Dmitry Nekrasov’s Philosophy — on the Past, Present and Future of Ukrainian Brewing IndustryA meeting with Dmitry Nekrasov always turns into a training course: “Introduction to brewing business“. We are talking to a clever “playing trainer“ a person that can be called a godfather of the Ukrainian craft. He has a dozen of successful projects to his name. Dmitry told us about craft beer in Ukraine, on market cycles, on specifity of operating in retail and HoReCa, on union of Ukrainian brewers and certainly, how a brewery of his own, First Dnipro Brewery is doing.
The market of import beer in Russia: review and databasesThe market of import beer is rapidly growing and changing. But while in the past years it was growing due to brands variety, in 2019 major and affordable brands from TOP-10 were developing actively. It seems that the fact of a brand origin from far abroad counties, even if it is not well known but has moderate price and good distribution provides for million liters of sales in the territory of Russia. Among distributors AB InBev Efes was far behind, yet the role of Baltika and suppliers of the second row got more important. The boom of German brands was followed by stagnation of import from other traditional regions (and Belarus) instead the supplies from Mexico, Lithuania and Asian countries grew considerably.
Russia: Positions of Brewing CompaniesThe review contains an analysis of interim performance of brewers in the first half of 2019. There are rather dynamic changes behind a modest industry growth. Baltika is again experiencing a stage of volumes and market share slid due to competition with AB InBev Efes. Because of the price competition and presence expansion in the modern trade company #2. has come close to the leading position. At the same time sales of Heineken Russia have continued growing which makes the premium part of the portfolio heavier. The market premiumization trend had been also confirmed by import brands. MBC and Zavod Trekhsosenskiy have been the most successful among federal market players. The market share of independent regional brewers and Ochakovo have continued falling as they are being squeezed out by the market leaders at their competitive fields.
Ukrainian beer market 2019: companies and brandsIn 2019 beer production and market have been still fluctuating about zero point. However, the past season was successful for brewers judging by the sales profitability. The price mix has improved due to rapid general market premiumization, as well as its particular aspect, the growth of import beer sales. By the season end AB InBev Efes improved its positions considerably. It turned out that consumers had not forgot Efes brands that had to leave the market, but started to recover rapidly. Against the stagnating market that meant sales decline of other companies, in the first place Carlsberg Group that most of all beneficiated from Efes exiting the market. PPB turned out to be stable to branding activity of its competitor and Obolon kept the same volumes and at the moment it is the absolute leader of the economy segment. The share growth of independent producers took place thanks to leading craft breweries, that so far do not have a big market weight, but they are rapidly gaining it.
Brewing industry in Kazakhstan 2019During the first half of 2019, the majority of Kazakh brewers made their contribution into positive dynamics. Yet it was companies of the lower division, not the two transnational leaders that raised their production and sales. The shares of draft beer and aluminum can which is rapidly squeezing glass bottle out of the market, have been growing. The price segmentation has remained stable despite the substantial rise of retail prices and fluctuations of brand market shares, while the borders between segments have become blurred. The main events in the industry have been: the announced revision of the beer excise policy, launch of BeerKhan brand in the strong beer segment, and most important – purchasing assets of Shymkentbeer by Arasan.
The trend of complication of Russian beer market is going on and in several directions at the same time. The range has got wider, the import and small segments are growing, namely craft beer, alcohol-free beer and special flavor beer. At the same time, all ex-mega brands and light lagers by Russian brewers are experiencing a decline of their shares. AB InBev Efes, Heineken, MBC and Pivzavod Trekhsosenskiy have exceeded the market, Carlsberg was developing slower than the market and Ochakovo as well as some other mid-sized breweries have been cutting down their volumes. To a big extent brewers’ performance was connected to their ability to reach agreement with networks, sacrifice their margin and enter new markets. Craft brewers are facing a serious danger of producers’ registration introduction – de facto licensing. ...
Conditions for craft beer expansion
In order to better see the drivers of the craft beer category growth, one should look at the current trends on the world market. For this we use the materials by Kevin Baker, a well known alcohol branch analyst from Canadean company. This information was presented as a report at RMI conference in Dublin, in March 2015.
The continuing growth of premium international lagers should benefit major global brewers especially those with exposure to emerging and developing markets. However, premiumisation through brand extensions or new product launches runs the risk of diluting, or downgrading, existing core brand propositions. Besides, there is a trend of speciality beers to take share from lagers.
The premiumisation trend is also fuelled by consumers' seeking speciality, heritage and authenticity in brands. Consumers want know where products come from and to support the small producer; as well as seeking an authentic or unique experience. This is what consumer gets together with a drink when paying for craft beer.
In mature markets such as North America beer volumes have been flat. And the consumption level is 71.6 L per capita yearly. In general the beer market growth is under the pressures on disposable income and competition from other drink categories.
Despite slow growth, many consumers are trading up to craft and speciality beers, willing to spend more for an authentic, quality product. In price segmentation of the market this is reflected in premium and superpremium shares growth.
We are seeing a broadening of the beer occasion and a fragmentation of beer consumer tastes. The core of beer drinkers is evolving and becoming more experimental, which is both a challenge and an opportunity for brewers in an increasingly fragmented market.
Let us look at several obvious factors driving the growth of craft beer sales:
Mature Beer Market. A well established beer market dominated (or perceived to be dominated) by big players or big brands.
Affordability. Large or growing middle class with increasing disposable income.
Appreciation. A knowledge and appreciation for beer as more than a thirst quencher.
Heritage. A revival of previous eras and experiences; such as prohibition style bars in US cities.
Localization. A move towards support of local and smaller producers.
Quality. Consumers seeking quality, and willing to pay for it.
Whilst we see many of these factors in other developed beer markets we do not predict the same level of success in Europe overall. While craft is hard to define, Europe has a more "Craft-y" beer industry historically, with a greater speciality presence and not dominated by a small number of brands and light lager in the same way the US was.
Due to this more established "craft-y" segment there is less of a gap for "new craft" to take off in the same scale.
However we are seeing this "new generation" of craft have traction in some European markets. In urban areas in HoReCa there is development in food service such as gastro pubs, 'kitchens' etc. They are a big driver of craft which then might translate into retail alternatives.
Research suggests UK Consumers have no more or less interest in "craft" beer than they do in mainstream beer brands. They barely differentiate craft beer from other forms and niche styles. In order to be sure that you buy a craft beer, you have to find out several things.
For instance, whether it is a limited or batch production? Who is the beer producer - an independent brewer or a major brewer? Does this brand have local or national distributional channel? Is the product sold on the brewer's premises or distributed to a trade.
The lack of knowledge on craft beer is confirmed by consumer polls. Thus, four in ten beer drinkers (38%) say they do not know what a craft beer is. Only three in ten beer drinkers (33%) think they are knowledgeable about craft beer. Only three in ten beer drinkers (30%) know the difference between a "real ale" and a craft beer. This confusion is reflected in the retailers and bars.
Real ale is the English analogue of "live beer" in its original meaning. This name was coined by the Campaign for Real Ale (CAMRA) in 1973 for a type of beer defined as "beer brewed from traditional ingredients, matured by secondary fermentation in the container from which it is dispensed, and served without the use of extraneous carbon dioxide". The heart of the definition is the maturation requirements. If the beer is unfiltered, unpasteurised and still active on the yeast, it is a real ale; it is irrelevant whether the container is a cask or a bottle.
Craft beer is more suited to specific occasions. These are some of the typical situations and occasions for drinking craft beer:
- When pairing alcohol with food;
- When trading-up to a genuine treat;
- When buying beer as a gift;
- When experimenting.
But currently consumers are less likely to buy beer for occasions, and specific situations have little influence on choice of beer. The majority of consumers see beer as having a generic "suitable for all occasions" positioning and only 15% buy it for specific occasions.
Conclusions & Implications:
1. Despite the very high profile of "craft" beers, outside of the US, they remain (almost by definition) a small part of the market.
2. There is little or no consensus as to what constitutes a "craft" beer amongst consumers, producers and retailers(!)
3. Although the current "craft boom" is probably unsustainable, many of the underlying drivers are part of wider societal changes, and therefore "craft" is more than a "passing fad".
4. The Jacobsen mini-brewery, and Molson Coors' Sandlot Brewery are good examples of how larger brewers can play in a category that is defined by small scale production.
Niche for craft beer in Russia
The recent years saw a significant change in the structure of Russian market. Beer consumption reduced and the premium market share has grown considerably. However this dependence is not as obvious as it seems.
RLMS-HSE* survey results make it obvious that the Russians did not reduce their beer consumption volume at one time, if they start drinking it, but they do it less often. And due to the frequency decrease, there is a decline in all consumers' groups by month. People who never drank much beer started drinking it even less often, but beer lovers cut their consumption frequency to a lesser degree. We should also note that both men and women started drinking less often.
* Russian monitoring of economic situation and health of the population (RLMS-HSE) which is carried out by research institute Higher School of Economics and joint-stock company Demoscope with participation of Population Center of University of North Carolina in Chapel Hill and Institute of Sociology RAS. (RLMS-HSE research sites http://www.cpc.unc.edu/projects/rlms and http://www.hse.ru/rlms).
Detailed results of the analysis concerning beer consumption in Russia were published in №1-2015 of Beer Business. In short, the main reasons for the decline can be described this way:
- Year 2008 put an end to the outrunning growth of the Russians' incomes compared to beer price, that had been a powerful driver of the market growth as the share of low-income population had been decreasing.
- State regulation: excise growth, forming of negative beer image, ban to sell beer in kiosks. New regulatory approval system of production control and others.
- Beer status fall among young consumers who start forming consumer core, including the world tendency of lower consumption of alcohol by young people.
However the alternative brewing is almost uninfluenced by these trends, for the exception of some aspects of the state regulation.
The market reduction took place due to sales fall of well-known brands, mostly in the mainstream segment. And the brand positioning in certain price frameworks was gradually losing its preciseness for consumers at a time when prices for beer were rising. Companies' marketing policy also had its adverse effect as they try to attack more expensive brands by competitors by launching their own cheaper brands. After disappearance of commercials from TV, the ideas of brand managers of the leading brewing companies started getting fuzzy in consumers' memory.
Thus, in brand development the initiative does not belong to international companies, they rather strive to satisfy a much more demanding consumer willing to try beer of his region, the production of small breweries and import. In particular, since 2008.
- Brand Zhigulyovskoe by 140 Russian producers became the leader in the segment.
- The lower mainstream boarder became dominated by regional brands, having displaced Baltika №3, Klinskoe and other mass brands by transnational companies. Initially, this was drawn by the popularity of "live" beer, and later - by specialized retail development.
- In the upper mainstream and license segment the usual strategy of international companies, launching inexpensive "Russian" beer and premium license brands, became less effective. The main factor in ruining this stereotype was "Moscow brewing company".
- Major companies had to refocus on the premium segment, losing sales volume. However, expensive beer lovers became more picky and demanding. Some of them got fond of small breweries production and some even switched to elite alcohol. A significant role was also played by import segment development.
A lot of inexpensive and unremarkable by taste local sorts of "German" and "Czech" beer raise big doubts whether they really have any relation to Germany, the Czech Republic or Great Britain. And if no, should we at all trust the label on the bottle? It is but too easy to tell import beer from license by the price and shelf position.
The consumers still have the geographic notion of qualitative beer which is cultivated by market specialists. Qualitative beer is perceived as a product from the country with historic traditions of brewing. Beer fans simply understood that "correct" product is not a license Russian sort, but import beer.
However, from the point of view of price segmentation, market development came to big price gap in the product range of the premium beer, if we consider it generally as the market of expensive beer.
Thus most of license brands "crowd" the narrow price interval, which can be called low premium and which is constantly fighting for its life with the segment upper mainstream. To raise price for premium license beer and fill this gap is too difficult for producers due to the fierce competition in the segment and limited purchasing power of the population.
In the low premium segment in Moscow markets, as well as in other big cities one can also find Russian regional brands. They are targeted at the consumer who distances from branded license product. He prefers regional brands for their alternative taste, and for beer patriotism or because he wants to buy "genuine" beer but cannot afford buying import.
Price niche Middle premium is occupied by special license brands, which in any part of the world are associated with expensive and image product. They also include specialized and "women" sorts. Segment Middle premium is usually not marked out in the traditional classification, as brands Heineken, Miller, and Stella Artois come under superpremium segment. However, it would be logical to distance both from the extensional license brands of low premium segment, and from the import beer.
If a demanding consumer wants to buy not an image license beer, but "genuine" product or if he can afford undoubtedly qualitative product with a special taste, he will have to make a big "leap" over the price gap between license and import beer.
This price gap in the product range is the territory of craft beer, which due to the current economical situation became even wider. Against the sharp dollar rate growth, the premium beer of Russian production becomes much more competitive than import beer.
Notice that the segment of expensive import beer in 2014 continued growing. According to Rosstat data, by the year end the beer supplies from far abroad countries increased by …%, to … mln.dal. But because of the severe ruble depreciation from December 2014 till March 2015, the average retail price for West European beer increased by nearly …% and the growth in that period took place against the background of the Russians income fall. The price growth rates for beer by Russian producers at that period amounted only …%. It is not surprising that in the first quarter of 2015, the import decline ran at …%.
That is why, if the Middle premium segment and higher gets an alternative, that will be very timely. By the way import phase-out by the production of craft brewers can effect not only the category of beer but the whole segment of elite alcohol. Wide style variety and strength of craft beer will promote this trend.
Besides, women who want to find a substitute for import drinks can make their contribution. Tellingly, that mostly known women's sorts, namely, Eve and Redds are positioned in the Middle premium segment.
How many small brewers are there in Russia?
Craft breweries in American sense are to comply with rather strict definition by Brewers Association, which is adequate for North America. This framework, especially in the new broader definition (the output volume up to 71 mln. dal.) fits even medium regional enterprises as all of them are independent and almost all stick to the traditional technologies.
By the formal standards of the USA, every forth beer bottle produced in Russia can be considered craft but in that case the notion of the craft beer will disappear as itself. That is why we should distance from the formal frames and perceive craft beer as special taste of the drink and such presentation of brewers' product as opposed to the mass output by major companies.
In the USA the craft boom was originally connected to the market expansion of home brewing, when new breweries were being opened by passionate enthusiastic experimentalists. Their number was growing exponentially and practically from zero. However in Russia small producers cannot be called craft as they owners were in the first place entrepreneurs but not enthusiastic brewers, willing to share their inspiration results.
When after the crisis of 1998, the beer consumption started recovering rapidly, there appeared the first industrial minibreweries. Their emergence in distant parts of Russia rather resulted from lack of beer than from higher taste demands of consumers. If needed, the product line was diversified via license brands by major companies or import - depending on consumer's income. Middle regional breweries which went on producing beer of the Soviet style were forced to the cheap beer market or stopped operation, which created a niche for ambitious brewers.
In the middle of the noughties, significant changes took place, creating material and motivating basis for small scale brewing development.
Firstly, key producers of minibreweries entered Russian market. The market started to be dominated by companies which were actively promoting the idea of small brewing and helped new entrepreneurs.
Secondly, we have to mention an unprecedented project, that is, the creation of "Tinkoff" breweries network. Its most active realization stage took place from 2002 till 2008. This network had a big impact on development of all small brewing in Russia. This may be a coincidence, there might have been simply favorable conditions, but in our view, it was the success of "Tinkoff" which formed steady growth wave of restaurant breweries number.
In 2007, small brewers had the leanest share, when, on the contrary, the beer market reached its peak due to the growth of transnational companies.
Now we can observe the quantity transforming into quality. In 2008 entrepreneurs and companies purchased about … industrial breweries abroad (against … in 2007). But the recession threw cold water on brewers' enthusiasm, and in 2009 the number of new investment projects halved, many breweries changed owners
However, such stress-test at the early stage of the small brewing development, led only to the effect of "delayed demand". In 2010 and 2011 the volumes of import equipment purchases were growing dynamically and ran at nearly … packages per year, not including quite small restaurant breweries.
As the launching projects progresses, the number of operating breweries started growing with growth rate lagging for one year. While in 2009 Russian market contained nearly … small enterprises, in 2011 their number grew by …%, … by 2013. By 2015, the number of small breweries was increasing much slower, and ran at …*.
"Small" does not equal "craft"
As we see, today there is a rather big potential for craft beer production. But are many brewery managers willing to experiment with technology, tastes and design? Do brewers wish to develop their relations with consumers at a new creative stage?
Let us try to determine the operation format (or positioning) of small beer producers and estimate the share of different groups in their total number.
Under our estimation about …% of small beer producers in Russia belong to traditions supporters, let us call them Traditional.
As we have already mentioned, in small brewery creative and experimental "craft" is opposed to European approach. In other words, it is unlikely that beer producers that underline their belonging to European roots and traditions will in the nearest future position themselves as craft. Such breweries have Czech, German and Belgian names and traditional images, names, and styles of beer sorts. Most often, they declare that they brew beer under Czech or German technologies on correspondent equipment, underline that they use raw materials from these countries and so on.
Involvement into European image can be different - most of producers confine themselves to the name of their brewery of beer sorts. But some breweries, for the most part, restaurant ones, inspire their clients by authentic atmosphere, like, for example Scottish restaurant Mc highlander in Ufa with correspondent sorts. Others distance themselves from the regional link as for example company in Togliatti, which designed brand "Abbey" for the network of establishments "EinKleinBar" and shops. These producers approach positioning creatively, which puts them close to the conception of craft brewing.
The second by size group of small brewers position their production as regional product. Let us call them Regional. They use Russian images (for example, Kosouhoff) or geographical names (for example Bilibinskoe) in their brand names. These producers account for …% of small breweries number.
The regional link seems to be very correct from the point of view of the craft brewing in the USA, where consumers understand that the original local product should cost more. But in Russia small brewers play on the territory on the medium breweries that have popular production too. This restricts the retail price and, accordingly, the cost price of beer, not allowing small brewers to use such raw materials that would fully express creative approach, which is in craft brewers' nature.
Certainly, if regional craft beer is brewed in a restaurant brewery and served as a brand-name product, this eliminates all the questions concerning quality bonus. But when selling in retail, at the stage of launching, it is difficult to explain the buyer, why the beer brewed at a minibrewery costs more than many other local brands with similar name.
The third biggest group of small enterprises is called Amorphic. These are brewers who do not have any specific marketing conception, creating a mix of already known sorts, geographical names and images.
Certainly such a mix belongs to many craft brewers. But in this case there is no creative idea, as for example using images (situations, objects, and animals) that help creating the necessary atmosphere for beer consumption.
Breweries that create their product line by adding beer color (dark, light, amber, red, platinum etc.) to their company name can be attributed to the same group. The company name has abstract meaning, which does not give any information on the product.
A special group can be formed by the brewing companies that purchased technology, brand, beer sorts and the brewery style turn-key ready, along with brewing equipment. Let us call them Patented TM. Under our estimation the share of this group totals nearly …%.
This segment is mainly represented by breweries by Slovakia company Techimpex. It is actively promoting its logotype and brand Blonder beer, which includes the formula of several standard beer sorts.
Due to very low price, this equipment was bought by hundreds of entrepreneurs willing to try brewing. Some of them halt production, some continue operation, using the technology and the brand Blonder Beer (they actually form Patented TM group) and some reconsider the conception and invent their own formulas.
Brand Blonder Beer is mostly spread in Russia, but technological know-how and brands of their own are proposed by many other equipment providers. For example, Hungarian company Agrometal proposes its own technology for production of Kellers beer line.
One more example: Czech company Destila, which promotes its own brand Shpachek. Currently in Russia there are several restaurants and minibreweries using the joyful logotype with a starling in a mug. However, thanks to obvious Czech roots and the brand image these companies rather belong to Traditional group, than to more conventional group Patented TM.
However in the recent year there have sprung up tens of breweries that call themselves craft and are very close to them. According to our estimation, there are …% of such breweries among small beer producers. Despite the fuzziness, let us formulate the numerous and ambiguous criteria for entering Craft
- Non-standard beer focus due to using unusual ingredients and brewing technologies, such as dry, hopping, adding hops of special sorts and/or in larger volumes than usual in Russian beer. One can say that IPA presence alone in the product line of tens of breweries allows to consider them craft (even if they do not admit it), as it is an effort to please lovers of special beer or, on the contrary to propose a new taste to their consumers.
- Marketing conception, alternative to European Brewing traditions. This does not mean full ignoring of European geography, but it is underlined that this beer is good not because it is made under German/Czech technologies, but because the author was inspired by German/Czech beer and proposed a good interpretation. Besides, not all sorts, but only some, are made with special geographic incline. For example, beer Jaws Bock in German style by Ural craft brewery Jaws Brewery having a product line of 16 different sorts.
- Unlike Czech and German names, Americanisms in beer names underline belonging to alternative style. For example, sort Laughing Sam by craft brewery Bakulin in Saint-Petersburg or Hop Rocker by brewery Stamm Beer in Kaluha region.
- The package design and brand name by craft brewers express their involvement in certain ideas. Besides, they may include special cultural code, significant for local consumer or a distinct group. The most famous example is beach series of Bogerhogg by Anapa brewery. On the other cultural pole there is Moscow Side Street Brewery whose sorts have urbanistic design.
- Individuality and uniqueness of the supply. This means you will find similar beer nowhere else, nobody else will do it. The brewer can go even further if each of his sorts will be of limited production and will not be repeated even at his brewery. Such playing on the wish not to lose a unique experience will attract beer "geeks" and probably less sophisticated beer lovers too, provided the name is appealing. Examples are beer Ania's Treasure brewed together with the rock band or seasonal sorts Four Saisons by contract brewery Victory Art Brew.
- Peculiarity of craft brewers in the USA and now in Russia too is using animal images. This is of course proper to major companies too, but animals of craft breweries are more original and less pretentious (ales by Baltika are exceptions ). For example, the geese by the same name Novosibirsk brewery, the deer by Malz&Hopfen in Nizhniy Novgorod, the alligator and fox by Heartly Brew in Lipetsk etc.
We should note that most of craft breweries have been opened over the recent 5 years. Besides, the market includes a range of contract companies that have a big impact into alternative movement popularization. But problems in Russian economy and state's efforts to control the brewers' work, put strict limits on the craft beer development.
Judging by the slowing dynamics of brewing productions number increase, even if the craft beer popularity increases significantly, one should rather expect already existing producers to get involved into this culture than any new craft breweries to appear in the medium term. Besides, there can appear a lot of sorts in "crafty" style by major and medium companies that are now actively research the demand for unusual beer.
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11 Июн. 2015