BARRIERS TO EXIT

The United Breweries group was founded in 1915 by a Scotsman name Thomas Leishman. It has 5
key subsidiaries namely United Spirits Limited (USL), United Breweries Limited (UBL), Kingfisher
Airlines, Mangalore Chemicals and Fertilizers Limited (MCF), UB Engineering. Here we are going to
discuss about United Breweries Limited which is one of the market leaders in alcoholic beverage
industries.

Assets specialization : Beer and alcohol brewery operations requires a lot of specific assets. To brew
Budweiser it approximately takes thirty days which consists of a Beachwood Aging process that
requires large steel vessels. With these large assets it is difficult for industries to escape this sector.
Similarly for United Breweries, it has a total of 30 manufacturing units all over India out of which 21
is owned and 9 is contracted.From Exhibit 1 it can be seen that as of march 2019 it has a total assets
of Rs 53786 million out of which fixed assets is Rs 19421 million. It is clear that fixed assets which
comprises of properties, plants and equipments equate to 36 percent of its overall assets. If it is
compared to other consumer goods industries this is in the range of 10-20 percent. Hence with
these large assets it is difficult to exit the industry. Also there is huge capital requirements needed to
enter into alcohol brewing industry. The cost of constructing a plant which is capable of producing
upto 5 million barrels per year is around $250 million. While there has been a large increase in micro
breweries in the recent times but for a company of the stature of United Breweries which competes
on the highest level these high costs of operation and construction expenses act as a barrier to exist.

Cost of exit : From the above part it is clear that the cost of exit for industries involving in alcohol or
beer beverage sector is pretty high. First of all the cost of plants, equipments and properties are on
the higher side if compared to other industries. Also from Exhibit 1 the total liabilities of United
Breweries is Rs 53,786 million. This includes loans, equities from shareholders etc. Also if we
consider the profit from the sales of alcoholic beverages, it is quite high. So the opportunity cost of
exiting for united Breweries is quite high. The licensing cost in alcohol industries is also very high and
that is another aspect of cost which we have to consider while exiting. So this also adds up to the
cost of exit. So overall we can say that just like any alocohol industries the cost of exit is pretty high
for United Breweries.

Government restrictions : The alcohol industry faces a large amount a government regulation. This
is due to fact that alcohol consumption after a certain extent is injurious to health and minors are at
major risk with this. Also due to the sedative nature of alcohol, people generally loose self control
under the influence of alcohol. Also some industries practice in the illegal production of illicit alcohol
which is nothing but adulterated alcohol which contains a highly fatal substance called methanol.
Illicit alcohol also evades national and state level taxes and duties.There are different policies that
govern different aspects of alcohol in each state. Alcohol is regulated by the state excise policies
covers multi-dimensional issues such as alcohol control-possession, production, manufacture,
selling, buying and transport of liquor. There are three types of alcohol policies in India:

a) Total prohibition of production and consumption of all kinds of alcohol

b) Partial prohibition of some kinds of liquor – for example, a ban on the production and
consumption of arrack in Tamil Nadu, Kerala etc.

c) Imposition of dry days, where sale of alcohol is prohibited throughout the country on that day

While alcohol policies may vary from state to state, most of them fall under the following categories:

i)Discontinuing advertisements of alcoholic drinks

ii)Not allowing drinking in public places

iii)Banning liquor shops

iv)refusing permission to open new liquor shops

v)declaring pay days as dry days

vi)punishing government servants who drink

vii)enforcing strict restrictions on drivers and pilots

viii)Not allowing liquor shops in the wayside

ix)Not granting licenses or distillation or brewing of liquor

Also there are sales tax associated with the sales of alcohol. The total collection of excise and sales
tax are estimated to be around $500000 every year and it is the second major revenue source for
most of the state governments. So it can be seen that there are lots of government restrictions
which can add as an incentive for the alcohol industries to exit it.

Barriers to Exit Atrractiveness

Assets specialization Low
Cost of exit low
Government restrictions High

Exhibit 1:

UNITED BREWERIES Balance Sheet as on March 2019

No. of Mths Year Ending 12 Mar-18* 12 Mar-19* % Change

Networth Rs m 26,885 31,819 18.4
 
Current Liabilities Rs m 17,973 20,986 16.8
Long-term Debt Rs m 2,050 754 -63.2
Total Liabilities Rs m 47,191 53,786 14.0
 
Current assets Rs m 26,361 29,997 13.8
Fixed Assets Rs m 17,773 19,421 9.3
Total Assets Rs m 47,191 53,786 14.0

https://en.wikipedia.org/wiki/United_Breweries_Group

https://www.nku.edu/~fordmw/mgt490projectbeer.pdf

https://www.motilaloswal.com/site/rreports/HTML/636111679438336608/index.htm

http://unitedbreweries.com/about-us/manufacturing-network
https://www.equitymaster.com/research-it/annual-results-analysis/UDBS/UNITED-BREWERIES-
2018-19-Annual-Report-Analysis/714/?
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