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4-2014 Beer market of Kazakhstan in 2014

Beer market of Kazakhstan in 2014

Beer market of Kazakhstan has shown a good growth in 2014, which catches eye against the background of the depressive results of Eastern Europe. The brewers were lucky as the financial troubles took place during the low season, and summer was favorable for beer sales, besides, the Government took steps to stimulate consumers to switch from vodka to beer. Over the last years, the competitive situation has also become more interesting, as some of breweries got investment flow and changed their owners. The market development will depend on the further action of the Government to regulate the beer sales and on the alcohol policy.

Beer and Economy of Kazakhstan
Beer and weather
Beer displaced vodka
Development of beer market outlets
Production and market development
Leading companies' positions
Malt production

Beer and Economy of Kazakhstan

Year 2014 saw further moderate growth of Kazakhstan economy – GNP increased by nearly 4.3%, which is a good performance compared to the negative tendencies abroad. According to Euromonitor International, the main trend of 2014 was growing of the middle class which is the basis of any consumer market. Such expense items of middle class as communications, service sector and rations are experiencing the most dynamic growth

The results of 2014 are positive for the beer market as the main disaster, i.e. tenge fall, occurred during the low sale season.

Economy experts started speaking of the threat of the national currency devaluation as early as in 2013. It was mainly caused by the Kazakhstan raw materials economy, which is strongly dependent on oil export. According to the agreements of Customs Union, in 2014 Kazakhstan was to become the key oil provider to China and to substitute for Russia, which entailed decline in deliveries and currency revenues, even in case of the same high prices for oil. At the same time we could observe the ruble weakening and upsurge of import volumes, which put tenge under additional pressure. And the devaluation expectations stimulated a massive exchange of tenge deposits into dollar among the population. It was no longer reasonable to spend the reserves of the Central Bank in order to retain the tenge rate, as the country’s economy was suffering from it.

As such decision was taken by the government, it turned out to be too unexpected and drastic. Instead of the gradual and soft correction the Central Bank dropped tenge by 20% and shifted from rigid rate to targeting. Such approach gave great support to raw materials exporters and helped to solve the budget incomes problem easily. However, the population of the republic, entrepreneurs and many enterprises, dealing with import, were shocked at that moment, which negatively affected the consumer behavior and the economy.

Talos

So, it is logical that at the year beginning the beer market showed a considerable decline, though the effect was short term. As fast as April 2014, the beer market got the level of 2013. The consumers quickly recovered from the shock and further their behavior was influenced by not so much economic but rather psychological factors connected to Ukrainian military conflict, deterioration of the economical situation in Russia and oil prices fall.

In spite of the worldwide reduction of oil prices, Kazakhstan economy is considered to be relatively stable in the current conditions. Thus, for instance Kazakhstan is the only state which got a positive prognosis of the rating dynamics for achieving price of $60 for an oil barrel from agency Moody’s. IMF also gave a positive assessment of the financial and economic policy of Kazakhstan, underlining high efficacy of the government in retaining the stability of the national currency. This was supported by unpacking sizable National fund, accumulated during the “fat years”, as well as the combination of the flexible external and strict internal policy.

At the same time, a new turn of tenge devaluation is expected by experts in 2015 due to further fall of oil prices and ruble collapse and consequently, the marketability rise of Russian products. The expectation of the next tenge fall is as such a negative factor for beer consumption, as people spend less money for non-basic foods. These prospects do not give us much optimism concerning beer market growth in 2015.

Beer and weather

Kazakhstan has continental climate which means sharp differences between seasons, so the beer season is comparatively short. This factor is coupled with Kazakhstan people’s attitude to beer as to mostly summer drink. Accordingly, beer consumption experiences slumps during the cold season. All this makes good weather in Kazakhstan to be extremely important for brewers’ sales.

As for weather, the base of 2013 was low. According to Kazhydromet, the summer was not hot, on the most of the republic territory the temperatures were close to long-term annual average, and on the east and northeast it was even cool in summer. But though the temperature influence was neutral, it seems that the extreme quantity of precipitations is likely to have negatively affected the sales in all the regions except for south and west of the country. The autumn unexpectedly made the brewers happy with warm and dry weather on the whole territory of Kazakhstan, but failed to make up for the bad weather in summer.

Year 2014, on the contrary to the previous one, was rather hot. According to the current data of Kazhydromet, it was cool only at the end of May and in general, summer was mostly cool only in the northern regions of the Republic. Rains during the high season did not upset beer lovers, and the summer was rather dry. So, we consider the weather factor in 2014 in general to be positive and to have much effected the market growth. Accordingly the weather basis of 2014 can be assesses as high, and it will have a detrimental effect for 2015 prognosis.

The key influence of weather on the beer market is confirmed by the outrunning growth in output and sales of other refreshers. Thus, the production of mineral and carbonated water grew by ...% and of soft drinks by ...%. And this despite the fact that their production was fluctuating between stagnation and decline over the last years.

Beer displaced vodka

Potentially, beer market in Kazakhstan can grow substantially, if the structure of spirits consumption changes. It is too early to consider lowering of alcohol content of preferred drinks to be a formed tendency, but in 2014 this process has probably become one of the key factors for the beer market growth.

Until recently, beer was much behind other alcoholic drinks concerning its affordability. Certainly, in case beer is considered only as an alcoholic drink. For a buyer that converts money into alcohol percents, consuming beer would seem a waste of money. Thus the official minimum price for vodka litre from August 2012 till February 2014 equaled ... tenge, and beer, being ... times less strong, cost only ... cheaper.

The minimum price growth to ... tenge has stimulated a part of vodka consumers to opt for beer. This process is reflected in the official statistics, that is, over the 11 months of 2014 vodka production has reduced by ...%, and liqueurs and other spirits production lost ...%. At this background ...% beer production rise may seem insufficient, all the more so taking into consideration the favorable weather. Possibly, the major decline of spirits production resulted from fall in its unofficial deliveries to Russia through the open border of Custom Union due to price difference reduction.

At the same time the process of price unification within the Custom Union creates the risk for beer market in Kazakhstan. In Russia the beer excise reaches 18 ruble for a liter, and in Kazakhstan it equals 28 tenge. If the rates continue leveling, then, even despite the ruble devaluation, beer will be becoming cheaper.

Ziemann

Development of beer market outlets

Under the estimation of Carlsberg Group, the share of on-trade segment in Kazakhstan in 2013 reached nearly ...% of the market. And in this sale channel major producers dominate not so absolutely as on the market of packed beer. For instance, the key role is played by company Shymkentpivo a leader in draft segment and in the economy beer segment, which is mainly represented on the south of the country.

A third of the market is very much, as compared to for example Russia, where the share of beer consumed on the spot amounts ...% or Ukraine with its ...%. At the same time, the market is experiencing a very fast reduction of on-trade share, thus, in 2012 it was ...% and ...% in 2010.

This process was to a high extent offset by growth of specialized difference. In Kazakhstan, like in other post-Soviet countries shops of draft beer, which became an important market outlet for regional producers, were gaining popularity very quickly. The peak of development of independent companies was 2010, when it seemed that they could be serious competitors to Efes and Carlsberg. But then the positions of regional and international companies stabilized.

Currently the significance of draft beer shops as market outlets is rather big. According to data for August 2013-July 2014, the share of draft beer in sale is ...% (in different market outlets, excluding HoReCa sector, in Kazakhstan cities with more than 10 thousand population), - such estimations were given for Forbes Kazakhstan by Ilias Sadykov, senior specialist of company Nielsen Kazakhstan.

The chances of specialized retail are now dependent on the state regulation. Vodka producers and one of the biggest brewing companies have expressed their surprise as to the possibility to buy draft beer in PET from kegs, as it was forbidden to sell beer previously packed in PET at a brewery.

However, on 12 July, 2014, the prohibition for beer turnover in a bottle without a label and in a plastic package. It was also stipulated that the retail sale belongs to the notion “turnover”. The new law has not influenced the market to the full extent as till the end of 2014, there is a moratorium on small enterprises inspections. A minor number of trade firms had to cease operation, but many others continued bottle beer in PET due to the absence of control. At the same time the entrepreneurs and representatives of several breweries turned to the authorities with a request to cancel the ban on beer sales from kegs and PET. They have a lot of weighty arguments and quite possibly, the process of “bottling” will be excluded from “beer turnover in PET”. Otherwise, small and medium beer producers will have big problems, and they may even stop operation as they will not be a way to deliver keg beer to specialized retail.

Besides, the new law will in the first place affect specialized outlets which deal with only draft beer in PET. Their share, according to Nielsen Kazakhstan, reaches ...% of all beer market (by volume). The other ...% belong to supermarkets and food stores.

Accordingly, sales in the segment of packaged beer and other trade channels are expected to increase. However, even beer sales consolidation in the net retail does not mean absolute domination of the two leaders of the beer market. This is because Kazakhstan retail is almost fully divided between local trade networks. International networks are represented only by company Metro Cash&Carry which has only ...% of the general turnover (Kursiv.kz, 7 November 2014). Fragmentation and independent character of the retail leave brewers, who sell beer in glass and can, good chances to supply their goods on the shelves.

Production and market development

After the brewery crisis in 2011, the production and market in Kazakhstan are gradually recovering. The crisis was to a large extent caused by a high basis of 2010, when Baltika’s brands license production was launched, while they had been exported in big volumes. But the collapse in 2011 was mostly conditioned by twofold excise growth, beer sales regulation and high inflation.

Kazakh brewers failed to exceed the record of ... mln l of beer established in 2010 or production volumes of ... mln l in 2007. Furthermore the unstable recovery can hardly be called a trend as there was a substantial decline in 2013, due to the cool summer. Most probably, if not for the rule change on the spirits market, the beer production in 2014 would have been much like in 2012. But the potential of vodka substitution by beer has not been in our view exhausted so far, and can become the growth driver for the market in the nearest years, under the condition of the reasonable difference in prices in terms of alcohol.

Thus, according to the current data by Kazstat, in 2014 beer production has grown by ...% reaching ... mln l.

As we have already mentioned, steep decline at the beginning of the year transformed into practically ... dynamics in March-May. This period could have become a watershed period, a beginning of switching to beer from spirits, boosted by warm weather. In June the production grew rapidly, catching up with the market, and ... growth rates were observed till October. But absence of weather catalyst and negative expectations of consumers resulted in a minor production fall in November.

In 2014 not only beer production, but also outer trade experienced dynamic growth. The export, under preliminary assessment, grew by ...%, having exceeded ... mln liters. Obviously, this process is connected to hot weather in other countries of the Central Asia, where beer from Kazakhstan is delivered. The import increased by ...% nearly to ... mln liters. Probably, this process was also influenced by market entrance of Oasis group (Moskovskaya Pivovarennaya Kompania), which is expanding to the market by foreign deliveries of its own beer and has signed a lot of contracts with world beer producers.

If we suppose that the trade balance result equals the beer market, we can calculate that in 2014 it has risen by ...% and achieved nearly ... mln liters.

Basing on Kazstat data, we can estimate that the growth of the average weighted producers’ prices by the end of 2014 equaled ...% to ... tenge for a liter of locally produced beer. In spite of the market domination by international companies, the major price upswing was observed not during the devaluation period, but just before the sales season from May to July 2014. The devaluation of tenge has led to selling price decline, in dollar by nearly ...%, from $... to $... .

Basing on these data, and the output volumes, we can roughly assess Kazakhstan brewers’ revenue volume from their major activity. Over the year it has increased by ...% to ... bln tenge, excluding VAT and excises. Due to tenge devaluation, the revenue decline came to ...% up to $... mln.

Along with monitoring producers’ prices, Kazstat publishes wholesalers’ prices. According to the current information, they increased beer selling prices only in June. Besides, distributors have somewhat leveled May price rise by brewers. In general, over 2014, the weighted average prices in wholesale trade have increased by ...% to ... tenge for a liter.

Leading companies' positions

In assessing the positions of leading brewers in Kazakhstan we can use Nielsen data, which are given in the financial reports of Efes company, as well as the regional statistics. When comparing there appear certain discrepancies, which can be explained by the fact that Nielsen systemically researches the packed beer market, while on-trade segment and specialized retail, which represent a considerable, though lesser beer market segment, escape its field of view.

Two leading international companies dominate the packed beer market absolutely and they are represented in retail better than other producers. According to data for 12 months from September 2013 to September 2014, their net share decreased from ...% to ...%. The setback took place resulting from a considerable deterioration of company Carlsberg Kazakhstan positions, whose market share has been in a prolonged decline since 2008. Against the market growth, this dynamics can be connected to moderate output setbacks. However, the regional production dynamics does not reflect negative tendencies, on the contrary, in city Almaty, where Carlsberg enterprise is located, a two digit growth was registered.

An opposite situation was observed at a major regional producer, company Shymkentpivo. According to Nielsen data, given in Efes report, the share of South Kazakhstan company increased from ...% at the end of 2013, to ...%, over the 12 months till September 2014. However the regional statistics evidence a substantial setback of Shymkentpivo production equaling nearly ...% by the end of the year. This decline could have been explained by reduction of draft beer sales due to the growth of packed beer sales. But the dynamics grew pronouncedly negative as early as in the second quarter 2014, when limitations concerning beer bottling into PET were not put into action.

The market leader, company Efes Kazakhstan continued gaining weight, actively proposing new sorts and package formats to their consumers. For instance, a range of new sorts in one liter glass bottle and can entered the market, and they are quite timely in view of the ban to sell beer in PET. This production is probably imported from Russia. According to the report, the company increased its share to ...% over the reported period.

According to the report data, the share of “other” companies has remained stable, which in the conditions of growing market means proportional advance of packed beer sales in retail.

Among them, we should pay special attention to the “old new” market player, company Pervyi Pivzavod which can in some time influence the competitive situation and the market development. Well known company Oasis CIS became the shareholder and the managing partner of Pervyi Pivzavod. So far its projects in many regions have been rather successful. Since an active and effective market player entered the beer market of Kazakhstan, other big companies will have to yield their share.

After 2007, when the operation of Pervyi Pivzavod was ceased due to the construction of Eastern bypass, the enterprise moved to Almaty suburbs, where it was under reconstruction and reequipment for five years. At the first stage the brewery capacity equaled ... mln l of beer per year, but it can be expanded to ... mln. By the time of the enterprise launching the investments into this project amounted $... . The total investments into production equipment, the sale system and brand development are planned to exceed $... mln by the end of 2017.

Pervyi Pivzavod owes its easy start to the import beer distribution system of Oasis CIS. Further growth prospects of the company sales can quite probably be connected to using the trade networks of Pervyi Pivzavod itself for realization not only local but worldly known beer sorts. Foreign producers give the old partners contracts for distribution or license production of their brands in Kazakhstan.

As we research the audit data on retail trade and the market of the packed beer, we have to keep in mind that small and medium regional breweries sell a big or a considerable part of their production via other trade channels. In general they were successful, but Shymkentpivo (see above) and several others saw their positions deterioration.

Производство пива в регионах в 2007-2014 гг., тыс. л.

Производство пива в регионах в 2007-2014 гг., тыс. л.

Thus, under our estimation based on the regional statistics, a steep decline was observed at Nurzhanar in West Kazakhstan region. However, there is an objective reason for this. In September 2014, it became known that, after a two-year proceedings, Nurzhanar holding of shares was sold by the bank.

The same information was later confirmed by Valentina Rybalko, general manager of the enterprise: “…thanks to the staff’s efforts we managed to keep the productional equipment and the production itself. We had to address several judicial authorities, and according to the decision of 10 June by international intermediate court, the whole holding of shares was transferred to the bank, and the bank in its turn assigned it to the new shareholder. It is good news for us, as the new investor intends to fully restore the enterprise’s activity and keep all the jobs.”

According to the current information, new owner of Nurzhanar is the family of senator Rashid Akhmentov. It is already known that the new owners are going to invest ... bln tenge (nearly $... mln by the new rate) in the enterprise development.

Besides, judging by the regional statistics, company Tamila Plus, located in East Kazakhstan region, experienced a substantial production setback. This enterprise is to a high extent focused on draft beer shops, including their own trade network. Entrepreneurs have applied to cancel the ban on draft beer sales in PET, as for them sales via this channel amount to ...%.

Pavlodar brewery Rosa, had been operating at a loss for many years, till it went bankrupt in 2012. In 2013 the enterprise at last managed to overcome the consequences of the legal proceedings and got new owners which greatly promoted its development. Rosa had the production modernization and new equipment by firms Kronos, KHS and Holvrieka was installed. The investment sum, according to Abdulla Kurmantaev, CEO of Rosa, currently reaches nearly ... mln euro. As a result the brewery capacity was increased to ... mln l of beer per year, and shelf life grew to ... months.

The product range widening, investing into marketing and longer shelflife made it possible for the company to enter the markets of other regions, such as Karaganda, Astana, Almaty, Petropavlovsk, Taraz and Novosibirsk.

As a result, according to the regional statistics, at Rosa the beer production doubled in 2014, having amounted nearly ... mln l of beer, and is probably still growing.

Good performance in 2014 was also shown by other producers, for instance breweries in Kostanay region increased their general output by ...% during the first three quarters of the year.

Malt production

At the beginning of the noughties group Soufflet bought a malt house in Tekeli. In spite of the work with the local farmers and the fact that the plant capacity could permit supplying the raw material to national producers, malt for expensive sorts production is still imported and in rather big volumes.

Lack of high quality barley, according to the local authorities is still an acute problem of Tekeli malt house. Due to insufficient supplies of acceptable raw material, the enterprise has to halt operation for summer, awaiting the new harvest grain.

Following a considerable beer production setbacks which started after the recession for brewers in 2011, malt producers quickly corresponded to the growth recovery in 2014, and, accordingly, to malt demand. Under preliminary estimation, in 2014 the enterprise increased the malt production by ...% and equaled nearly ... tons.

Apart from higher demand, the cutbacks of import supplies could be the reason for the increased raw material output. In 2014 the volume of malt imported to Kazakhstan was a quarter less, that is, nearly ... ths tons.

At the same time, less goods got to the market as the production growth was followed by a steep export upsurge, i.e. from ... ths tons to ... ths tons over the first four quarters. The key outlet market for Soufflet, apart from the national, has been Uzbekistan. In general, it is Uzbekistan’s demand for malt that determines the company’s export dynamics. A dozen of big brewers operate on Uzbek markets, that purchase malt in Kazakhstan.

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2Checkout.com Inc. (Ohio, USA) is a payment facilitator for goods and services provided by Journal.Beer (Pivnoe Delo).

The article materials were prepared using data by “Republic Kazakhstan Agency on statistics” (“Kazstat”). A number of estimations are based on info provided by beer producers and by research companies. The publication in issues “Kursiv” and “Forbes Kazakhstan” were used in the article preparation.

In case the information source is not provided, the data on companies’ output and their interpretation are our assessment based on the current trends.

We do not guarantee that the given information is absolutely correct, though it is based on data obtained from reliable sources. The article content should not be fully relied on to the prejudice on your own analysis.

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