Review of Russian Beer Industry in Q1 2012
Research of the Union of Russian Beer Brewers
In Q1 2012 Russia brewed 180.7 million dal of pale beer which constituted 92% of production volume in January-March 2011. Most impressive downswing was registered in January and February when monthly production volume demonstrated significant period-to-period decline. In January 2012 beer industry brewed 42.8 million dal of pale beer - minus 17.7% against January 2011. Still in January and February 2012 production volume did not go as low as production volumes of same months 2010. In general beer production saw 8% period-to-period decline in volume in Q1 2012.
Decline of production volume during the first months of 2012 was the respond of the industry to 20% increase of excise tax valid since January 1, 2012. In early 2010 beer industry reacted the same way to the tripled excise tax. Meanwhile in 2011 when growth of excise tax was close to annual inflation rate - 11.1% - the year started with some increase of beer production volume.
In Q1 2012 beer production demonstrated the worst dynamics among other excisable drinks, especially in comparison to hard drinks. For instance, vodka production increased by 6.8%, production of cognac - by 3.3% in volume. However, wine production declined in volume by 3.3%.
Sales volume in February and March was smaller than during the same months previous year. Some increase of sales volume in January was determined by stock of "last year's" beer with no influence of increased excise tax upon unit prices. Similar situation was observed in the beginning of 2010 when despite increase of excise tax and decline of production volume retail sales demonstrated growth in volume. But in Mach 2010 sales started to go down so in Q1 2010 total decline of sales volume constituted 13%.
Extra decline of sales in 2012 can be stimulated by ban on beer advertising on TV, radio and billboards which is valid since H2 2012. Beer thus would loose "advertising" advantage over hard drinks. This ban will have negative impact first of all on sale value because promotion stimulates consumer preference of more expensive and quality brands. Launch of new brands will be more difficult and consumers will have even less motivation to buy beautifully packed promoted light drink instead of inexpensive spirit.
Symptomatically, on the background of stagnating beer market in Q1 2012 sales of vodka and liquors increased by 3.1%, sales of cognac - by 9.8%; total growth of alcohol market volume in general constituted 2.1% in terms of absolute ethanol (counterfeit products not considered). This reveals the trend of increasing consumption of alcohol and switch of consumer preferences to hard drinks.
Excise collected on beer (production and import) in January-February 2012 constituted RUR 13.87 billion - plus 24.8% over January-February 2011. This growth was determined both by increase of excise tax and some upswing of beer sales in January-February. Maximum amount of excise tax was collected in January (plus 37.5% over January 2011). Share of beer in total increase of the amount of excise revenue in January-February 2012 constituted 41.5% (59.5% in January). In winter excise revenue on beer is lower in comparison to hard drinks due to seasonality of beer consumption. In January-February 2012 share of beer in excise revenue on excisable drinks (production and import) increased just by 0.1% and reached 41%. Meanwhile share of hard drinks grew from 48.9% to 52.6%.
Share of beer in excise collected on drinks produced in Russia reduced for the first time in many years - from 43.1% to 42.8%. Meanwhile share of hard drinks - also for the first time in many years - demonstrated ascending trend and reached 51.2% (+3.8%). Share of beer in excise revenue on imported drinks saw 4.7% period-to-period increase and reached 17.2%; share of hard drinks in excises collected on import also increased (+3.2%) while share of wine declined significantly - from 15.5% to 9.5%. It should be mentioned that 97.1% of total excise collected on beer was provided by domestic products and so the taxes went to regional budgets in Russia.
Reduction of beer share in excise revenue on domestic production of drinks in January-February 2012 could have been caused by sales seasonality or indicate the start of a new trend - if performance of beer market does not improve during warm season of 2012. Today share of beer in excise revenue significantly exceeds share of pure ethanol consumed with beer (according to Rosstat, 29.3%). Excessive tax burden has a negative impact upon consumer demand and performance of beer industry in general. As a result importance of beer industry as a source of budget revenue in regions will decline despite the growth of excise tax.
BOTTLED BEER MARKET AND ACTIVITIES OF MARKET PLAYERS
In Q1 2012 product range offered by Russian market of bottled beer saw practically no changes. Large market operators hold back on new launches of brands but extended their popular brand lines. For instance, "Heineken Russia" in March 2012 announced launch of porter "Stepan Razin Martovskoe (March)" brewed and bottled by Saint Petersburg facility "Pivovarnya (Beer Brewery) Heineken". Beer is offered in glass 0.5 liter bottles. New beer variety will be distributed by retail in Saint Petersburg and Northwest Federal District.
Meanwhile "Pivovarennaya Kompaniya (Beer Brewing Company) "Baltika (Baltic)" extended its beermix line "Eve" - new drink is flavored with mango and orange. "Eve" is brewed in Russia since December 2009 under the license of "Carlsberg Breweries".
In January 2012 "Efes" group launched its "Gold Mine Beer Yachmennoe (Barley)" in 2.5 liter bottle. This package formats supplements 1.5 liter bottle used for the brand. The new variety is brewed and bottled in Moscow, Kazan and Novosibirsk.
Sluggish performance of domestic market stimulates expansion of Russian companies abroad even to the segments totally new for them. In the beginning of 2012 "Baltika #7 Exportnoe (Export)" appeared in beer lists of all 846 bars of a popular British chain "JD Wetherspoon", the largest HoReCa operator in Great Britain.
Beginning of 2012 brought several important M&A deals which mean foreign investors consider Russian beer industry quite promising. Danish "Carlsberg" announced its plan to buy up the remaining 15% of "Baltika" brand. Total amount of the deal will constitute 6.5 billion Danish Kroner ($ 1.15 billion). This deal is inspired by successful performance of concern in 2011.
Operating profit of Danish beer brewer in 2011 constituted 9.82 billion Danish Kroner instead of the forecasted 9.8 billion Danish Kroner. In the frames of previously achieved agreements "Miller Brands Ukraine" PJSC was transferred to a new owner "Anadolu Efes" (a part of "Anadolu Group") in March 2012. In the context of strategic alliance between "SABMiller plc." and "Anadolu Group" originally announced in the end of 2011 "SABMiller" have completed the transfer of Russian and Ukrainian beer businesses to "Anadolu Efes". In return "Anadolu Efes" transfers 24% equity stake to "SABMiller" by way of a capital increase.
Besides, according to this strategic alliance "SABMiller" will be represented on the "Anadolu Efes" Board, and the two companies will share best practice to develop their international brands in Russia and other markets covered by the agreement.
Positive expectations of market operators are also proved by regional news - for instance, Barnaul beer plant started third stage of reconstruction; and also news of the market of beer package. "Rexam" launched to Russian market new format of aluminum can (0.75 l); new package will be produced at "Rexam's" facility in Naro-Fominsk. New size of beer can satisfies demand of beer manufacturers for a "middle" size between popular package sizes of 1 liter and 0.5 liter. New aluminum container will be produced using DWI (Drawn Wall Ironed) technology.
Meanwhile "Orekhovo-Zuevskaya Stekolnaya Kompaniya (Glass Company of Orekhovo-Zuevo)" Group responded to undersupply of glass containers in Far Eastern Federal District with its construction project of Far Eastern Glass Container Plant in Khabarovsk. The plant will make glass containers corresponding to demands of Russian and international standards. Production capacity of the new plant will be 450 million units of glass containers annually - enough to satisfy demand of the Far East and East Siberia. The plant is expected to reach designed capacity by 2014. The company already signed agreement with "Baltika" to supply 160 million bottles annually (about 40% of total production volume). The project is started to satisfy demand of beer brewing and spirit distilling industries, of manufacturers of canned food; another goal is to create working places and improve social climate of the region.
Department of Analytics and Legal Advice
The Union of Russian Beer Brewers