Trends in the global beer markets - Carlsberg Group

14 Management review: Markets and strategyTrends in theglobal beermarketsTHE GLOBAL BEER INDUSTRYBrewing has historically been a localindustry with only a few companieshaving a substantial internationalpresence. However, the last coupleof decades have seen increasingconsolidation within the industry, adevelopment which initially took off inWestern Europe and North America.More recently, the consolidation beganto include brewing companies in thegrowth markets of Eastern Europe,Asia and Latin America.The global consolidation process hasaccelerated in the past ten years. Thetop 10 brewers accounted for 34%of the global beer market in 1998. In2008, this figure had grown to 59%.In 2008, two major acquisitions tookplace in the global brewing industry:• The acquisition of Scottish & Newcastleby Carlsberg and Heineken• The acquisition of Anheuser-Buschby InBevFollowing the acquisitions this year,Carlsberg is the fourth largest brewerin the world with an approximate worldmarket share of 5%.The dynamics of beer consumption vary significantly acrossthe world. In mature Western European markets volumesare broadly stable or declining modestly. In contrast, lessmature or emerging beer markets in Asia and Eastern Europeare growing, with some countries even showing quite rapidgrowth rates.Volume drivers and trendsGlobal beer volumes are primarily being driven by growingdisposable income, improvements in the quality of beer,marketing and advertising activities, and a steadily growingbeer-consuming population base.An ongoing trend evident in emerging and growth marketsis the substitution of beer in place of traditional, local spirits.This trend is driven by rising incomes and increasing responsivenesstowards brands and marketing. In addition, demographicshifts towards urbanisation and increasing westernisationof tastes among younger generations have supportedthe shift towards beer. In mature markets, consumption ratesvary based on product differentiation, and marketing andpromotional activities.Beer consumption is also affected by a range of otherfactors, including seasonality, weather, demographics,tax and duties, perceived health effects, responsible-useprogrammes, rules and regulations and the consumption ofsubstitute products.ON-TRADE AND OFF-TRADEBeer consumption is described as beingsplit between on-trade and off-tradeconsumption. On-trade refers to beerpurchased in a bar or restaurant.Off-trade refers to beer purchased ata retail outlet. The relative importanceof the on-trade or off-trade segmentsvaries from country to country.Consumption patternsThere are clear differences across markets in the types ofbeer consumed depending upon, among other things, thehistorical brewing traditions within a given country and themarket’s maturity level. In most markets, there are one ormore mainstream lager brands as well as discount brands atthe lower end of the market. At the higher end of the market,there are premium brands, super-premium brands andimported brands.Because beer is often consumed in a social setting, brandimage is very important. Marketing plays a major role increating and reinforcing a brand’s image and typicallybecomes increasingly important in highly differentiatedmarkets. Domestic and regional brands can establish astrong base while the premium brand category becomespopular as consumers look for a better image or new tastes.

Carlsberg Annual Report 2008 15NORTHERN & WESTERN EUROPE EASTERN EUROPE ASIANorthern & Western Europe comprisesmature markets as well as less maturemarkets in the eastern part of the region.Eastern Europe covers the growth marketsof Russia and the Ukraine and a number ofemerging beer markets.Asia comprises old, mature Carlsbergmarkets and new emerging beer marketsin China, Vietnam and India, amongst others.Carlsberg is the second largest brewerin the region with market leader positionsin a large number of countriesand significant market positions inother countries.The region comprises mature marketslike the Nordic countries, the UnitedKingdom, France, Germany, Switzerlandand Italy, where growth rates areexpected to be flat or slightly declining.The region also comprises markets likePoland, the Baltic States and countrieson the Balkan Peninsula, where longtermbeer consumption is still expectedto grow.Volumes are generally supported bya well-established retail structure, astrong tradition of beer consumption inmost of the region and consumers whoare receptive to innovation.The competitive landscape varies fromcountry to country. For example, inthe Nordic region Carlsberg competesmainly with local players andlocal beer brands, while in the UnitedKingdom and France Carlsberg is upagainst large international brewers andinternational brands.The Eastern Europe region coversthe growth markets of Russia andthe Ukraine and the emerging beermarkets of Kazakhstan, Uzbekistan,Belarus and Azerbaijan.Carlsberg’s Russian brewery, Baltika,is a strong market leader in Russia,and in the Ukraine Carlsberg holds ano. 3 position. In both countries, thecompetition primarily comes frominternational brewers.The beer markets in this region arestill expected to show positive growthrates as an average trend in the comingyears.The region is characterised by along tradition of alcohol consumption,strong domestic brands, rapidlymodernising distribution systems andincreasing disposable income. Theemergence of an aspirational middleclass looking to differentiate itself fromprior generations that consumed lowquality,high-alcohol-content spiritshas also had a positive effect on beerconsumption, not least in the premiumand licensed segments.Carlsberg’s activities in Asia comprisethe mature markets in Malaysia, HongKong and Singapore, and emergingmarkets in China, Vietnam, Cambodia,Laos and South Asia, including India.The Asian beer markets are characterisedby large populations, growingeconomies, rising per capita incomesand improving infrastructure.In the region’s emerging markets beerconsumption per capita is generallylow but with high projected growthrates in the coming years.The presence of international brewersin the region is high. In many cases, theexposure of the international brewersto the region is through joint venturearrangements or investments in localbrewers.See also: www.carlsberggroup.com/company/markets

16 Management review: Markets and strategyMarketoverviewOur markets Our breweriesPopulation(million)GDP/capita(USD) 1GDPgrowth Market(%) 2 maturityMarketgrowth2008-13 Breweries EmployeesNorthern &Western EuropeDenmark 5.5 37,200 0.2 U 1 2,246Norway 4.6 56,850 1.8 j 3 1,547Sweden 9.0 37,620 0.6 U 1 996Finland 5.2 37,190 1.6 j 2 1,003Baltic States 4 7.4 19,1807-2.3-4.4 j 4 1,454United Kingdom 60.9 36,310 0.7 U 2 1,985Germany 82.4 35,150 1.4 UNorthern Germany 5 4 1,398Switzerland 7.6 42,250 2.0 U 2 1,425France 62.2 35,130 0.9 U 1 2,238Italy 58.2 31,370 -0.4 j 1 687Greece 10.7 31,220 2.6 j 1 287Portugal 10.7 22,550 0.4 j 1 775Poland 38.5 17,770 5.1 W 3 1,325South East Europe 6 22.0814,18182.5-6 j 4 1,552Eastern EuropeRussia 140.7 16,330 7.0 W 11 12,266Ukraine 46.0 7,600 4.5 W 3 1,927Kazakhstan 15.3 11,440 3.5 W 1 919Uzbekistan 27.3 2,660 8.6 W 1 349Belarus 9.7 12,470 10.3 W 1 476Azerbaijan 8.2 11,820 13.1 W 1 284AsiaMalaysia 25.3 14,110 5.6 j 1 671Singapore 4.6 43,590 2.2 U - 66Vietnam 86.1 2,830 6.1 W 5 723China 1,330.0 6,170 9.1Western China W 19 5,107India 1,148.0 2,950 5.6 W 4 1311PPP; 2008 2 Real terms, 2008E 3 2008F 4 Estonia, Latvia, Lithuania 5 Schleswig-Holstein, Hamburg, Lower Saxony 6 Bulgaria, Croatia, Serbia7Weighted average 8 Weighted average. Serbia not included 9 Carlsberg estimate

Carlsberg Annual Report 2008 17Northern & WesternEurope, Eastern Europeand AsiaOur position Consumption characteristics 3Marketposition (no.)MarketshareCompetitive climate(international/local)Approx.on-tradeshare of marketPer capita beerconsumption (litres)Per capitapure alcoholcomsumption (litres)Beer: shareof total alcoholconsumption (%)1 63.0 Local 22 81 9.6 42.21 54.2 Local 24 59 5.6 52.51 37.7 Local 21 53 6.3 42.31 46.9 International 19 87 8.7 50.01 43.5-46.1 Local 5-10 67-95 8.7-14.3 33.1-38.24 13.3 International 54 87 9.9 44.24.9 33 108 10.0 54.01 International1 41.8 International 47 62 8.9 34.51 33.3 International 27 31 11.3 13.73 6.4 International 40 32 10.1 15.62 - International 65 42 7.0 29.71 49.8 International 65 63 8.9 34.83 13.2 International 21 97 9.0 54.22-3 16.3-26.7 International 31-66 61-86 8.7-14.3 41.1-70.11 38.3 International 18 87 10.5 37.03 23.8 International 21 71 8.3 42.51 47.9 International - 39 - -1 38.7 Local - 8 - -2 28.2 International/local - 50 - -1 72.4 Local - 6 - -2 43.2 International 71 5 0.3 67.32 22.6 International 73 18 1.4 66.54 11.0 International 65 21 1.1 93.1International 45 32 3.3 48.51 59.0 Local917- - International 37 1 1.7 3.5Sources: Economist Intelligence Unit (GDP data), CIA World Fact Book, Canadean and Euromonitor (Consumption characteristics).

18 Management review: Markets and strategyBrandportfolioFour brands in Carlsberg’sportfolio are among thetop 10 in EuropeThe Carlsberg beerportfolio includes morethan 500 brands. They varysignificantly in volume, price,target audience and geographicpenetration. The brand portfolioincludes the well-known internationalbrands Carlsberg, Tuborg, Baltika and1664, and strong local brands such asRingnes (Norway), Feldschlösschen (Switzerland),Lav (Serbia) and Wusu (Western China).STRONG LOCALAND INTERNATIONALBRANDSFollowing the acquisition of assets from Scottish& Newcastle, Carlsberg has full control over theRussian brand Baltika and the French brand1664. Consequently, Carlsberg has revised its brandportfolio objectives and priorities to include thesestrong brands in the overall portfolio strategy.An important strength of Carlsberg’s brand portfoliois highlighted by the fact that four brands(Baltika, Carlsberg, Tuborg and Kronenbourg) areamong the ten biggest brands in Europe withBaltika as number one.Portfolio segmentation and strategyBeer brands can be segmented along a numberof variables such as consumer needs, consumergroups and occasions. Beer is generally pricedaccording to four broad segments: discount, mainstream,premium and super-premium. The size ofthe different price segments varies from marketto market. For example, France has strong largepremium and super-premium segments, whereasin Germany discount brands have a much greatermarket penetration.The objective of the Carlsberg Group’s portfoliostrategy is to premiumise the product mix. Thisis done with Carlsberg’s own premium and superpremiumbrands, such as Carlsberg, Tuborg, 1664,Grimbergen and Jacobsen, as well as with complementarysuper-premium brands of other brewers.Notwithstanding this objective, Carlsberg sees itas a strength to have a broad portfolio that coversall consumer needs. In times of economic downturn,Carlsberg will assess and adjust the productportfolio in line with consumer demand to captureand secure shares not only in the premium andmainstream beer segments but also in the economysegment in markets where consumers choose totrade down.Local power brandsLocal power brands play, and will continue to play,an important role in Carlsberg’s portfolio. In each ofCarlsberg’s European markets, a local mainstreambrand has been developed as a power brand. Therole of this power brand is to be the key driver in thelocal mainstream segment.The allocation of resources is focused on leadingand developing the beer market from a localperspective. It is Carlsberg’s ongoing ambition touse the strong platform of the local power brandsto offer trade-up opportunities to the consumer byintroducing new packaging or line extensions (suchas flavour variants or reduced-calorie versions). Thisis part of the strategy of portfolio premiumisation.Power brand management, ranging from productdevelopment to sales and marketing, is carried outlocally but in order to achieve synergies across markets,a power brand network has been established atGroup level, where ideas and experiences are shared.

Carlsberg Annual Report 2008 19Volume (m hl)131211CARLSBERGCarlsberg Pilsner was launched in 1904 and is the flagship in the CarlsbergGroup’s portfolio of beers. It is an all-malt premium lager beer spiced bythe unique Carlsberg Aroma Hop. Green Label is the centre piece of theCarlsberg portfolio but across markets a number of line extensions exist inorder to broaden the brand franchise.10200620072008Carlsberg is the beer of sports, in particular football, and it has a longheritage of impressive local as well as international football sponsorships,for example UEFA EURO 2008 and Liverpool Football Club.Volume (m hl)TUBORG121086200620072008Tuborg Brewery brewed Denmark’s first pilsner-type beer in 1880 andpackaged it in bottles with a distinctive green label. It became instantlypopular with the Danes but is today a real cosmopolitan, present in morethan 70 different countries.Tuborg is the youth brand in Carlsberg’s international portfolio and is assuch a catalyst for fun and partying. This is often associated with musicand therefore Tuborg is involved in several music sponsorships aroundEurope.Volume (m hl)201612BALTIKABaltika is the only truly national beer in Russia, brewed in many locationsand sold across the entire country. Baltika was introduced in 1992 and fromthe very beginning, Baltika beer was exclusively conceived as a beer ofthe very highest European quality brewed according to classic technology.Today, Baltika is the largest European brand in terms of volume.8200620072008The Baltika brand family consists of a number of line extensionsdifferentiated by numbers. No. 3 is for example the large mainstreambrand whereas No. 7 is the most popular Russian premium beer.2.6million hl in 200816641664 was included in Carlsberg’s beer portfolio following the partialacquisition of S&N and thus Brasseries Kronenbourg in 2008. 1664 is astrong, traditional beer named after the year the Hatt family, the foundersof the original brewery, first started commercial brewing.1664 is associated with French art and pleasure and is a super-premiumbrand in Carlsberg’s international beer portfolio.See also: www.carlsberggroup.com/brandsInternational premium brandsCarlsberg’s premium brand portfolio includes theGroup’s international brands Carlsberg, Tuborg,Baltika and 1664, the last being positioned in theinternational super-premium segment, as well aslocal brands, which are often brand extensions asdescribed above, sold at premium prices.The management of Carlsberg’s international brandsis carried out centrally at Group level to ensureboth the correct prioritising and streamlining of theinternational portfolio and to build strong brandplatforms and growth models for each internationalbrand in order to optimise profits. Strong implementationof the strategies and marketing tools is securedthrough the local organisations.

20 Management review: Markets and strategyStrategyGroupAMBITIONCreate value for our shareholders and all other stakeholdersOBJECTIVEBuild the fastest growing global beer companyBe a significant player in the markets we choose to compete inDEFINING THENEW CARLSBERGGEOGRAPHYNorthern & Western Europe, Eastern Europe and AsiaPRODUCTS & INNOVATIONBeer is core, but expansion from core where it makes business senseBRANDSFocus on local power brands and international premium brandsSTRATEGIESSTEP CHANGE INNOVATION – bigger, better, fasterCOMMERCIAL EXECUTION – brands, categories, route to marketEFFICIENCY – group, regional, localWINNING BEHAVIOURS – leadership and organisationRegionsNORTHERN &WESTERN EUROPE EASTERN EUROPE ASIAOBJECTIVEImprove competitivenessand earningsEnsure profitable growthBuild growth platformMID-TERM TARGET Operating margin 14-16% Operating margin 23-25%STRATEGIESIncrease efficiency· Excellence programmes· Network optimisation· Business standardisationValue creation· Strengthen local power brands anddevelop international brands· Premiumise portfolio· Innovate· Expand portfolio· Improve category and valuemanagementFocus on portfolio and mix· Balance value and volumeAssessing multi-beverage portfolio· Leverage strengths with non-beercategoriesRoll-out of Excellence programmes· Realise synergiesContinued build-up of smallermarkets and new marketsStrengthen brand portfolioBuild stronger platform in WesternChina, Vietnam and IndiaFurther value creation from otherstrongholdsCommitment to add to existingpositions through M&A activities

Carlsberg Annual Report 200821Defining the new CarlsbergGEOGRAPHYPRODUCTS & INNOVATIONBRANDSThe new Carlsberg effectivelyspans two continents: Europe andAsia. These continents are wherethe Group has the expertise and theright products to secure a leadingposition.The business portfolio is split intothree geographical regions:• Northern & Western Europe• Eastern Europe• AsiaCarlsberg's core business is beer.However, Carlsberg will expandfrom the core business where itmakes sense:• Malt-based beverages: Carlsbergaims to take the lead in thedevelopment of this segment• Other beverages such as softdrinks, water and cider: Carlsbergintends to work in partnershipswhere this fits the local portfolioand makes a positive contributionto the businessCarlsberg will remain focused ondeveloping and strengtheningits brand portfolio based ona combination of local powerbrands and international brands.An essential part of the brandstrategy is premiumisation ofthe portfolio. Wherever possible,Carlsberg will be the brand ownerof premium products, but wherethis is not possible, Carlsberg willengage with partners to increasepremiumisation.Group strategiesSTEP CHANGE INNOVATIONCOMMERCIAL EXECUTIONEFFICIENCYWINNING BEHAVIOURSCarlsberg will excel in stepchange innovation and valueengineering. The aspiration isfor fewer but more efficient andvisible "product news" across morecountries. This will be within thebeer category as well as withinmalt-based beverages but alsoincludes packaging, marketing andexecution. Carlsberg will sharpenits focus not only on developingand launching new productsbut also on enhancements andinnovations for existing productssuch as new flavours or newtypes of packaging in response togrowing sales from conveniencestores.Outstanding commercial executionentails areas such as:· Consistent brand execution· Converting unique shopperinsights into actionable strategies· Deploying sales and marketingresources with highest possibleeffectiveness· Excellence in value management· Converting deep customerunderstanding into value creation· Ensuring optimised route-tomarketcontrol in all marketsCarlsberg will continuously adjustand optimise the cost base,including the brewery structure,in all markets.In recent years, a number ofExcellence programmes havecovered systematic streamlining ofprocesses and procedures acrossthe whole value chain in areassuch as production, procurement,administration and logistics.Carlsberg will continue to executethese in the commercial area, inproduction, procurement, logisticsand in administration.As a natural extension ofthe Excellence programmes,standardisation across functionsand geographies is the next phaseand the new enabler in the ongoingwork to increase the efficiency ofall parts of the business.Carlsberg is committed toenhancing the skills of managersand employees, and to developingstrong winning behaviours, whichpulls the Company together acrossnational borders and functions, andpromotes commitment in people’severyday work.A set of shared winning behaviourswill guide the way business is doneacross markets and regions. Thewinning behaviours include:· All decisions are based onthe needs and preferences ofconsumers and customers· Employees are empowered topromote a work environmentwhere good ideas and passionto deliver are recognised andrewarded· Despite the local marketposition, Carlsberg acts as anentrepreneur: fast, proactive andaction-oriented

22 Management review: Markets and strategyCarlsberg’s ambitionis founded on one keyprinciple: creating valuefor our shareholders andall other stakeholdersThe acquisition of assetsfrom Scottish & Newcastlewas one of the most significantevents in the history of theCarlsberg Group, representing animportant step into a new league. Bydiversifying market exposure, Carlsbergcreated a new and stronger balancebetween mature and growth markets, andthe company is well positioned for profitablegrowth in the years to come.VALUE CREATIONBusiness portfolioCarlsberg’s activities are focused on the marketswhere the Group has the expertise and the rightproducts to secure a leading position. The businessportfolio consists of brewery activities in threegeographical regions: Northern & Western Europe,Eastern Europe and Asia.The beer markets in these regions vary widely,from the very mature markets of Northern &Western Europe to the emerging beer markets inAsia. There are big differences in growth rates,consumption per capita and the types of beer consumed,as well as whether beer is enjoyed at homeor in restaurants, bars and cafés. Consequently, thecontributions to growth, earnings and developmentwithin the Group differ according to region, bothcurrently and in our longer-term projections.In countries where Carlsberg has no breweries, theGroup sells its products through exports and licensingagreements. Carlsberg aims to establish anddevelop strong market positions for the internationalpremium brands Carlsberg, Tuborg, Baltika and1664 through dynamic partnerships with licensing,export and duty-free partners around the world.Northern & Western EuropeNorthern & Western Europe is a particularlyimportant region in the business portfolio with theoverriding short-term goal of generating free cashflow for the Group while developing long-termequity through strong consumer loyalty. This isdone by focusing on value rather than volume anda constant focus on efficiency improvements withinand across markets. The efficiency agenda hasbeen delivered through the Excellence programmein all functions. The value growth agenda focuseson obtaining and using better consumer insights,and improved in-store execution with both beersand other beverages.Eastern EuropeThe priority in Eastern Europe is profitable growthnow and in the coming years. The most importantchallenge is to exploit the growth potential of theRussian market as well as of a number of the othermarkets in the region. A key task is to strike the bestpossible balance between value growth and volumegrowth. On the one hand, this means strengtheningbrand loyalty and sales of more expensive premiumbeers, whilst on the other hand, it means supplyingcompetitive and attractively priced beers which cancapture consumers and sales from other beverages,in particular spirits. The Eastern European region isthe growth asset in the business portfolio despitean expected short-term slowdown in overall marketgrowth due to the current macroeconomic environment.Eastern Europe will continue to grow and thenecessary investment will be made in the region tocapture future growth opportunities.AsiaThe goal of the Asian region is to continue to developthis business so that the region can supplementEastern Europe as an additional growth enginefor the Group. In the less mature markets of Asia,efforts in the coming years will be largely concentratedon generating growth that increasingly willbe more balanced between volume and value.Value creationValue creation and profitable growth play a key rolein Carlsberg’s strategy. These objectives are to beachieved by a number of means and initiatives.Commercial initiativesIn recent years there has been a growing focuson commercial initiatives to increase value andgenerate growth, but activities and target areasvary from region to region and from market tomarket.

Carlsberg Annual Report 2008 23To realise the growth strategy, it is essential to be ina position to respond quickly and effectively to newconsumer trends. First and foremost, this requires asystematic and targeted approach to innovation. Aswell as developing the product range locally, effortswill increasingly be concentrated on larger internationallaunch concepts. Carlsberg will sharpen itsfocus not only on developing and launching newproducts but also on enhancements and innovationsfor existing products, such as new flavours or newtypes of packaging, in response to growing salesfrom convenience stores. In recent years, Carlsberghas developed and marketed a number of newproducts and initiatives internationally in both beerand other beverages, and this work will be intensifiedin the future. To further improve these capabilities,a new integrated innovation organisation and structurewas implemented in early 2009.Commercial execution will also be on the agenda inthe years ahead. An example within this area is thedevelopment of sophisticated methods and intelligenttools that have been taken into use for analysingconsumer behaviour with a view to improving productplacement and sales in locations such as supermarkets,convenience stores, restaurants, cafés and bars.Efficiency initiativesThe efficiency initiatives are about constantlyreducing the cost base across the Group. They arealso about optimising the brewery and distributionstructure and as a result of this, the proposedclosure of the brewery in Leeds, United Kingdom,by 2011 was announced in 2008. This announcementfollows plant closures in recent years in Denmark,Portugal, Switzerland, Italy and Finland. Closurescontinue to be on the agenda in the coming years.In recent years, Carlsberg has implemented anumber of Excellence programmes which havecovered systematic streamlining of processes andprocedures in areas such as production, logistics,procurement and administration. Excellence initiativeswill continue in Carlsberg. In mature marketswhere the first wave of these programmes hasalready taken place, second-wave initiatives arenow being rolled out, building on the experienceand knowledge acquired through the execution ofthe first round. In less mature markets, Excellenceprogrammes are being rolled out in a modified formso that the cost base here too can be optimised.Major programmes were initiated in Eastern Europeduring the second half of 2008.An important initiative is the continued work onglobalising and centralising procurement at Grouplevel to ensure the most favourable terms and conditions.Central procurement will be implementedacross the cost categories of the business.Another area that is being scrutinised is how tooptimise the route to market in order to improve theservice provided to our customers and consumers.This work is being done market by market torecognise the differences across markets.Standardisation is the next phase in Carlsberg’songoing work to increase the efficiency of all partsof its business.The aim of standardisation is to strike the best possiblebalance between centrally defined ways of runningthe business regardless of national and departmentalboundaries, and respect and consideration forlocal markets, customers and consumption patterns.This standardisation process will take a number ofyears. The first phase has involved identifying andmapping the many operational and administrativeprocesses in the Carlsberg Group with a view todesigning and optimising uniform procedures andIT systems across the Group’s companies. As withprevious projects, the standardisation project will berolled out first in the mature European markets andsubsequently in the Group’s other markets. Besidescreating immediate synergies by reducing the complexityof the Group, standardisation will result ingreater transparency across the Company, whichwill provide new opportunities to optimise workingmethods and processes. This will also be a key leverfor more accurate and faster decision-making.PeopleContinuous development of the Group’s employeesis an important part of everyday life at Carlsberg.This ongoing work is supplemented with a numberof programmes spanning not only managementdevelopment but also talent development, internalacademies for production, procurement and marketing,and personal development programmes forboth managers and other employees at variouslevels of the organisation.2009Carlsberg’s long-term business strategyremains intact. However, recognising that2009 will be a year of lower visibility andgreater uncertainty, action plans are in placeto ensure that Carlsberg emerges from 2009as an even stronger business. Please seepage 10.