“The situation on the Russian beer market is in a steep nose dive” – said Nikolai Mitchin, co-owner and founding member of Vasileostrovskaya brewery in an interview with “RosBiznessKonsalting”. During the last two years, in the country ten breweries have closed down, two of which belonged to Baltika, the leader of the domestic beer industry.
Vasileostrovsky brewery is experiencing the reverse situation. According to Nikolai Mitchin, the company’s sales are growing. This is the only notable local player in the beer market of St. Petersburg. However, now Vasileostrovskaya brewery is approaching a certain critical stage. The company runs the risk of becoming a hostage to its own growth and losing those unique differences that helped it to achieve the current results. In the interview with RBC Petersburg Nicholai Mitchin told how to avoid such scenario.
IMPORT SUBSTITUTION FOR 200 THOUSAND
– What is the performance Vasileostrovskaya brewery in 2015?
– I cannot tell the exact figures yet, but the turnover in 2015 has increased by about 10-15% and net profit by 5%.
According to kartoteka.ru, revenues of Vasileostrovskaya brewery in 2014 amounted to 300 million 455 thousand rubles, and net profit was 61 million 344 thousand rubles
– What results in the growth of Vasileostrovskaya brewery, whilw the whole beer industry is decreasing?
– Probably, the fact that we initially chose the strategy that proved to be a winning one. We initially focused on live beer with a short shelf life. And all the marketing was built around it. In other words, we consciously did not enter the market where large companies operate. We have been forming our segment of the market from the beginning.
– Tell us more, how did you come to this strategy? And what was the situation in the industry at that time?
– I came to that strategy naturally. My beer business began with the distribution. In 1996 the leadership of the Tartu brewery offered me to organize a branch in St. Petersburg and to establish the delivery of their products to Russia. In 1998 the crisis came and all imported products became uncompetitive. And we at that time had already formed a large customer base and shops, and HoReCa, and it would be foolish just to lose it. Finally, it has become clear that we should go into production. At that time we couldn’t open the large-scale production because we were limited. Therefore, we thought just about a small brewery. In fact, we were engaged in import substitution.
– How much did you have to invest in the opening of Vasileostrovskaya brewery, if that is not a secret?
– At the first stage about 200 thousand dollars. This is what we have earned from the distribution business, plus the money of my partners and now they are shareholders of Vasileostrovskaya brewery too. Initially, my share was 35%, and then it decreased to 20% because new business investments were needed and means of my partners in this plan were greater than mine.
– Can you call the names of your partners? From open sources it is known that 80% of Vasileostrovskaya brewery belong a certain Austrian company “STPB HOLDINGS GMBH”.
– My partners are not public people, so I cannot mention their names. And whether they are represented in the business as individuals or through a legal entity, I do not care.
ON THE THRESHOLD OF A BEER REVOLUTION
– Who were your main competitors in the early 2000s, and how many of them are there now?
– At that time there were few competitors. In St. Petersburg, there were only two private Breweries Shiko and Capitan. For comparison, now there are about 40 Breweries (including the largest: Munhell, Dome, Knightberg, Severnaya Pivovarnya). And, by the way, the growth of which I said is happening not only in our company. What we are witnessing now is actually a redistribution of the market in favor of small producers and local producers of beer. Large multinational companies are losing the market but the share of small ones is growing. And this is against the general decline of the industry.
– It sounds unusual, as I keep hearing that multinational brewing concerns are squeezing domestic producers from the market.
– So, it was up to a certain point. But now we see the reverse process.
– How would you explain this process?
– This process can be observed in other countries too. Russia has just become a part of a global trend called “craft revolution”. Local producers (craft breweries) are becoming more common. The number of private small breweries in Russia over the past two or three years has doubled. In contrast to multinational corporations, which, as I noted before, are closing breweries, microbreweries are increasing production capacities.
– So, do you want to say that a Czech-Belgian-German beer culture is forming in Russia?
– No, our market is developing rather according to the American scenario. In the Czech Republic, Germany and Belgium there traditionally was a local beer culture. There historically were a huge number of local breweries having its own “best” beer. Thus, the market was formed. In the US it was different,there the investment immediately poured and large breweries began to form, which later grew into multinational companies. And only at the turn of the 1980s, when the market was already filled with yellow soda with the smell of beer, the industry entered into a crisis. This gave impetus to the development of microbreweries, which now cover more than 20% of the U.S. market.
– What is the proportion of such breweries in Russia?
– In Russia less than one percent. It is one per cent in St. Petersburg. But the share definitely will grow because the number of so-called beer «geeks» is growing from year to year. Today in St. Petersburgthere are about 3-3.5 thousand of them. And two years ago, there was none.
Now, by the way, another trend has become noticeable (especially it is obvious in the USA). Large corporations, not wanting to lose market share, began actively to purchase craft breweries. Therefore, it is possible that someday someone will come and say: let me purchase you.
– Have not you had such offers until now?
– Yes, there were offers, but nothing concrete. And we are not eager to sell.
NOT LIKE TINKOV
– You said that at the initial stage 200 thousand dollars was invested in the business. How much do you think Vasileostrovskaya brewery costs now?
– I suppose about 20 million. That is, the price has increased 100 times in 14 years.
– Now, if you say “private brewery” many will probably think of Tinkov, which has successfully sold his beer business. Is your strategy focused on the same goal?
– No, we differ in the main. Oleg is a venture businessman, the majority of businesses that were related to him, were made on the sale. But we had another task. Significant moment. Tinkov at the peak of its beer business sold five times less beer than we sell now. But he has spent on advertising much more than we. Another example is the Bravo Company. They built the plant, which now belongs to Heineken. I do not remember the exact numbers, but in advertising of the brand Bochkarev they invested two times more than was spent on the production of beer. After that, they sold the brand very successfully.
We did not choose that option. The mass market is primarily bottled products. It makes sense to invest in advertising only if your products are on each shelf. Our initial profile is draught beer. We work mainly with HoReCa. And HoReCa does not advertise beer, it is like to shoot at sparrows from the gun.
THE RISKS OF GROWTH
– We keep talking about the craft revolution and small breweries. But we cannon call Vasileostrovskaya brewery small.
– Not anymore. At the first stage of production we had only 30 thousand litres per month, and now it is about one million.
– At some point you began to work actively with retail. What percentage of sales do you have on retail?
– With retailers we began to work just a couple of years ago due to the fact that we have beers that ferment in the bottle. It is impossible to sell it in draught form. We saw another free niche in the market: in Russia, beer with secondary fermentation in the bottle to this day no one produces. Now, bottled products account for about 12-15% of sales. In general, the ratio of retail and HoReCa is about 30 to 70. And the share of retail is growing.
— Aren’t you afraid that you can gradually lose your core competence? Indeed, retail has a completely different type of competition.
— Yes, it’s a completely different type of competition. But the workflow itself is much easier. Because, when we produce draught beer, we have to invest in special equipment for draught beer and its maintenance. All this affects the cost of production. With a bottle it’s much easier. Not by chance the ratio of draught and bottled beer in Russia is approximately 12 to 88. For all major producers the sale of draught products is the marketing. But the main business is bottled beer.
– So, a private brewery, as you said, is a small business that operates in a special niche and opposes itself to large corporations. What is the principle difference between these two models?
– The fact that in the pursuit of reducing costs, increasing shelf life and quality averaging, multinational companies use cheap ingredients. There is even a term “euro lager”. This is the average taste that doesn’t depend on brand.
– Is it possible to be a major beer producer, without releasing such product?
– No. In order to increase sales volumes, it is necessary to expand the geography of supplies. The geographical expansion creates the need to increase the time of sale. And so on.
– Thus, at some point you will need to specifically restrict your growth, not to turn into a completely different business. Are you ready to say to yourself “stop”?
– It would be nice if you asked about what will happen in the next three or four months. But we are talking about a long time, and our vision of the market and business can change. As long as we can produce unpasteurized product, we will expand production. And then, when the volume will be more than three million litres per month, we will have to make a critical decision about how to develop further, grow or stop.