The beer industry in Colombia is a prosperous business with a per-capita consumption of 87 liters per year in 2011 and a forecast of 88 liters in 2012 (just people between 15 to 65 years) and a gross profits of US$3.0 billion in 2012, but it shows high grade of Market Power. SABMiller Colombia has approximately 99% of total beer market; there are other beer firms such as Bogotá Beer Company that has low share in the market still (gross profits of US$8.7 million in 2012). An industry that shows a Market Power in a country where the income distribution is awful, it lets government rethinking economic policies in this industry. Of course, increasing taxes is not the solution because it makes undesirable market distortions such as pushing down private incentives to invest and unemployment can face an increase. However, through competition, this industry can contribute to reduce the unfair income distribution; the market that can be useful is monopolistic competition. The duty of government, in this case, is to set economic policies to increase the competition to achieve two targets: better income distribution and better consumer welfare. This note shows how much beer industry is prosperous in Colombia and its demand properties for those who are interested in this sector.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Beer production in Colombia started at the end of XIX century and nowadays is a prosperous business with a gross profit of US$3.0 billions in 2012 where SABMiller is the main player with 99% of the total market. This note shows a brief of beer production-consumption in Colombia during XX century and its demand properties.
One of the main businessman that contributed to beer industry development in Colombia was the German Mr. Kopp. After some issues that were sorted out such as losses and closing down some beer factories because at beginning colombians did not like beer as much as nowadays and the 100% of nationalization because the Second World War (WWII), the beer industry took a prosperous development. After WWII the new local owners decided to expand the business to regions where beer was difficult to supply; for instance, Santa Rosa de Viterbo (Boyacá region) and Ipiales (Nariño region). The beer production went from 984 thousand of hectolitres per year in 1946 to 1,842 thousand in 1947 as figure 1 shows; this volume of production-consumption meant an increase of consumption per capita from 33 liters per capita (just economically active population) in 1946 to 131 in 1960. Nowadays, the per-capita consumption is 87 liters per capita (just economically active people; between 15 to 65 years old).
Figure 1. Beer production-consumption 1936 - 2011
(thousand of hectoliters per year)
The volume of beer is sensitive to economic crisis. One tends to think that beer demand is inelastic under economic crisis, but it is not; for instance as the income shows a reduction of 1.0% (a decline of real GDP per capita), the volume of beer demanded shows a decline between 0.3% and 1.5% (with a punctual decline of 1.0%); this result comes from an econometric model where results are controlled by supply variables such as wages and crude oil price; moreover, figure 2 confirm this result; for instance, the Balance of Payments Crisis during 1955-1960 let a lower consumption of beer; same situations were in economic crisis faced in 1982; 1999 and the last one in 2009.
Figure 2. Beer production-consumption per capita
1936 - 2011
(liters per year, total production divided by people between 15-65 years old)
Source: Palgrave International Historical Statistics; Oxford Latina American Data and Bureau Of Statistics Colombia.
From this econometric model, one concludes that Beer Price Elasticity of Demand is elastic also. The measure of this elasticity is between 0.2 to 3.0; it means, as price shows an increase of 1.0%, the volume demanded can face a decline between 0.2% and 3.0% (with a punctual decline of 1.6%). This information can be useful for marketing professionals that are interesting in set new business in beer industry. When a product shows a demand that is elastic in price, suppliers face high risk to miss consumers because of competence. Therefore, for those young graduate students in chemistry and business management can be interesting to spend time in developing new lines of beer in Colombia.
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