Earlier this year, just-drinks’ managing editor, Olly Wehring , travelled to Russia with Carlsberg to learn about the brewer’s plans for its Baltika division in the country. The unit, which produces the namesake range of beers, is the clear market-leader, but has had to struggle of late as the legislative environment has grown more hostile to alcoholic drinks. Having assumed the leadership of Baltika late last year, Isaac Sheps talked to just-drinks about what he found when he made the move, what he’s battling against today, and what he wants in the future.
After a morning of presentations at Baltika’s brewery in St Petersburg, Sheps welcomes me into his under-stated office. Bar a set of three shelves boasting examples of the array of beer brands brewed on-site, there is little else, except his desk and a meeting table.
I pull up a chair (yes, there are chairs), while Sheps makes himself comfortable. Having moved from the UK to become CEO of Baltika in December last year, I’m eager to hear about what he inherited.
“There are two things you don’t do when you move senior positions in Carlsberg,” he says by way of preamble. “You cannot do a clean-up of your books to make next year look better. You just continue as it was. The other part is that you cannot bring in a whole new team; you inherit the team.
“I got this team, and there are only two people today who were not here before I came here. The way it was managed, however, was a bit different. There were five VPs and another five were directors. The VPs met every week and the directors were invited. Now, eight are VPs and two are directors, but all ten meet every week – usually on a Tuesday – with a very structured meeting.”
At the time of his move, we reported that he had been “parachuted in” to Baltika. A year ago, it was clear that Carlsberg was having problems in Russia, with the country being squarely blamed for a 26% plunge in net profits in the first half of 2011. Group CEO J?rgen Buhl Rasmussen said at the time that Russia’s recover was “taking longer than we anticipated”, as consumers worked to get used to a year-and-a-half’s-worth of massive duty increases on beer.
Isaac Sheps, CEO of Baltika Breweries
Aside from the legislative pressures, there were also noises that Carlsberg was struggling with the mindset of its executive body in the country. In late-2010, the company’s international HR director for Eastern Europe, Nadja Minde, warned that “employees (in Russia) are reluctant to take decisions due to severe punishment for mistakes and non-traditional behaviours”.
Sheps confirms this. “The culture of management was totally Russian,” he concedes. “Even with Western owners, the management style was Russian: “Tell me what to do, and then I’ll do it.” That’s how they worked here. The other side of this was: “If I did it, you have to give me a bonus. Salary doesn’t matter.” This culture is still maybe there at some levels.”
Sheps set about changing this attitude by bringing in a new VP of human resources, uniquely placed to understand the comparisons and contrasts between the east and the west. “She is Russian, but she studied abroad and worked in Sweden,” he explains. “She speaks Russian and knows Russia, but she has a western attitude. She can drive procedures like we didn’t do before.”
He also worked to remove any barriers between Baltika and Carlsberg. “Just by my behaviour, I opened the door more to Carlsberg’s headquarters,” he says. “Today, there is no such company as Baltika in the Carlsberg group. Before, there used to be a wall between the two that the former CEO didn’t encourage to break. Now, I am breaking down that wall.” Baltika has subsequently sent five staff to work in Carlsberg’s central supply chain in Western Europe.
Talking of supply, unused capacity appears to be a major issue today for brewers in Russia. Since peaking in 2008 – at 80 litres per capita – beer consumption in the country has slid, with analyst estimates suggesting per capita consumption levels last year fell to 63 litres. Consequently, Carlsberg saw its capacity utilisation ratio total 72% in 2011. This would suggest brewery closures, right?
“We have higher capacity than we are using and, even with the growth that we predict, our capacity will still be higher,” Sheps admits. “But, the non-efficiency of over-capacity in Russia is compensated for by the logistic costs from the huge distances in Russia. We’d rather have over-capacity in a brewery than bring goods 9,000km from another brewery: That would cost us more.
”The cost of non-utilisation is the cost of not covering your depreciation,” he says. “Empty tanks don’t use energy.
“All our production is centrally-managed. What is produced every day in our ten breweries is controlled from here in order to optimise delivery routes, production costs and different SKUs. We closed the Vena brewery three years ago, because we don’t need two breweries in St Petersburg. The economic formula that over-capacity means lower prices to push volumes works in the UK, but it doesn’t work here.
Sheps cites the UK as a comparative from a position of experience: From 2008, he was head of Carlsberg’s unit in the country for three years. Barely five months before Shep’s move to Russia, Anheuser-Busch InBev announced that it was promoting its head of UK operations, Stuart MacFarlane, to the post of zone president for Central & Eastern Europe. Could the UK be seen as a training ground for the multi-national brewers? Are stripes earned in the murky waters of a stagnant, western European battlefield?
Sheps rubbishes the suggestion. “I don’t think there is any connection at all,” he says. “It’s really a coincidence. We joked on email that I was following him. Stuart did a very good job in the UK, now he’s VP for Eastern Europe and he’s on the board of A-B InBev.
“I took it because Baltika is the biggest unit of Carlsberg, and to sit on the executive committee of Carlsberg is a big honour. This is the top of my career in beer.”
And, what of other differences between the UK and Russia? Does the remorseless power of the retailers in the west, for example, work the same here in the east? “You still have the modern trade here, who are fighting among themselves,” says Sheps. “They account for only around 21% of our sales, but they are growing. There is some push there too. But, no, it’s not as strong as it is in the UK.
“Here, the outlets aren’t dictating what you should drink, unlike in the UK. That was my main frustration: No matter what you do with your brands, the people will drink what the pub owner decides. The same applies in supermarkets – it depends what is on promotion.”
As the market leader – with around 37% share – in such a large beer market, Sheps is well aware of Baltika’s importance within Carlsberg. The thorn in his side in his time in Russia, however, appears to be Heineken. The Netherlands-based brewer has been keen to hit out at Baltika, accusing the unit of not behaving like a market leader. “It’s time to focus on profitability (in Russia),” said Heineken’s CFO, Rene Hooft Graafland, back in April. “That means passing on increased input costs and excise rises.
“Luckily, we’ve seen (some) pricing movements from Baltika,” Hooft Graafland continued, “but still not enough to cover the full excise increase. Personally, I don’t find that the right behaviour from the market leader.”
When I raise this with Sheps he is calm in his condemnation. “I think that we are acting totally right and it’s not true what they are saying,” he says. “I believe it’s a very strange way to justify your unsuccessful attempts to be profitable. I don’t think that this is the right thing to do: I would never say that I cannot make my profits because my competitor is doing something. Come on. So, do something else!
“Usually, we increase the prices then they follow,” he says. “Sometimes, they didn’t follow us at all. They were discounting like hell for a long time, especially in the last half-year. We have increased prices as recently as 1 August. We do what we need. We’ve covered all the duty increases and then we’ve raised prices to cove our additional costs.
“I cannot understand why they do it, I really don’t know. Factually, it’s not true.”
It is clear, both from the morning’s presentations and from our time together, that Sheps is relishing the challenges provided by the Russian beer market. At 63 years-old, however, could these be the last set of challenges he expects to face?
“That’s what I hope,” he laughs. “But, who knows? I don’t want to continue for many years and not be at home. I want to enjoy my five grandchildren. It’s tough to see them at the moment.
“My contract is a standard three years,” he notes. “I like challenges, I don’t like easy work. I’m enjoying myself here. More now, because it’s getting better.”