In March 2011 the general manager of Private Joint Stock Company “Miller Brands Ukraine” (formerly Closed Joint-Stock Company “Sarmat”) Igor Tikhonov summarized the results of the work which has been performed by the company for two and a half years since the day of Donetsk enterprise SABMIller plc purchase. Integration into the framework of the parent company is completed. The main strategic mission of Ukrainian subdivision today is to create a coherent portfolio of brands, which could include international and local trademarks. “Sarmat” brand was the foundation which served as the basis for license brands emergence and growth but in the course of time its role will become of minor importance.

“Sarmat” enterprise disintegration out of the existing in 2008 group took place when the economic recession was at its highest. Donetsk plant was at that time the main enterprise of the group, which also included four enterprises, not affiliated by SABMiller, and a malthouse. New owners had to reorganize the company management completely and create a new organization practically from scratch. This process was painful and long. Igor Tikhonov compares technical condition of “Sarmat” brewery in the format in which it existed three years ago to a second-hand car which already required repair. Capital investment comprised approximately $20 mln from the moment of purchase.

Such substantial funds were necessary because among other things the plant was designed and built with provision for bottling of just several beer brands in limited packing types, but with big volume of manufacture. However, new owners had an entirely different intention, that is to create a flexible manufacturing which could give an option of bottling also low beer volume in several packing types, for instance, expensive license brands. This problem was solved which made it possible to increase the number of packing types by 20%. Modernization of production, adoption of the international management system and fundamental adjustment of requirements to the raw material and ingredients quality let Ukrainian subdivision receive production licenses for the manufacturing of three international brands, “Zolotaya Bochka”, “Velkopopovicky Kozel” and “Amsterdam Mariner”.

The key changes occurred also in the system of sales, relations with distributors were substantially reconsidered. But the main thing, the strategy of regional expansion was changed, the distribution became selective. The company does not presently intend to promote “Sarmat” brand outside the eastern Ukrainian region. At the same time, license brands enabled SABMiller to achieve a perceptible distribution extension in Kiev and many other districts.

Intensive investment helped to gain a considerable improvement of representation in retail. Several millions of dollars are spent every year on the purchase of new shop equipment. Considerable resources are also spent on television advertising and other methods of promotion. As a consequence, according to the results of financial year in 2010*, production and sales increase of the company comprised 22%.

* From April 1, 2010 till March 31, 2011

Fiscal closing of 2010 coincided with the change of the company name and legal status. On the one hand, Ukrainian subdivision had to change the form of ownership as consisted with new legislation concerning joint-stock companies. On the other hand, association of the company name with “Sarmat” brand lost its efficiency, considering the selective geography of this trademark promotion. Necessity for Ukrainian subdivision of SABMiller plc image renewal became even more obvious, and in March Closed Joint-Stock Company “Sarmat” was officially named Private Joint Stock Company “Miller Brands Ukraine”.

Correspondent: You defined “Sarmat” as a brand for the eastern region of the country, is it connected only with logistic expense?

Igor Tikhonov: No, it is not connected with logistic expense. In fact, we promote other brands outside the eastern region. Logistics is not a barrier for brand development. Barriers for the brand can rather be formed by consumer reception, existing on Ukrainian market. “Sarmat” brand appeared in the eastern region and it caught on there. All the efforts of the company from the moment of “Sarmat” appearance to turn it into a national brand have been unsuccessful. I don’t want to repeat someone else’s mistakes, it is better to analyze the past experience, to draw conclusion and not to try rowing against the stream. Although, such “regional nature” of the brand results in a number of complications connected, for example, with media planning. We pay for advertising on national television, though we know that the product is meant for one region. But there are no powerful regional TV channels with the same efficient communication in Ukraine. Sure enough, considering spatial quantity of Ukraine, it would be more effective to have only national brands in the portfolio. On the other hand, “regional nature” of the brand is its strong point, due to the big number of loyal customers in the east of Ukraine.

Cor.: That is, as license brands develop, “Sarmat” fades into the background?

I.Т.: We can say that. But at the same time the brand will keep its significance for the company, especially on the domestic market.

Cor.: It is common knowledge that there are several products by “Amsterdam” brand in Europe, such as “Amsterdam Navigator”, “Amsterdam Mariner”. You have decided to launch the brand, developed specifically for Ukraine? Who developed it?

I.Т.: Indeed, there are several sorts of beer “Amsterdam”, for example, rather tough brand for men “Amsterdam Maximator” with alcoholic content 9.6% and “Amsterdam Mariner”, which has existed as a brand for a long period of time, it has been developed by the Dutch… We had a wide choice, the range of brands is very large. Certainly, we described our vision of the product. That is why the product we represent here, in Ukraine, was created in accordance with our requests.

Cor.: Do you think there is still much space for license brands on Ukrainian market?

I.Т.: I assume that there is enough space for individual positioning products on Ukrainian market. In particular, for “Amsterdam Mariner”, the product which was produced at such reputable plant as Grolsch and which has European roots. I think its chances to achieve success in Ukraine are rather high. In summer we will naturally tell the consumers about the history of this brand in greater detail.

Cor.: Distribution of your company brands in Kiev and countrywide is essentially lower than that of competitors. Namely, there is a big growth reserve on account of sales system development. What stage is it on today and what are the plans for its development in future?

I.Т.: It is, probably, the most difficult task which we are facing today. But I have to correct you a little, distribution level in a number of regions is very high, for example, in Donetsk it reaches 95-96%. At that, we don’t speak only about “Sarmat” or “Zhigulevskoye”. Market presence of such brands as “Miller”, “Zolotaya Bochka” or “Velkopopovicky Kozel” comprises here 70-75%. Not only in Donetsk, but also in the whole region. And, for example, in Kiev we are not keen to impose “Sarmat” on retail trade for the achievement of high distribution rate. There, above all things, our task is to extend market presence of such brands as “Miller” and “Kozel”. They have quite significant economic clout in the trading network, that is, in the channels, where license brands are traditionally popular.

That is why, perhaps, we should not make generalization, as retail coverage level in the regions is completely different, from practically full retail coverage in Donetsk, to practically zero distribution in Lvov.

Of course, in terms of distribution we are yet inferior to the three leading players. But, after all, one of the most difficult tasks is, probably, to set up distribution, to solve which we should apply a lot of time and efforts. It is possible to develop a product, to buy its design, to carry on an advertising campaign. All this can be performed by a small team, such as marketing department plus departments of advertising and research campaigns. But it is much more difficult to establish distribution, the number of powerful and established trading companies is limited. And our business rivals have long been working with them on certain terms, which are intended to choke off their rivals. To work with retail is not simple, as it got used to a certain product range, which is already in demand on the local market. Kiev is the same case, it is very hard to get the product into a stall and place it on the front shelf, moving “Obolon” or “Chernigovskoye” aside.

Cor.: Considering that it is complicated to find a sales partner, is there a possibility that you will have to found your own trading branch, as in Russia?

I.Т.: The scheme has been de facto worked out in Ukraine. Most of the large brewing companies engage exclusive sales employees. Moreover, the scheme operation principle does not change whether these employees are in the company’s own staff or distributor’s staff… And if we have already built a scheme in the east of Ukraine and have reliable major distributors, then in new sales geography we are in a catching up rank, and there we are facing the challenge of obtaining and raising distributors, which takes several months. After all, such a company should have its own financial resources, logistic framework and disciplined sales employees. Indeed, great opportunities are brought with distribution development. By increasing it twofold we can increase sales volume almost twofold. But, as I have already said, it is rather difficult and takes much time.

Cor.: But in some regions your distribution and market share have increased only by means of expansion in the number of branded refrigerators. It turns out to be a matter of money invested?

I.Т.: It is not only money, but also sales technologies and appropriate marketing support. And here we have to solve a range of problems as well. The first one is as follows: sales partners and company representatives, who should conform with our concerns on each territory. We support our partners, assigning managers or supervisors to them, who help to organize the process of sale. We help to select commercial agents, control their work, organize their field visits, deliver training. But we were not the first on this market and not the first to practice such a technology, that is why we constantly have to decide out of whom to choose. But to apply to non-core distributors, those who specialize in distributing chocolate or chewing gum is not quite reasonable, as they don’t know how to sell beer, they have completely different technologies, logistics and transport.

There is also a physical restriction. As early as three years ago they could hardly wait for a refrigerator in Kiev or Kharkov stalls, and were glad at how convenient it was. Now in retail point there is at times lack of sockets for plugging yet another refrigerator in. Plus there are also legislative limitations, as today street equipment is simply taken away in many cities. Street refrigerator is already getting uncommon, rather than be commonly found, their full quantity is decreasing. That is why when locating trade equipment we experience pressure from two sides.

Cor.: There is a company “Persha Pryvatna Brovarnya”, located on the opposite side of Ukraine, which at the moment has approximately the same overall production and national distribution levels as “Miller Brands Ukraine”. How do you rate its potential?

I.Т.: It’s hard to tell. I have great respect to the businessmen who could build up a well-established business from scratch. They grew out of a distributor company, absorbing sales technology, adding production elements and marketing elements. Moreover, they started with low production volume, without any manufacturing capabilities which would hundred-per-cent meet the demand. To achieve success with such starting data is a top performance. I am particularly impressed by the fact that the niche they have made for themselves and product name they have created convey the image of Lvov. Western Ukraine is practically overseas for large Ukrainian consumers. It is interesting, as they have history there and company brands are flavorful.

Cor.: How do you think will the business of “PPB” and other small players develop?

I.Т.: In my judgment, their growth is limited by the organization capability. To become a major player they need to have significant investment. One brand maintenance, its national television advertising and distribution cost millions of dollars a year. At that, it is necessary to stake everything, all your profit and not make a mistake. As contrasted with big international companies, which have certain margin of safety, giving them a right to experiments, a right to mistakes.

Experience suggests that the number of brands one is able to maintain should be strictly limited. For example, when we came to Ukrainian market, the company had to abandon a range of products, which were one day intended for manufacturing, for instance, by marketing director and then we were towing it for long years, not getting any profit. That is why, first of all we went through product line optimization.

I have experience of working as a non-executive director of the company which is not engaged in brewing industry. And I can say that this problem is typical for any branch. Then private stockholders had to decide whether they should give up the favorite brand which doesn’t produce a profit. It is always very painful but any adviser can say that it is necessary to do that.

Cor.: Which expertise that you have gained in Russia did you introduce to Ukraine?

I.Т.: I try to put my past experience aside and not to transfer automatically the schemes which appeared to be successful on another market. But I believe that to the work of the company in Ukraine I introduced, first of all, technical approach to the market, necessity of its potential assessment, detection of promising consumer niches. Every year we draw up a strategic plan. This is a technology of SABMiller. At that, year by year this technology becomes more complicated, we get to know our customer, evaluate trends which occur on the market and, as a consequence, are able to give an accurate estimate for our brands potential.

For example, let’s come back to the question if there is space for one more license brand in Ukraine. It is necessary to evaluate clearly, to what extent the customer is ready for product innovations, if there are niches where the product could be positioned, having clarified its distinguishing feature to the customers. After all, the intention of producers is to develop certain additional value, and at the moment some license brands are sold well only with discount, such as “buy four cans and receive one for free”. It’s wrong practice, as discount pricing makes a license brand equate to mass brand according to value apiece. So, I hope that our team managed to find a couple of niches with added value. At the moment the company portfolio includes 6 brands, they are 2 local ones (“Sarmat” and “Zhigulevskoye”) and 4 license products. We’d really appreciate if our new products could grow by 20-40% a year. But even if half of the brands are able to achieve this, we will consider it to be a good result.

It is also very important not to repeat the mistakes of the rivals, to realize, what worked out well for them and what didn’t. We have seen and are observing now unfortunate examples when our rivals lost hundreds of thousands hectoliters and simply eliminated their brand by switching their customers from a more expensive product to a cheaper one. These are the mistakes which should have been recognized and evaluated so as to never repeat them.