Big Western beer brewers in decline on Russia’s market
“Foreign beer in Russia is, for some reason, quickly becoming like local beer,” says Investcafe analyst Igor Arnautov. This metamorphosis should not come as a surprise, however: Major foreign producers bought out Russia’s main breweries a long time ago and are now producing the most popular foreign brands in Russia. Real imports account for only 2.5 percent of the market (8.4 billion ounces per year).
Beer giants are complaining about the sharp decline in sales in Russia this year—by 10 percent in the first nine months of the year. The Union of Russian Brewers expects the market to continue to contract, at least until the end of 2014. The fact is that, as of January 1, 2014, they are planning to abandon the production of beer in plastic bottles of more than 2.5 liters and of strong beer (more than 6 percent alcohol content) in bottles larger than two liters.
As noted in the union’s announcement, the brewers have decided to take this step voluntarily, to demonstrate their willingness to help solve problems related to alcohol abuse in Russia. They have expressed their willingness to discuss with the government the next steps to be taken in the area of industry self-regulation. According to Arnautov, by the end of 2014, the beer market will be reduced by 25–30 percent, as compared to 2008.
The reduction of the beer market in Russia did not begin yesterday. The new anti-alcohol campaign is just one of the causes of this phenomenon, and it is certainly not the main one.
According to the union, Russia currently ranks 29th in the world in the consumption of beer, at 65 liters per person per year; Vadim Drobiz, director of research at the Center for Regional and Federal Alcohol Markets, says he is certain the figure is more than 70 liters. Back in the mid-1990s, Russians drank only 15 liters per person per year. By 2007, when peak beer consumption occurred in Russia, it increased by more than a factor of five: In 2007, Russians drank 81 liters per person.
“That didn’t happen in any other country,” says Drobiz. “What happened is unique in itself. Arriving on the market, the big foreign brewers consolidated it and, after obtaining unlimited advertising rights, achieved excellent results. In 2007, they controlled 92 percent of the market. The Russian brewer Ochakovo held only four percent, while some small and medium-sized brewers combined held another four percent.”
The first wake-up call for the euphoric brewers came from demographics. The number of births in Russia declined significantly in 1992–1999. As a result, the number of new beer drinkers in 2007 declined by two-thirds, and sales began to decline. The crisis of 2008–2009 only aggravated the situation.
“Booze is a classic antidepressant,” says Drobiz. When the economy started to have problems, worldwide consumption of drinks with low alcohol content started to decline—first in favor of cheap low-alcohol drinks, then in favor of cheap and expensive spirits. As a result, by 2010, beer consumption fell to 72 liters per person per year.
In the same year, the Russian government, seeing low tax revenues coming from such a huge industry, decided to do something about it—so it increased excise taxes. Prior to that, from the 10–11 billion liters that Russians were drinking per year, the budget was receiving only 30 billion rubles. Thanks to the rise in excise taxes, that amount quickly increased to 85 billion rubles; it only continued to grow in subsequent years.
The increase in excise taxes did not greatly affect the volume of production; it increased from 2011–2012. To be sure, a lot of illegal beer was sold. According to Drobiz, illegal beers accounted for more than 8 percent (about 800 million liters) of the market.
At the same time, small- and medium-sized companies in Russia are actively engaged in brewing, and the government is trying to support them. Large young breweries that are 2-3 years old—such as MPK—still have plenty of room to grow. As a result, major Western companies saw their market share drop to 82 percent in 2012, and Ochakovo saw its share drop to 2.5 percent. Meanwhile, small- and medium-sized Russian companies managed to increase their share by a factor of four, to 15.5 percent.
This year, the catalyst for the decline in sales was the ban on the sale of beer at kiosks as of Jan. 1. About 200,000 outlets across Russia closed down. According to Andrei Altunin, CEO of Pivnaya Kompaniya LLC, the closing of these stalls, pavilions and distribution centers caused a reduction in production and sales by an average of 20 percent among the big players.
“The Alcoholic Beverage Regulatory Service has been tasked with reducing alcohol consumption in Russia by 50 percent by 2020. This means there will be further restrictions on the sale of beer,” says Altunin.
Drobiz is sure that the major Western players will see their market share fall to 75 percent in the next few years, with Russian companies holding 25 percent; this is the point at which the ratio will stabilize.
Ukraine is the biggest exporter of beer to Russia, accounting for 73.7 percent in 2012. The Czech Republic accounted for 8 percent, Germany 6.9 percent, Japan about 3–4 percent, and France less than 1 percent. These percentages may change over the next five years because, as of 2018, the import duty on beer will be reduced to almost nothing (from the current $.65 per liter).
Despite Germany’s ranking at number three, German beer is still the standard in Russia. “We copied our beer from German beer—especially Bavarian. But, after the start, we polished the taste a lot for the consumer,” Altunin says. In his words, copying is not uncommon in the world of beer: Even the Japan and French obviously copied the Germans, adapting their methods to suit their national tastes.
“Brewers from all over the world go to the Weihenstephan Institute in Munich or Berlin to learn about quality control,” says the CEO. “The Germans make the best brewing equipment, and German is the language of beer brewing.”