. Peru is the South American country where beer (620 ml bottle) has the highest price without recording the tax burden as shown in Table 2 below.
Global Market
The Peruvian market registered in 2003 a demand of 602.7 million lt (7) for a population of 27.15 million inhabitants. Experts predict (8) that the Lima beer market grows at rates of 2% per year in current environmental conditions. In conservative terms, it is assumed that this trend will continue, understood as the most probable levels of sales during a given period. These perspectives are very independent of the potential market analyzed.
Then a projection of the global market understood as expected sales of the activity for the next five years is presented in Table 3.
| Table 3 Expected Sales of the Beer Industry | ||||||
| Concept | Base year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Year | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
| Demand (million lt) | 602.7 | 614.8 | 627.1 | 639.6 | 652.4 | 665.5 |
| Source: Own elaboration, considering 2% annual growth |
Global Market Relationship and Potential
In order to appreciate how close or far the projections of the global market are in relation to the potential market, we proceed to analyze the prospects for an increase in per-capita consumption as a goal, for which, with conservative criteria, three possible scenarios shown in the table are established 4:
| Concepts | Scenario 1 | Scenario 2 | Scenario 3 |
| Goal at year 5 | 25 lt per capita | 30 lt per capita | 35 lt per capita |
| Current population (millions of Habit.) | 27.15 | 27.15 | 27.15 |
| Population growth rate | 1.6 | 1.6 | 1.6 |
| Population at year 5 | 29.4 | 29.4 | 29.4 |
| Potential market at year 5 (million lt) | 735 | 882 | 1,029 |
| Differences in year 5 | 69 | 216 | 363 |
| Potential market | 735 | 882 | 1,029 |
| Global Market | 666 | 666 | 666 |
As can be seen, the goal of per-capita consumption of 25 lt, which represents 12.6% increase to the current per-capita consumption of 22.2 lt, would be approximately reached by the growth of the current market if the current conditions of a single producer that controls persist the market in a monopoly position without significant price decrease by the producer.
For a goal of 30 lt it represents an increase of 35% in current per-capita consumption, which is still far from neighboring countries and the average for the region, it would not be achieved with the current market forecasts, which means that it is looming an important ceiling to reach and that the businesses that are carried out today have a minimal risk of failure.
If a structural modification of the Peruvian market is imposed with the entry of new producers, with a lower price and with an aggressive promotion of the product, it is possible to reach the goal of 35 liters per capita, which represents a 58% increase in current consumption. If this change occurs with the expansion of new strategic forms of expansion of the total demand for beer consumption, then the real market could grow at a much higher rate than the current 2% forecast, and given the ceiling that exists with In this potential market, the success of the businesses that enter into this activity is practically taken for granted.
Text box: This market is the portion or share of the real market that would correspond to an already installed company, or a new one that intends to meet the projected future demand, understood as the sales forecast of that company.
In the case under analysis, it could mean the goal of capturing 10% to 20% of the global demand projected for year 5, which would mean aiming for a target market between 66 to 120 million lt. Considering the important difference between the global and potential markets, there is no risk that would prevent us from entering the business; quite the contrary, it is feasible to achieve it. The AmBev business group has announced its decision to install a beer plant in Huachipa-Lima with a capacity of 100 million liters per year with an estimated investment of 80 million dollars, a decision that supports the thesis developed in this article.
Conclusions
The analysis carried out shows that Peru has a large potential market for beer consumption, taking into account its relationship with other countries in the region. This potential demand definitely contains a very important volume of unsatisfied demand, that is to say that there is evidence of a gap between installed supply and potential demand. So any additional investment that is made to enter this industry to increase current installed capacity is potentially good business in the long run.
The beer war has already started. A new competition scenario is looming in the Peruvian beer industry, the proposal of new strategies (9) to face the new environment, which involves a new positioning of Backus and a "price war" will be reflected in the industry. The new strategic focus of competition will have the positive effect of increasing the per-capita demand for beer in the Peruvian market.
Bibliography
1.- Maldonado, O. & Izaguirre, J. Estudio Unión de Cervecería Peruanas Backus & Johnston SAA, Apoyo & Asociados, May 2004.
2.- Loayza, J. and López, C., Pulseo Chelero, in the Sunday Magazine of the Republic, 03.28.04
3.- Loayza, J. and López, C., op. cit., pp. 10
4.- Loayza, J. and López, C., op. cit., pp. 9
5.- Loayza, J. and López, C., op. cit., pp. 9
6.- Loayza, J. and López, C., op. cit., pp. 8
7.- Maximixie, Statistics of the Beer Industry, El Comercio, p. b7, 04.27.03
8.- Business & Economy, The Beer Wars, El Comercio, 10.10.04
9.- Wong, R., Beer Group: Backus & Johnston- Strategic Innovation,
