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. ...
Beer market of Ukraine 2015
Ukrainian beer market has been declining since 2008, however 2015 made an abysmal record, that is, a 20% slump in sales and production. Half of this decline results from the actual production stoppage at Efes Ukraine. Even after reallocation of the company's volumes other brewers were not able to compensate for the outlets loss and consumption decrease caused by the military conflict and economy shocks. The price structure of the market also saw changes as it drifts to the economy segment. The year of 2016 does not give much ground for optimism due to the twofold increase of excise.
Dynamics of production and the beer market
By the end of 2015, the drop in beer production has become worse and now it is around 20%, to 195 million decalitres*. And as compared to the record production volume of 2008, the decline reached 40%.
* Here and further, the volumes by the end of 2015 were calculated on the basis of statistics up to October-November 2015.
The rapid growth of retail prices at the beginning of 2015 had to prepare consumers before the start of the selling season. However, the sharp hryvnia devaluation in February and the subsequent impact of inflation made the consumers save money. Ukrainians started economize on beer, as it is not a product of basic necessity, and more often exclude it from their daily basket. A very cool weather in spring, which failed to give the necessary impetus to the beer market before the sales season, created additional problems.
Based on the data of the trade balance, in 2015 the Ukrainian beer market has fallen by approximately 18%, to 190 million decalitres. At the same time, assessing the dynamics of production and market, we should take into account how much the territories that remain under the control of Ukraine have diminished and how it has affected the volumes of 2015 (see chapter “Territories and volumes”).
Today Ukrainian beer market has become considerably less important for international companies. Although they have significantly increased prices, but in 2015 in terms of US dollars their revenue fell sharply due to the devaluation of the hryvnia, by about ..% to $... million.
Thus, the phase of rapid growth of the producer prices continued for a long time commenced in June 2014, it only completed in July 2015. However, the most intense period was short and fell on low season between December and March 2015.
The producer average weighted price increased by ..% to USD … per litre in 2015. But during the 2015, producer prices increased by ..% and accounted for nearly . hrn. per litre at the end of the year. This growth has allowed brewers to partially compensate for the inflation (which will ..% by the annual results) or the fall of the hryvnia in terms of the US dollar (by ..%).
The sharp decline in natural volumes meant that the rapid increase in sales prices has allowed to increase its revenue by only ..% to .. billion hrn., by the end of 2015.
The rapid growth of producer prices, has led to the fact that in 2015 the average weighted retail price of beer increased by about ..% to about …. USD per litre. The beer market in money terms has increased by ..% to … billion hrn.
At the same time, the average retail price for a litre of beer in dollar terms has fallen by ...%, to .. cents per litre, while the beer market has fallen by ..% to … billion.
In 2016, Ukrainian brewers will have to face a new challenge, that is, a twofold increase of excise, to 2.48 hrn. per litre. Brewers will not be able to mitigate retail price spike. The retail price for beer in 2016 will grow by ...%, while the inflation is prognosed to equal ...%, according to assessment of Evgeniy Shevchenko, general manager of Carlsberg Ukraine, published by Forbes. This significant beer affordability decline does not inspire hopes for market stabilization in 2016. Even though other negative factors of 2015 such as unfavorable weather and military and political shocks can become not actual.
Exports and imports
In 2015, the foreign trade declined sharply.
By the end of 2015, the export of beer from Ukraine has decreased by half – from .. million decalitres to about ... This is due to the fact that since August 2014, the deliveries of beer to Russia that used to be the main customer of Ukrainian beer (in 2013 it accounted for 2/3 of exports) have actually stopped. Almost all delivery volume accrues to Obolon Company, which has now established the licensed production in Russia. The exports to two other major customers have decreased– by ..% in Moldova and by ..% in Belarus. The negative dynamics was compensated partially due to the significant of exports to Poland, the share of which in the total volume reached about ..%.
The imports of beer to Ukraine have also decreased by half - in 2015 a decline from … to .. million decalitres is expected. The key impact here was the fall in trade with Russia, from … million decalitres in 2014 to … million by the end of 2015. The decline was mainly due to the termination of deliveries between the departments of multinational companies - AB InBev and Efes. In particular, AB InBev imported Bud beer from Russia. The company Efes due to blocking of work of the Donetsk enterprise was trying to establish the deliveries of beers Belyi Medved and Miller from Russia. But, apparently, the deterioration of relations between the countries forced the company to redirect flows from Russia to Moldova (and, to a lesser extent to Turkey). As a result, by the end of 2015, the import of beer from Moldova increased by approximately ..%, to … million decalitres.
The import of expensive beer from the EU in 2015 has fallen by half - from … to about … million decalitres. More than one third of European beer volume is imported from Belgium and mainly represented by AB InBev brands (non-alcoholic version of Stella Artois, beer Leffe and Hoegaarden). For this reason, a reduction in imports of Belgian beer was relatively small - about …%, but the deliveries of beer from Germany and the Czech Republic have fallen by half. At the same time, by the end of 2015 imports from Mexico, from where AB InBev carries Corona beer, has grew … .
Territories and volumes
When comparing market volumes of 2014 and 2015, the base for calculations is of key importance. In the new realities the beer market of Ukraine should be considered without the uncontrolled territories of the Crimea, and a large part of Donbass. The loss of these regions from the economic zone of Ukraine, military operations, which began in the spring of 2014 and the trade barriers that have arisen at the end of 2014, have led to a gradual decline in deliveries of beer. For these reasons, the peak season of beer sales in 2014 was very different from 2015.
At the beginning of 2014 the Crimean share approximately corresponded to ..% of Ukrainian beer market (.. million decalitres a year-on-year). About .. million decalitres of this amount was provided by Crym Brewery, which sold ..% of its production on the territory of the republic.
Efes Company had a particularly large market share in Donetsk and Lugansk oblasts. Thus, the production volume of the Donetsk enterprise in 2014 amounted to … million decalitres (… million decalitres in 2013), and about ... million decalitres were produced by other breweries of Donetsk and Lugansk oblasts.
At the same time, the share of Donetsk oblast was about …% of Ukrainian beer market (… million decalitres a year-on-year), and the share of Lugansk oblast is just over …% (… million decalitres).
Thus, the territories that now have dropped out of the trade area of Ukraine, had half of the volume of beer imported from other regions. Since Donetsk and Lugansk oblasts provided about …% of beer consumption (… million decalitres in 2013 and … million decalitres in 2014) and about …% of beer production (… million decalitres in 2013 and … million decalitres in 2014).
Subtracting these … million decalitres, which almost entirely belong to Efes company, we can see that the brewers, who kept on working in the area controlled by Ukraine in 2015 have reduced the production by about …%, among other reasons due to the termination of deliveries to the uncontrolled territories. That is, their decline in production continued unabated. At the same time the beer market in the territory under the control of Ukraine has fallen by about …%, i.e. the decline was accelerated by about … percentage points, primarily due to economic factors.
The market positions of the independent breweries in the 2014-2015 biennium primarily determined by their dependence on Donetsk and Lugansk oblasts and the Crimea.
The greatest weight of about one-third of total sales had Donetsk and Lugansk oblasts for Efes Company. Its Donetsk brewery stopped operating in 2014, according to media reports. The market share of the company began to fall rapidly in August 2014, when it controlled more than …% of the Ukrainian market, but in March 2015, its share was less than …%. It does not make sense to discuss the degree of influence of geography here.
The most dependent of the operating companies was AB InBev. According to our rough estimate, about …% of its sales were in Donetsk and Lugansk oblasts. Also, these regions accounted for one tenth of the Carlsberg Group, and for almost …% of Oasis CIS. Obolon Company was least dependent on Donetsk and Lugansk as its weight in the troubled regions was less than …%.
The Crimea was important for Carlsberg Group and Obolon, providing about …% of their sales. We estimate that the weight of the Crimea for AB InBev was about …%. Ukrainian brewers had problems with the deliveries starting from August 2014, when the Russian Federal Consumer Rights Protection (Rospotrebnadzor) made a claim on the labeling of beer.
Denis Khrenov, CEO of SAN InBev Ukraine in the interview with LigaBusinessInform for April 2015, said "... we and Obolon lost the right to deliver the goods to the peninsula. But Obolon later resumed the deliveries to the Crimea...". In the fall of 2015 Obolon Company managed to establish licensed production of its beer in Russia.
If we speak of the dropped territories in general, then among currently operating enterprises, the main losses were incurred by AB InBev Company. We estimate that the negative effect for the company over the period of 2014-2015 was about …% of total sales, excluding the impact of other market factors. Such dependence on the trouble areas did not allow AB InBev to participate in the redistribution of the Ukrainian market share of Efes in proportion to its scale.
The losses of Carlsberg Group were not less, among other reasons because of the great importance of the Crimea. However, if we look at the situation more broadly, the international group was able to compensate for the loss of this market by means of its Russian department.
At the same time, Obolon and Oasis CIS have suffered comparatively little. Their loss could be estimated at …% during the period of 2014-2015. According to our estimates, the greatest damage from the termination of the delivery of beer to Russia had Obolon Company. The market shares of these companies became bigger (excluding other factors) due to the relatively low dependence on Donetsk and Lugansk oblasts.
The transition to the new base, which includes only the territory under the control of Ukraine, requires assessing how this changes the sales and market shares of companies.
The positions of companies and brands: Chernigovskoe vs Lvovskoe
By the end of 2015, due to the sales reallocation of Efes company, one can expect a considerable upturn of Oasis market share as well as good and not bad results of AB InBev and Carlsberg Group respectively, while Obolon is likely to see their share decreased. Though we should mention that given the markets loss, only Oasis was able to keep the sales approximately at the level of 2014. Mid-sized regional enterprises were developing better than the market and increased their market share, yet the majority of them saw their sales decline.
Evaluating the development of companies and brands we should take into account that a key influence on their sales belongs not to the beer market, but the dependence on the uncontrolled territories today, which was different (see chapter "Territories and volumes"). We will consider the positions of market leaders, excluding the Crimea, Donetsk and Lugansk oblasts from the database for comparison in the period of 2014-2015, in order to estimate precisely the market factors.
Besides, the price policy of the largest Ukrainian brand makes us revise the structure of the Ukrainian market since autumn 2014.
In the traditional sense the price segmentation of the market suggests that the mass brands, which account for the majority of the companies’ sales, are to be a middle-price beer. The Ukrainian beer market was in the same situation until 2008, when Carlsberg, in response to the economic crisis decided to stake on the economic brand Lvovskoe. This step was very successful, because at that time the company did not have the mass brands the sales of which might be affected, so middle-price brands of competitors yielded to Lvovskoe.
The brand Zibert by Obolon, many variants of Zhigulevskoe, as well as regional varieties by the independent producers that have become very popular, have also made a significant contribution to the development of economic segment. This process led to increasing polarization of the market.
The consumers began to consider the retail price of mass middle-price brands, of which there are only two Chernigovskoe and Obolon, inadequate due to the displacement budgets towards cheaper beer. The innovations and experiments with sorts and packaging could not stop the decline in their market share at the current price segmentation. Only price-cutting was effective.
It seems that Chernigovskoe beer is voluntarily or involuntarily moving to the economic segment of the beer market. At a certain point in time, we could say the same about Obolon.
The largest segment, which presently includes Chernigovskoe, Lvovskoe, Obolon and Rogan, can be called a low-mainstream. This segmentation complicates the assessment because of too blurred border with the economy segment. But, anyway, the constant retail price fluctuations of brands make us review the existing market price structure every few years.
The decreased price of Chernigovskoe in terms of volume is due to the growth of its popularity in PET and promotions. Perhaps, this is a tactical move that allows AB InBev to compensate for the sharp market drop this year and boost sales growth during the low season.
One way or another, but in March 2014 the average retail prices for Chernigovskoe and Lvovskoe went to the convergence and were quickly closing the distance until September, although Chernigovskoe continued to cost a bit more expensive. The next convergence of the price began in the spring of 2015, since the average retail price per litre of the two brands was virtually equal.
The drift of Chernigovskoe towards the economic segment and the convergence with Lvovskoe can be explained as a reaction to the difficult competitive situation. In view of withdrawal from the market of Efes Company, its shelf space and market share were to be divided by competitors. But the vacated space was occupied by other companies and brands, thus, at the beginning of 2015 the share of Lvovskoe started growing dramatically, but the share of Chernigovskoe remained stable, the leading positions of the largest brand no longer looked so strong. But by the middle of summer the price convergence gave effect and the situation became the opposite - the market share of Chernigovskoe began to grow, and Lvovskoe stabilized.
The beer market fall and outlets reduction made AB InBev and Carlsberg Group enhance their trade marketing activity on the territory under Ukrainian control. Along with fiercer price competition (on the verge of damping), this led to a stronger pressure on brand Obolon and its market share decline in summer 2015. This, in turn, caused the low-mainstream segment stabilization, following the riot growth.
However, AB InBev too got one brand injured, namely, beer Rogan. Though the brand’s market share has been going down for a long time. After the price maneuver taken by Chernigovskoe, the retail price of Rogan equaled it. In these conditions “cannibalization” seemed to be inevitable.
The changed sales structure resulted in reduction of economy brands’ market share. In the first place this process was connected to ousting inexpensive brands by Obolon from the market. Thus, brand Zibert achieved the peak of its market share early in 2014 (about …%), but that resulted in the market share fall of the title brand. But soon beer Obolon became much more available, which, on the contrary, caused an abrupt slump in the market share of Zibert, nearly to …% before the high season. Then the price margin began growing again and the brand’s share increased to …% by the end of 2014. However, the abrupt aggravation of price competition in 2015 and the pressure from the growing low mainstream segment again led to Zibert’s share decline.
At the same time, beer Zhigulevskoe by Obolon was gradually losing its share and the share of Zhigulevskoe by Efes (as well as Sarmat beer) fell sharply. All these changes benefited the dynamics of Yantar brand, that started gaining weight early in 2015, though it had negative dynamics prior to that. Besides, we cannot but mention the market share upswing of beer Zakarpatskoe by Oasis. The democratic specialty is rapidly capturing the market of Ukraine and by the end of 2015 it quite possibly can won …% in the total volume of national sales.
Despite the seeming stability of the upper mainstream segment, there were considerable changes inside it. The share of Belyi Medved started falling rapidly in summer 2014. And approximately at the same time the key sorts by brand Persha Pryvatna Brovania (PPB) began growing fast
Besides, there was a reshuffle in the product range of Carlsberg Group. On the one hand the decline of the market share of Slavutich sped up dramatically, as its image was blurred by lots of beermixes. By the end of 2015, Slavutich virtually disappeared from the market. Besides, without intensive promotional support the share of Zhatecky Gus was gradually decreasing. At the same time, since the end of 2014, Minskoe Zhigulevskoe has started gaining market weight, as its production began in Ukraine after market piloting. Due to positive image of Belarus goods and distance from the economy sorts, this sort looks like an interesting alternative product and has a capacity for price competition. By the end of 2015, the share of Minskoe Zhigulevskoe can reach …% of the market.
In the premium market segment AB InBev managed to halt a negative tendency and press Carlsberg Group considerably. The market share of premium brand Baltika was constantly fluctuating from 2010 to 2013, but the trend was rather stable. Over the recent years, Carlsberg Group has staked on cosmopolitical subbrand Baltika№7 Exportnoe, which virtually overcame other sorts, even including sometime leader Baltika №3 Classic. However, upspring of many other premium brands by the competitors, creative package of specialties and new design of many old brands (e.g. Obolon) led to lower interest to Baltika. Its market share started decreasing mid2013, which continued till the beginning of 2015. The causes of gradual devaluation of youth brand Tuborg have been described by us many times, in 2015 they as well as the general trend remained unchanged, thus, the brand’s market share declined to …%.
Probably, the reasons for Staropramen reinforcement were its rather democratic price as for license beer as well as exit of competitors, namely Zolotaya Bochka and Velkopopovicky Kozel. Consequently, Staropramen is dominating the segment of “Czech” beer again and became more prominent in the family of license brands, which was reflected first in stabilization and then in the market share growth. Besides, given the strong promotional support at the launch stage as well as timely western image, Bud’s market share grew considerably by the beginning of 2014. The stabilization period changed into growth wave in spring 2015, due to competitives’ exit from the market.
The share growth of independent mid-sized producers has a mixed effect on price segmentation of the market. A part of beer is sold at the domestic market, where, as a rule, its price corresponds to the economy and low mainstream segments. But in case of regional expansion their brands are positioned as alternative product (e.g. Berdichevskiy brewery, Mikulinetskiy Brovar and Ternopolskiy Brewery) and most often get to the upper mainstream and premium segments. Thus, beer by regional breweries is evenly allocated on the price spectrum. Increase of their market share makes small contributions into the weight of the economy and premium segments.
The cutbacks in beer import from western countries and supply suspension of expensive brands by Efes had a considerable effect on the superpremium market segment. On the average, over 2015, the segment share shrank from …% to …%. At the same time, beer Stella Artois is still in the lead and goes on increasing its market share; in 2015 it was a little more than …%. Besides, import brands belonging to major companies (Hoegaarden, Leffe, Lowenbrau, Grimbergen and some others) have preserved their market share.
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19 Янв. 2016