Virtually all Colombian beer brands are brewed by one company, Bavaria S.A. The SABMiller subsidiary holds 98% of the country’s beer market, not exactly a healthy environment to attempt competition.
The beer giant has beers for every possible market in Colombia.
For Bogota it has Aguila, for Medellin Pilsen, the Caribbean coast drinks Costeña and Cali drinks Poker.
More sophisticated brands like Club Colombia or the imported Italian Peroni are also owned by the same Bavaria S.A.
SABMiller estimates that Bavaria holds a 98% share of Colombia’s beer market, virtually a monopoly.
Generally, that’s bad for consumers because monopolists don’t have any competition to worry about so they are able to charge a monopoly price.
However, according to a Euromonitor International report, SABMiller actually, “absorbed any added costs of ingredients and refused to increase manufacturers’ standard prices at all during 2009” due to the economic downturn.
That might sound like a friendly gesture from a monopolist, but it’s nothing more than a tactic designed to further reinforce the colossal entry barrier that exists in the market.
The enormous economies of scale that are obtained by controlling nearly the entire national beer market serve as a practically insurmountable barrier to entry for any competitors thinking about entering.
Monopolists like Bavaria S.A. also enjoy a number of other advantages. For example, when you have a wide portfolio of products as Bavaria S.A. does, you tend not to suffer nearly as much from economic downturns as other companies in competitive industries.
To demonstrate this point, you must understand the difference between normal goods (consumption increases as income increases) and inferior goods (consumption decreases as income increases).
For instance, luxury automobiles are normal goods. If you go from making $120,000 dollars per year to $120 million dollars per year, you are likely to consume more luxury automobiles.
Contrarily, a 1983 Chevrolet Chevette is probably an inferior good. As your income increases, you are much less likely to buy one of these classic clunkers.
The beer industry works the same way. The cheapest, worst-tasting beers are generally inferior goods because people tend to consume less of these as their incomes increase while the more expensive or premium brands tend to be consumed more as incomes increase.
This is great for SABMiller because in times of economic hardship the company benefits from the substitution effect as consumers switch from its premium brands to its lower-end brands. This dampens the effect of an economic downturn for the monopolist while companies in competitive industries might find themselves in a profit-killing price war during economic downturns in order to maintain market share.
Some might point out that this monopoly is not all bad citing an independent Fedesarrollo report from 2007 that states that Bavaria S.A. generated $1.8 trillion pesos in tax revenue in 2006 which accounted for 3.4% of all taxes collected in Colombia for that year. The report also states that Bavaria S.A. employed 4,509 workers at a salary that was almost three times higher than that of the average worker in the industry.
To begin with, Bavaria S.A. makes up 98% of the industry so a comparison with “the rest of the industry” isn’t reasonable and if they had real competition from “the rest of the industry” they almost certainly wouldn’t be able to pay their workers three times as much.
Still, the tax contribution of Bavaria S.A. is noteworthy in a country like Colombia where it is estimated that as much as 40% of the economy is informal.
One might argue that such a large contribution is good because it allows the government to invest more in social welfare programs or infrastructure but the counterargument to that is that anticompetitive prices are essentially a tax on consumers meaning that any investments are at least somewhat offset by the higher prices that consumers are subjected to.
Bavaria S.A. is also involved in several sustainable development and social programs including the responsible sourcing of coal (the main fuel source for Bavaria S.A.’s breweries), a recycling partnership with Carrefour, a program to, “strengthen the culture of ethics in companies providing services to Bavaria,” as well as a program to help prevent beer sales to minors in Colombia.
It’s possible that programs like these wouldn’t be feasible in a highly-competitive market due to fierce price competition but it’s not certain. Companies in competitive markets might choose to take part in programs like these regardless of increased costs as a way to improve their brand image and attract new customers.
On the whole, consumers by and large prefer choice when they are shopping for products of all kinds. They don’t want to be tied down to any particular brand or company. There is something about knowing that, no matter what brand you choose, your money ends up in the same pocket that doesn’t sit well with many consumers.
For now, alternatives are few and far between. There is a very small, but growing, craft-brew segment with companies like 3 Cordilleras, San Tomas and the Bogota Beer Company leading the way, but these companies are aiming to produce high-quality craft brews that aren’t perfect substitutes to the Bavaria S.A. product line.
The upside to all of this is that room for competitors is still abundant as Colombia’s consumption comes in at just 41 liters per capita while in countries like the U.S. consumption is roughly 111 liters per capita. Consumption is sure to increase as the Colombian economy continues to grow and Colombians’ real incomes rise meaning that future opportunities will be there for the taking.
However, it will take another giant in the global beer industry to be able to overcome the large entry barrier that SABMiller has erected in the Colombian market meaning that the chances for a Colombian producer are slim.
Perhaps a company like Anheuser-Busch Inbev, which currently holds an approximate 50% market share in the U.S. will start looking south towards the Colombian market.
Nevertheless, if Colombians want to enjoy Colombian beer produced by Colombian companies, they will probably need to adjust their palates to the beers that make up the craft segment.
Author Matthew Helm is an American who moved to Colombia where he started the website relocationcolombia.com, specialized in information for potential expats and investors.
