Unfair taxes, illegal border trade stifle Carlsberg’s Myanmar plan

Michael Jensen, managing director of Carlsberg Myanmar, didn’t bother to hide his frustration at the environment in which his brewery has been forced to do business in the country.

“We are faced with a tax regime that is completely unfair, incredibly bothersome bureaucratic procedures and illegal trading of beer across the Thai and China borders,” Mr Jensen told The Myanmar Times.

All those issues have not only been bad for business. They are forcing the brewer to reconsider its growth plans and put all additional investments on hold.

Carlsberg Myanmar, which is controlled by local tycoon U Thein Tun, who also publishes the Myanmar Times, first opened its US$100 million brewery in Bago Region, Yangon, in 2015. It now brews Carlsberg, Yoma and Turborg beers.

Built in anticipation of rising demand for beer by a growing Myanmar middle-class, Carlsberg Myanmar’s brewery has the capacity to brew up to 600,000 hectolitres of beer annually, around 13 percent of the country’s beer consumption. In just three years, Carlsberg beers can now be found at approximately half the number of commercial beer outlets, around 20,000-25,000, in Myanmar.

Illegal trade

Yet, the business continues to be loss-making. Among the largest operational setbacks is illegal trade of beer in the country. Even though Myanmar has placed bans on all imports of beer, up to 30pc of all beer sold in the country is illegal, according to Euromonitor. Around 80pc of the loot comes across the Thai border, while the remaining 20pc is smuggled in through the Chinese border.

“Illegally imported beers can be found everywhere in Myanmar, including five-star hotels and in the airport. These beers are smuggled across the border and sold at prices that are impossible for us to match,” said Mr Jensen.

“We talked to the government about these illegal imports but nothing has happened. Why would anyone set up a brewery or expand here when the majority of competition is illegal imports?”

What’s even more frustrating for Mr Jensen is not being able to import beers from Carlsberg’s overseas breweries. “When considering expanding our product offerings we cannot start by importing to test the market. Yet, the guy who hasn’t invested anything can just drive over the border and sell beer for less than what I can produce it for,” he added.

Poor taxation

Affordability is the key driver for consumption of smuggled beer, which is about 35pc cheaper than locally produced beer for a 330ml can, based on store check findings. Smuggled beer is cheaper than locally produced beer because it pays no tax.

In fact, Euromonitor estimates the loss of tax revenue for the government caused by the illicit trade of beer could have been as much as $50 million in 2016. “This is the amount which could be earned by the government if legitimate beer producers in Myanmar could make up the volume,” it said.

But brewers like Carlsberg are instead thinking twice about expansion because taxes on beer in Myanmar, in addition to illegal competition, are actually another deterrent to growth.

In Myanmar, the tax on beer is 60pc, which is usually passed on to consumers. “Paying 60pc tax is one thing. But the same amount of alcohol in a bottle of whisky is taxed at a rate that is five times less than the alcohol in beer even though whisky contains much more alcohol,” said Mr Jensen.

The lower tax on whisky compared to beer has not been good for business. With a bottle of Grand Royale whisky selling for around K1,200 compared to K1,600 for a bottle of Tuborg beer, demand has not risen to levels allowing new brewers to be profitable.

Mr Jensen said the current level of taxes on beer compared to hard liquor is “prohibitive” for growth. “People need to drink more beer to get to know the new brands in the market but there isn’t enough demand because whisky is just much cheaper.”

For the beer industry to grow, “the government should create a more balanced tax structure under which we can sell beer at a price that is five times less than current levels or raise the taxes on whisky to create a more level-playing field,” Mr Jensen said.

“The entire market can easily be three to four times bigger than it is now without the tax. Far more players will come to market if the tax structure is changed,” he added.

Too much bureaucracy

That isn’t the end of Carlsberg’s Myanmar woes. The way Mr Jensen tells it, the brewer is constantly bogged down with bureaucratic processes that occupy manpower and unnecessarily drive up costs.

Distribution, for example, is a logistical nightmare. “Getting permission to move our products is extremely difficult. I can’t move a case without having a transport permit. We transport beers every day, so getting a transport permit from the authorities is a daily affair and incredibly bothersome,” he said. As such, distribution costs in Myanmar compared to other countries are twice to three times higher.

After receiving approval to launch a new beer last September, for example,

Carlsberg was nevertheless unable to move the goods to supermarkets, restaurants and bars in the country. “That’s because we only received the transport permit six months later,” said Mr Jensen.

To make doing business a little easier, the government must modernise the laws that govern the current system and remove bureaucracy. “Instead of having us apply for a permit every single time we need to make a shipment of beer, why not let us buy a one-year transport permit to reduce inefficiency?” Mr Jensen said.

Commercial establishments such as bars and pubs, which are important revenue sources for beer brewers, also face trouble obtaining licenses to open shop. “The government would restrict legitimate businesses but allow illegal imports and people to buy a bottle of whisky for K1,200. There is no logic to this system,” he said.

Importantly, that system is also discouraging Carlsberg and other brewers from expanding further in Myanmar. To date, only a handful of the brewers which hold licenses to operate in Myanmar are actively doing business. These include Carlsberg, Myanmar Brewery and Heineken, which brews Heineken and Tiger beers.

It is also adding to the brewer’s other challenges, including marketing its beers to consumers who for the past 60 years have mainly been exposed only to Myanmar Beer. Myanmar Beer is produced by Tatmadaw-linked Myanmar Brewery, the country’s largest and oldest brewer.

“We are looking at the next phase of growth for our brewery but reluctant to invest more because of the size of the illegal trade and unfair competition. We would like to do more business in Myanmar, but right now, we are not able to viably expand,” Mr Jensen said.

Source : Myanmar Times

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