E-Malt.com News article: Russia: Review of Russian Beer Market

“Forecasted sluggish growth of beer brewing industry was proved,” – the Union of Russian Brewers started the year 2006 with such comments. According to Federal Agency of State Statistics, in 2005 output of beer brewing industry constituted 892 million decaliters with 6% growth in comparison to 2004. From economical point of view beginning of the previous year was the worst and this made analysts speak about practically complete market saturation and very moderate growth rates in the future. Still, dynamics of the first months of 2006 became quite a surprise even for market experts. Severe winter stroke almost all territory of Russia and influenced negatively indices of beer brewing industry of the first months of the year. For instance, in January 2006 output decreased by 12.4% as compared to 2005. Industry has never been in worse situation since soviet times.

In February market situation stabilized and industry indices reached the level of previous year which made the “cross” trend. During the next months production growth became stronger: in the period from January to April it went up by 19.7 p.p. *. This was related, on the one hand, to recovery of industry output after the slump of January-February 2006, on the other – to growing activity of main players.

Comparison of production dynamics of the recent 3 years showed that both in 2005 and 2006 the industry was recovering after bad start of the year to reach the forecasted level, i.g. industry development showed ascending trend. This effect very often provokes comments that basic reason is seasonality, i.g. sales growth in the period “winter-summer” conditions industry output growth. Yet this opinion is to a great extent fallacious.

First, during the recent years the industry development displayed various trends. For instance, production dynamics in 2004 as compared to 2003 was descending – “square” trend – i.g. this was absolutely polar to what was observed in 2005-2006.

Second, swings of production within one or several months can be determined by “climate” factors like severe frosts this winter. Very often such factors have spotty influence. This evidences that though seasonality does influence sales during this or that period, it is not the thing to determine industry development for a year – unlike such significant factors and macro-economical processes like per capita income, balance of prices for hard and low-alcohol drinks, inflation, state tax policy, currency and custom duty control.

At the same time seasonality is very important in Russia for development of company strategy and tactics in launch and support of their brands. In brewing industry peak of sales falls on July. It is followed by gradual fade-out of sales until October. November and the following winter months are volatile and indices may swing under influence of a number of subjective factors – weather or long festive period. Difference of output indices in January-February and July with its peak of sales varies from 90 to 100%. Noteworthy, difference between indices of July and December is less significant and rates 50-70%. Finally this creates a kind of positive balance between sales of beginning and end of the year around 20-30% determined by market growth during the period.
Knowledge of peculiarities of sales seasonality is important for tactical planning of company activities. For example, summer trait is significant increase of demand for beer in large-size containers – mainly PET bottles. Seasonality also influences distribution of consumer preferences for “light” and “heavy” beer kinds. All this is considered by manufacturers in marketing activities in different regions of Russia.

REGIONS

Data on beer brewing in Federal Districts of Russian Federation during January-May of 2006 showed decreased output in 30 regions. At the same time 43 regions demonstrated production growth – in 36 regions of this group indices were equal or exceeded average industry level and in 21 regions growth rates exceeded 20%. Analysis of situation in Federal Districts revealed that Central and South FD closed the first five months of this year with negative production dynamics, and in Privolzhskiy, Urals and Siberian FD production growth rates were 20% and higher. Rate of annual capacity factor during the review period constituted for the industry 74.4%.

BREWING COMPANIES

Moscow plant of beer and soft drinks “Ochakovo” CJSC – the only large manufacturer staying independent – is persistently disproving take-over rumours. At the same time company’s directory is looking for partners. Search for new cooperation ways improving company’s development is very topical for “Ochakovo” – by the end of 2005 production indices of this manufacturer were significantly behind the average industry level. Company data shows that beer reduced by 4.4% down to 50.1 million decaliters. This is related to general market situation and company’s low promo activity, say experts of “Ochakovo”. To recapture, “Ochakovo” plans promo budget of $18-20 million in 2006. Promo campaign will cover almost 100 Russian cities – the so-call “key points” where advertisement can be most efficient. These are cities with million population and large regional centres all around the country. Promotion will be focused on drinks positioned in middle-price and premium segments.

In 2006 company leaders also plan investments into construction of a new facility in Tyumen and renovation of facilities in Moscow and other cities.
This year “Ochakovo” refused the policy of single country-wide price and introduced area coefficients. Now price is determined not only by price positioning but also by distance between production facility and sales area and by income level in that region. In reconstruction of company’s marketing strategy special attention is paid to cooperation with retail chains.
Executives of “Ochakovo” think that changes in management together with mass promo support would provide the planned sales growth in 2006 and increase of share of more marginal products with the distant target of growing revenue and benefit of the company.

Main determinative event of the first half of 2006 for “Pivovarennaya Kompaniya “Baltika” (Brewing Company “Baltic”)” OJSC was further merge with companies “Vena (Vienna)” OJSC (Saint Petersburg), “Pikra” OJSC (Krasnoyarsk) and “Yarpivo” OJSC (Yaroslavl). Before the end of 2006 “Baltika” plans to complete consolidation with Russian facilities of the holding “Baltic Beverages Holding” (“ВВН”) in order to reach the maximum synergetic effect. After consolidation brand portfolio of the company besides the largest federal brands “Baltika (Baltic)” and “Arsenal’noe (Armoury)” will also include such leading brands as “Tuborg”, “Nevskoe” (“Vena”) and “Yarpivo” (“Yarpivo”).

Year 2005 made a powerful base for further expansion of “Baltika” on Russian beer market. Last year share of the company constituted 24.1% – in comparison of 22.8% in 2004 – and sales volume grew by 13% during the review period. Total product sales constituted 225.4 million decaliters and part of beer was 224.4 million decaliters – the highest index in all-time history of Russian beer market.
At the same time by the end of the first quarter of 2006 “Baltika” displayed some decrease of sales – by 1.7% as compared to the same period of the previous year. According to company’s experts this was predictable drop due to active integration of four companies into the group – unification of distribution chains, changes in sales tactics, transfer to unified price models, rotation of trade personnel, etc.

Changes in sales tactics traditionally result in temporal sales drop to be recompensed in long-term perspective. Severe winter had its influence on company’s sales – demand slump in January 2006 was the universe trouble of the industry. For support of its brands the company ran a series of promo events – subject of close attention of Russian Federal Antimonopoly Service (FAS) due to tightening of advertisement legislation.

For “Pikra” OJSC key events of the first half of 2006 were development of investment projects and renovation of production facilities.
Investment program of “Pikra” for 2006 includes start of new facilities, renovation of production and also construction of office buildings. Total amount of investments this year will constitute at least EUR8.5 million.
Almost simultaneously with the start of new facilities the company presented new equipment for beer bottling into 2.5 litre PET containers. “Kupecheskoe Klassicheskoe (Merchant Classical)” – leader of economy segment in Siberian region – was the first brand to use this container size.

Year 2005 proved that “Yarpivo” OJSC remains one of the most profitable companies on Russian beer market. Profits allowed Rb1.2 billion investments into company development. Investments were made into ecological program (construction of pollution control facilities), renovation and upgrade of service facilities, development of marketing programs.
By the end of 2005 capitalization of “Yarpivo” constituted $601 million with increase of 35% since the beginning of the year. Sales volumes in 2005 made 55 million decaliters – by 4% more than in 2004. Share of “Yarpivo” in market volume and value constituted 6.2 and 5.4% respectively.

Belgian company “InBev” is transferring headquarters of Central and Western Europe to Moscow. Experts of beer market say it reflects attention of the world’s largest brewing company to Russian market. “InBev” appeared as a strategic alliance of Belgian “Interbrew” and Brazilian “АmBev”. “SUN Interbrew” is a part of “InBev” and represents company’s interests on Russian market.
“SUN Interbrew” closed year 2005 with personal record market share – 17.8% – and sales volume increase by 20.9%. Brand support promo activity of “SUN Interbrew” in the first half of 2006 proves that the plans are even more ambitious. For instance, in the second quarter the company announced new promo campaign of “Tolstyak (Portly Fellow)”. This new campaign is targeted on increase of brand recognition and on communication of brand values to consumers. Earlier “SUN Interbrew” ran promo events to support “Stella Artois”.
Besides, “SUN Interbrew” continues hi-tech upgrade of distribution system – scheduled introduction of mobile trade all over Russia. The company piloted this system in Moscow and further on successfully introduced it in such regions as Tula, Tver, Vladimir, Smolensk and Kaluga. Recent stage of the project covered Nizhnevartovsk and Noyabrsk – centres of large oil and gas recovering areas of Tyumen region.

In April 2006 “Pivovarennaya Kompaniya (Brewing Company) “Volga” CJSC (Nizhniy Novgorod region) announced start of new line for PET bottling with capacity of 18 thousand units per hour. Start of new line was a part of large investment program of “Heineken” in Russia.
In the beginning of 2006 Turkish company “Efes Breweries International N.V.” announced acquisition of “Krasniy Vostok (Red East)” OJSC (Kazan) – a long-term nominee for merge with one of the largest world operators. On the moment of deal closure group of companies “Krasniy Vostok” owned two breweries in Kazan and Novosibirsk with total capacity of 10 million hectolitres annually. Company’s property also included three malt-houses located in Kazan with aggregate capacity of 93 thousand tons of malt annually.

Noteworthy, before acquisition of “Krasniy Vostok” brand portfolio of “Efes” was mainly focused on middle-price and premium beer. Product line of “Krasniy Vostok” contains three low-price brands – “Krasniy Vostok”, “Zhigulevskoe” and “Yorshistoe” – and one middle-price brand – “Solodov”.
In general, directory of “Efes” is sure that acquisition of “Krasniy Vostok” will contribute to further development of the company on Russian market helping out the shortage of production facilities, formerly highly acute.

FOREIGN TRADE

One of export leaders in Russian beer and low-alcohol beverages industry is MPBK “Ochakovo”: by the end of the first quarter of 2006 this manufacturer provided export increase by 16.2% in value terms as compared to the same period of the previous year. To guarantee steady export growth “Ochakovo” makes active promotion of its products on foreign markets.
One of the most promising markets for MPBK “Ochakovo” is USA where the company works since 1998. During the previous year almost 144 thousand litres of beverages were exported to this country and 45.3% of this volume fell on beer.

“Ochakovo” also pays attention to the markets of CIS countries supplying draft beer to them. Noteworthy, by the end of 2005 the bulk of Russian export was shipped to CIS countries and Ukraine became second large after Kazakhstan importer of Russian beer.
Export of draft beer was a new experience for “Ochakovo”. Earlier company exported only bottled products – in glass, PET or aluminium. Sales of draft beer were balked by logistics problems.

In 2006 the largest Saint Petersburg brewing company “Baltika” plans to increase sales and improve its distribution in China. In 2005 China was the world’s leader in beer brewing with 3022 million decaliters. Company’s experts estimate Chinese market as very promising for beer industry. Current annual per capita beer consumption in this country constitutes 22 litres in comparison with Russia where this index exceeds 60 litres. The company plans supplies to Shanghai, Hong-Kong and some provinces of South and Central China.

“Baltika” started export to China in September 2004. By the end of 2005 sales in China exceeded 600 thousand conditional bottles: “Baltika” exports 5-litre kegs and 0.33 and 0.5 litre bottles. In 2006 the company plans to increase export to the largest beer market and exceed 1.5 million conditional bottles.
License agreement between “Baltika” and Ukrainian “Pivo-Bezalkogolniy Kombinat (Beer and Soft Beverages Facility) “Slavutich” OJSC became one of new directions of company’s export development. According to this agreement brand “Baltika” will be brewed in Ukraine. License agreement valid until 2010 allows production of all “Baltika” varieties by “Slavutich”. Pilot brewing started in February 2006, and launch of “Baltika #3 Klassicheskoe (Classical)” and “Baltika 9 Krepkoe (Heavy)” happened in March. “Baltika 0 Bezalkogolnoe (Alcohol-Free)” will be launched in 2007. “Baltika” plans to get stronger on Ukrainian market exactly with the help of license production.
“Baltika” exports beer to Ukraine since 2000. By the end of the previous year sales of the company in Ukraine constituted 2870 thousand decaliters giving 1.5% of Ukraine beer market to this manufacturer.

Top-management of the company underlines significant success in export development. Export volume in 2005 constituted 13.9 million decaliters – by 23% more than in 2004. New markets were entered – Norway, Finland, Holland and France. Export was also advanced in 2006: during the first quarter of 2006 export volume increased by 11% as compared to the same period of previous year.

BOTTLED BEER

Crude summary of the first half of 2006 in general showed continuation of existing trends of bottled beer. In the first half of 2006 most bright and prominent development was displayed by such trends as improvement of license beer, decrease of middle-price segment, continued downswing of glass bottle and growing popularity of light beer.

Demand for license beer grows at highest rates among other price segments – in April-May 2006 its share in volume constituted 9.1%. Only during the last year – from the first quarter 2005 to the first quarter of 2006 – license beer grew by 2 p.p. This is determined by several factors. First, consumer income increases, especially in large cities which stimulates switch to more expensive brands. Second, manufacturers’ activity in this segment is of great importance – companies are desperate to maintain their positions in highly profitable product categories.

“SUN Interbrew” analyzed its indices after launch of beer “Brahma” to Russian market – one of four global flagman brands of “InBev” staying sixth in company’s brand portfolio with its world sales. According to this data “Brahma” managed the fastest establishment of distribution chain since license beer exists on Russian market: in 6 months weighted all-nation distribution of this brand constituted 47% and after a year on the market – exceeded 55%.
“SUN Interbrew” started license brewing of “Lowenbrau”. For six years this brand was brewed in Saint Petersburg on facilities of “Pivovarnya (Brewery) “Heineken” LLC. In October 2005 group of companies “Heineken” in Russia and “InBev” agreed to transfer obligations on development of this well-known Bavarian brand on Russian market to the company “SUN Interbrew” – Russian branch of “InBev”. Since November 2005 “SUN Interbrew” distributes “Lowenbrau” in Russia, and since March 2006 – brews it.

Having transferred rights on one license brand “Heineken” launched two new brands in Russia. First, the newcomer of Russian market – “Zlaty Bazant” – production of which in Russian Federation was announced in February this year. Bottling of this brand is planned for “Heineken” facilities in Saint Petersburg.

In March the company announced presentation of another license brand planned for production in Russia. “Heineken” GK and “Anheuser-Busch International Inc.” (USA) informed about signing of license agreement for production, sales, distribution and marketing support of the main brand of “Anheuser-Busch” – “Bud” – on territory of Russian Federation by “Heineken”.
“Bavaria” makes a new entrance to Russian market – “Bavaria N.V.” licensed brewing of this brand by “Pivovarnya Moskva-Efes (Brewery Moscow-Efes)” CJSC. This brand is well-known to Russian consumers since 1990s – period of high popularity of imported beer. “Efes” branch in Russia – “Pivovarnya Moskva-Efes” brews, promotes and sells in our country premium beer “Bavaria Premium” and alcohol-free variety “Bavaria Malt”; license became valid since April 26, 2006.

“Bavaria N.V.” is the second large beer manufacturer in Netherlands brewing 5 million hectolitres annually. According to license agreement Moscow brewery “Efes” will produce and sell these brands in bottles of 500 and 300 ml and in 330 ml cans, and “Bavaria Premium” – also in 30-litre kegs.
“Efes” also attends promotions of its own main brands. In April the company announced new communicative strategy to support “Efes Pilsener” – title brand of brewery “Efes Russia”. The concept under the slogan “Open Efes World” was under development for a long time. Remarkable, first broadcast of promo video was made in Russia and only after that – in other European countries. In the beginning of last year “Efes” held an international tender on fulfilment of this global communicative strategy finishing at the same time development of new positioning of its main brand.

In the first quarter of 2006 segment of domestic premium beer constituted 23.3% of total sales volume – by 1.5 p.p. more in comparison to the same period of previous year. Sales in this segment traditionally go somewhat up in winter and reduce slightly in summer. Analysis of comparable periods of the last three years showed a soft trend to increasing demand for premium beer in the beginning of 2006. One of possible reasons of such sluggish growth can be low activity of market leaders on the eve of hot season. The only manufacturer which announced new communicative campaign on brands already known to Russian consumers was “Vena”. Image campaign for “Nevskoe” started in the end of April. According to company’s management, the goal of this activity is to support premium image of the brand.

Among segment novelties we should mention variety of “Ochakovo” brand – “Ochakovo Premium Izumrud (Emerald)”. It’s a special sort of beer brewed on classical recipe with addition of natural lime juice. Green colour is the peculiarity of this beer. By this launch “Ochakovo” plans to attract attention to all brands of its premium line.
Like all varieties of “Ochakovo Premium” “Izumrud” is bottled into aluminium cans and brand 0.5 litre glass bottles.
Demand for economy or middle-price brands was steadily decreasing during several years. The first half of 2006 was no exclusion: share of this price category went down to 53% of total sales volume – by 3.3 p.p. lower as compared to the same period of 2005. In the second quarter this trend continued: middle-price brands reduced to 52.5%.

Though this segment remains the most popular with more than half of market volume still in cost terms its share by the end of the first quarter of 2006 constituted 44.1% and for the first time was lower than aggregate share of high-price brands which made 45%. In the first quarter of current year this trend favored expensive brands increasing index difference up to 1.6%. Apparently Russian consumer gets more oriented on quality beer. This in its turn makes a good basis for improvement of highly-marginal brands in portfolios of market leaders.

Interesting peculiarity of economy segment development is that during the first half of 2006 companies’ activities were province-oriented. Two leaders announced about launch of new beer brands on regional markets.
“Kombinat Imeni Stepana Razina (Facility Named after Stepan Razin)” LLC in Saint Petersburg started production of brand “Tri Medvedya (Three Bears)” formerly bottled on facilities of group of companies “Pivovarni Ivana Taranova (Ivan Taranov Breweries)”. Brand “Tri Medvedya” includes three main varieties – “Klassicheskoe (Classical)”, “Svetloe (Light)”, and “Krepkoe (Heavy)” – and is positioned in low-middle segment. Today it is distributed mainly in Urals, Privolzhskiy and Far East Federal Districts.

“Heineken” activity was not limited by North-West FD. In February the company announced launch of new beer sorts “Patra Krepkoe (Heavy)” and “Patra Bochkovoe (Keg)” with production on facilities of “Patra” OJSC in Yekaterinburg. Consumer will be offered new product in new 0.5 litre glass Long Neck and PET 1.5 and 2 litre containers.
In the South the most active player is still “Ochakovo” – it supplemented a new brand “Cuban” to its portfolio. It’s a local brand designed specially for consumers of South FD and brewed on Krasnodar facility of “Ochakovo”. Currently this brand includes only one variety – “Svetloe (Light)” – in PET 2.25 litre containers.

PACKAGE

Currently communication of product to consumer develops in direction of search for new presentation forms the main of which is package. Restrictions on TV promotion of beer hamper launch and support of new brands, so manufacturers changed the tactics and now maintain already known brands rather than accent the launches. This leads to development of less costly attributes not affecting the product itself like new package types (for instance, aluminium bottles) or opening ways (screw and relief caps, self-opening caps with the ring, etc). These trends surely influence consumer preferences for different package types.

No serious redistribution between main container types happened during the recent 6 months. We can only mention lower as compared to previous year decrease rates of glass bottle – percent points lost by it go to PET container and aluminium can. And exactly in these growing categories market leaders made a kind of “novelty contest”. The most successful was introduction of aluminium bottle – already three global brands are presented in this high-tech package on Russian market.

“SUN Interbrew” informed that its Saint Petersburg plant “InterBeer” started production of “Stella Artois” and “Beck’s” in new for these brands container type – aluminium bottle.

The same thing was done by “Efes” – it presented its cognominal brand in new aluminium Cool Bottle.
Main peculiarity of PET development in the first half of this year was growing popularity – and thus growing production – of beer in large-size containers of 2.5 litres. On the eve of summer season which was specially accented in press-releases two market leaders – “Ochakovo” and “Baltika” – launched this container size.

“Baltika” started bottling of “Arsenalnoe” into 2.5 litre PET containers. In general share of PET containers larger than 2 litre constituted in February 2006 12.5% of PET segment and share of 2.5 litre containers was 5.3%.
“New design incorporates old image yet is more attractive and topical” – this is probably the slogan of the majority of marketing departments of Russian brewing companies. According to marketers, brand restyling allows renewal of brand perception and communicates success of up-to-date product.

Announcements made by a number of companies about launch of old brands in restyled package proved the forecasts of experts that with limited promo opportunities manufacturers will concentrate on new image of existing brands. For example, since April 2006 brewery “Pikra” started to bottle all the line of “Kupecheskoe” brand into new glass 0.5 litre bottles and PET containers of 1.5 and 2 litres. One of key peculiarities of new package is its colour – it was changed from traditional brown to brand green. Besides, new PET containers prolong shelf life of the product to 6 months.

Group of companies “Heineken” in Russia informed that brands “Okskoe” and “Rusich (Russian)” of company “Volga” are now bottled into new 1.5 litre PET containers. For “Rusich Klassicheskoe (Classical)” and Rusich Krepkoe (Heavy)” new glass bottle will be used – 0.5 litre Long Neck. Two new items will appear: 2 litre PET bottles for “Okskoe Bochkovoe (Keg)” and “Rusich Klassicheskoe”.

Brewery “Patra” in the first quarter of this year announced new package type for the brand “Strelets (Archer)” – 0.5 litre glass Long Neck with a new design.



28 December, 2006