Industry and market development The positions of the leading companies The brands of leading companies in 1H2013 Economy segment Mainstream segment Premium segment

Industry and market development

The results of the industry and market in 2012 could induce some optimism regarding the prospects of their development. The production grew by …% to … mln dal and the trade balance went …% up to … mln dal. However the factors that drove the positive dynamics were temporal. Mong the main ones is hot summer and and early autumn last year, which prolonged the season (by the way, the same factor determined the beer sales increase in 2010). Additional impulse was given to the market by championship Euro-2012 and social “infusions” before the elections. As a result there formed a high base which was by itself a precondition for growth rate reduction in 2013, so the correction had to be expected.

In the first half of 2013 the dynamics grew negative – the production cut by …% to … mln dal by the operative data of Goskomstat of Ukraine. In particular in May-June, in the first months of the high season, the tendency was negative. One can assume that the production dynamics will be nearly the same by the end of 2013, if weather is favourable for brewers.

External trade in the first half of 2013 also perceptibly decreased against 2012. While last year the export grew by …% to … mln dal, in the first half of 2013 it fell by about …%. The import in 2013 grew by …% and in the first half of the current year it declined by …%.

First of all the trade dynamics was influenced by the supplies between Ukraine and Russia in particular foreign shipments of two companies. Thus, most of export is accounted by Russian shipments of Obolon company. The decline of Russian market and raise of competition led to smaller purchase volumes of Ukrainian beer. Partially the negative dynamics of import to Russia was compensated by bigger supplies to Belarus, where the limitations for Ukraine were lifted. By the year end we should expect better dynamics of export beer supplies.

Rapid growth of import to Ukraine in 2012 as well as its subsequent reduction was caused by Efes company expansion, which before starting production of its local brands saturated the market with import production.

Regarding the negative results of production, import and export, the trade balance in the first half year under our rough estimation amounted to … mln dal of beer, which is …% lower than last year.

Average retail prices for beer in the first half of 2013 increased by …% to … hrn for a liter, that is, we can say that the rate of price growth is still slowing. In view of the reduction of natural volumes, the beer market in monetary expression over the first half year practically did not change having comprised … mln hrn *. In dollar expression, due to some hryvna weakening, the market shrank by …% to $… bln.

The price segmentation of the market continues developing in tune with the tendency formed after 2009. The sales polarization is in progress, that is, the premium and economy brands are taking share from the mainstream. If we take the sales in Ukraine as a whole, in 2013 the economy segment for the first time left the mainstream behind by the sales volumes in physical terms. The polarization is connected to significant expansion of the product range both due to marketing activity of the leading companies and to entrance of new players into Ukrainian market.

Positions of leading companies

According to AB InBev reports, its sales volume shrank from … mln dal in 2011 to … mln dal in 2012 which is a …% fall. Against the comparative market stability, we can speak of a perceptible degradation of company positions. The AB InBev sales decline was caused by two new active players on Ukrainian market, price raise and the conservative marketing policy of the company. However if we compare the first half of 2013 to 2012, it will be possible to speak of a stable market share of AB InBev, due to market innovations, especially if we take the market share in monetary expression.

Carlsberg Group being attacked by fast growing “young” brands was gradually yielding its positions. Till 2011, when the situation on the market was not so difficult, the company managed to effectively hit on the mainstream brands of major competitors, ringing them in premium and economy segments, and thus blurring the mainstream segment. In 2011 this strategy turned to be ineffective as Carlsberg Group in its turn got under the pressure of alternative trade marks in all price spectrum of the beer market. At the end of 2012 the sales decline comprised about …%. When evaluating the company positions in monetary expression, the market share reduction will be less pronounced.

The year 2012 was quite a good one for Obolon, if we remember that its share had been rapidly declining. According to the company statement in 2012 it increased beer production by …% to … mln dal. Here we should keep in mind that a big part of Obolon production is exported. While the bulk of supplies to Russia decreased a little bit by our calculations, Belarus, due to the limitation abolishment doubled the purchases of Ukrainian beer. According to our rough estimation, in the aggregate, these trends counterbalanced each other. Thus, the supplies to the domestic market as well as the production apparently experienced some growth. However, in 2013, Obolon again saw reduction of the sales volume and market share.

Transition of SABMiller assets under Efes control provided a spark to the company development. Ukrainian subdivision rapidly increased the sales of the existing brands in 2012 and continued the market expansion by their Russian brands. In short, Efes activity is much higher than of the previous owner of the business. This can be due to the ability of most international beer groups to effectively redistribute their investments according to the market dynamics and the shareholders’ mood. Compared to them, the operational activity of Efes is limited to the area from Turkey to Eastern Europe. In Russia strict state administration and the resulting market decline stand in the way of successful development of the integrated company today. That is why Ukraine can become a more effective point of marketing application. At least, the investments to the sum exceeding $… mln since March 2012, Alejandro Jimenez, Efes Beer Group president spoke of, confirm the strategic value of Ukraine’s market. As a result, over 2012, the company’s sales grew by …% to … mln dal.

The alliance of companies Persha Privatna Brovarnya and Oasis CIS was the most important event of 2012 and means appearance of a new active and effective player on Ukrainian beer market. By launching new brands and restyling the existing ones, the alliance in 2012 increased its share to …% of the market. This came to life due to capacity growth of Lvov brewery and loading of the brewery in Radomyshl. In the first half of 2013, the growth continued owning to the development of the main brands. Wider representation of the joint company in retail played the crucial role in this process.

Brands of leading companies in 1H2013

Economy segment

The economy segment has undergone certain changes in the structure of sales of the leading companies.

In the first place, there have been changes in the development dynamics of the sales leader of Ukrainian Carlsberg Group subdivision, brand … . In the first half of 2012, the brand continued growing, taking away market share from all mainstream segment and to a large extent determining the positive dynamics of the economy segment. But in 2013 the positions of … stabilized at the level of 13%. This took place against the background of comparatively slow price growth and active marketing support.

At the same time …, another brand by Carlsberg Group, which had been for long advertised on TV, stopped lagging behind.

In spite of the relative stability of the market shares of key brands, the company has reinforced its positions in the segment of inexpensive beer, having launched … in 2013. This variety of the most popular brand by Carlsberg Group was to be presented in Eastern regions of the country. Thanks to the developed distribution system the new product has quickly gained its market weight, that is, the sales volume in the first half year has already reached …% of the market, which is a good performance for such a short time slot. As for price positioning, the new sort of … is located between … and … .

Obolon has notably yielded its market share in the market of inexpensive beer to competitors. At some point the company had to focus on the economy segment due to the growing pressure in other segments. This strategy helped Obolon to slow down the reduction of natural volumes, though already half of its sales are provided by low-margin sorts. However, when other producers presented their economy brands and strengthened marketing activity, the competition on the market became much fiercer, which negatively affected the company’s sales.

Additional inertia to this process was given by lower representation in retail of two inexpensive brands by Obolon. The distribution of … by Obolon grew, and that of … and … reduced. And while beer … is anyway represented practically in all beer outlets, one can seldom find relatively light sort … on the shelves.

The market share of one of the oldest Ukrainian brands, namely, beer … cut its lingering decline and has even somewhat grown against the first six months of 2012. The change in … share dynamics can be explained by the company’s price policy. The decline which was particularly obvious against the growing market of inexpensive beer in 2012, resulted from new positioning of the brand, which virtually shifted to the mainstream segment. But further the price grew at the level with the average dynamics of economy brands. The market position of beer … was stable. However, with the growing sales of inexpensive brands of competing companies, AB InBev lost some of its positions in the segment.

Good performance was demonstrated by two economy brands by Efes company, which entered its portfolio. … and … hit the taste of inexpensive beer consumers and its share gradually grew to …%. We should note that … by Donetsk company became one of the first sorts of the popular brand, which were produced by large companies. According to the company’s strategy it had to become a national alternative to brand … . Though in 2012 beer … accounted for more than …% of the company sales, it was indented to become a regional one. However …, being well known to Ukrainian consumers is gradually restoring its positions, and not only in the east of the country, though, according to the company plan it has fallen into the shade.

Mainstream segment

Beer … was and still is the most popular trademark in Ukraine and it is a brand accounting for half of beer sales in the mainstream segment. For AB InBev … is also the main brand, giving about half of sales and correspondently having a key impact on its positions. The pressure on the mainstream from premium and economy brands resulted in lingering decline of the market share. AB InBev strived to stop this tendency by constantly bringing new sorts to the market. Now one can find 14 sorts of … in fridges among which there are 4 beermix sorts, youth subbrand … and new sort … . Besides, … is constantly supported by advertisement based on football teme. This marketing activity is probably effective but not enough to stop the sales fall and the reduction of the brand market share. Most likely, this led to rather unexpected expansion of AB InBev portfolio, namely introduction of … sort.

Retail sales of … started in low season, in winter 2012. Perhaps AB InBev looked to successful experience of Oasis CIS with … and unlike most of … sorts on the market, it did not position its sort among the economy brands. Though Oasis CIS representatives sued AB InBev claiming that the competitor used design elements of … package and the consumer now do not differentiate between these beer sorts. In the end, AB InBev considerably changed its sorts, which possibly affected its development negatively. One way or another but in the first half year … won …% of the market. Taking into consideration relatively high price of the new sort, this performance can be considered good. One can also say that thanks to this launch AB InBev managed to stop the reduction of its market share this year.

The company that suffered most from the reduction of the mainstream segment was … . Its title brand played the major role in the development of Ukrainian mainstream segment. The negative sales dynamics was to a large extent connected to the outrunning growth of prices, due to which currently beer … costs more than the brand of its main competitor, namely ….

Besides, to our mind, the brand promoting is one more problem. On the one hand, the competitors demonstrate higher advertising activity. On the other hand, the patriot and national theme, which the beer advertising focuses on, is now actively used by other producers, for example by economy brand … or the sales leader …. However the company may change or refresh the brand positioning. Agency Adventa Lowe has recently started working on a new strategy of … promotion.

Finally, we cannot but mention the shrinking of the shelf space of …, which was in progress over the last years. The brand was pushed out both by competitors and brands of its own portfolio in the first place, economy sorts. The positive dynamics of … and … coincided with the speeding of the negative trend of … . While in 2010 the main brand accounted under our assessment for 70% of sales, currently half of sales is formed by economy sorts.

The share of Carlsberg Group company in the mainstream segment is notably less than that of other competitors which is connected to high activity in premium and economy segments over the last years. In particular, … brand to a significant extent is represented by … sort and …, which are differently positioned in comparison to the main brand … and do not claim a big market share. … not having a proper promotion is constantly losing its market share. The launch of Ukrainian brand … in the popular segment of “…” beer looked rather promising. But the consumers’ interest raised by non-standard marketing tool, proved to be not very stable. Though the brand provided for an increase of the company market share in 2012, according to our estimation, it stopped growing and needs active promotion.

The most successful player in the mainstream in the first six months of this year became “Persha privatna brovrnya” (PPB), which having entered Oasis CIS got new impulse for development. Three major mainstream brands of the company, namely …, … and … demonstrate a fairly good dynamics, having in aggregate increased the market share from … to …%.

Expanding capacities, joining assets with brewery Radomyshl and distribution expansion drew the growth of the company. Besides a contribution was made by restyling of brands, in particular brand … has significantly changed its look and image and turned into … . Under our estimation the medium-priced brands of PPB today provide for about 70% of its sales. At the same time, they do not much influence the dynamics of the mainstream segment so far, as it is dominated by … and … .

Finally we have to mention such event as Efes launching brand … , which is known in Russia, to Ukrainian market. Last year beer … started being supplied to Ukraine in big volumes and became a major import brand. According to the company plan, when the production at Donetsk brewery starts, … will grow almost twice cheaper from … hrn to … hrn for a 0.5l bottle. The company intends to compete with …, … and …. The production of beer … in Ukraine has just started but it has quite rapidly developed its numerical distribution. Besides the brand is supported by rather active advertising campaign. As a result, the brand market share is approaching …%, which can be considered a very rapid growth.

Premium segment

Carlsberg Group with its key brands still leads the market of marginal beer. Brand … is the absolute sales champion in the premium segment and one of the favorite brands of beer in Ukraine. Steady positions of … are reinforced by the transition from mainstream to premium of those consumers who prefer more qualitative sorts of beer. Advertisement plays its role here, as it is targeted at people wishing to be business-like, cosmopolitical and successful. Possibly Russian origin of the brand is important here.

Alongside with modest … growth, the share of youth brand … continued decreasing slowly under the pressure from the competing brands. This is happening in spite of the restyling and massive promotion given to … . Image is certainly important to young consumers. But being surrounded by advertisement since childhood, they developed immunity, so the campaigns do not raise the public’s loyalty to … as well as to other youth brands. The high price is one more factor which against the background of the growing range of impressive brands, affects the brand’s sales. However, in the first half year of 2013, the average price of … was increasing slowly as compared to other brands of the premium segment.

Company AB InBev has been successful on the market of premium beer and made the main contribution into the development of the segment. One of the oldest in Ukraine license brand … stopped losing its market share under the pressure from a host of new brands, which also drew attention to its … identity. This becomes obvious if we compare the dynamics of other “…” brands’ share, which alongside with … growth were yielding their positions. This process looks like status quo restoration, which had been broken by competitors’ launches. But there is one more detail, if AB InBev had not slowed down its brand price growth, which was notably behind the average for the segment, and had not leveled … price in accordance to new market conditions, there could be no market share growth. Active marketing support made an impact too.

In 2012 the launch of the title brand of AB InBev, namely beer … became one of the most prominent events. Its appearance was followed by laconic, but massive and flashy advertising campaign …, which focuses on … origin of the brand. The advertising agency, which developed the advertising campaign strategy, set mission to announce that … strived for the leadership in the segment. The retail price also hinted that the new brand claimed for a large market share. In particular, the price positioning (between … and …) allows saying that … was to fill up the place in portfolio which becomes vacant due to sales fall of … . All this coupled with fast growth of distribution allowed … brand to rapidly increase the market share, which exceeds …% even today. However, due to the growing competition in the segment, it is too early to estimate the prospects of … .

As premium brands of SABMiller entered the portfolio of Efes, in the aggregate their positions did not see any notable alternation. The market share of … has somewhat grown thanks to new advertising campaign “…”, the idea of which was imported from Russia. Besides, the growth of national distribution, by the way the largest among the brands of the company, is very important for positive brand dynamics. The second by sales volume brand, … is significant for Efes from the point of view of margin. But the brand was supported only by keeping prices down, which anyway could not stabilize its market share. In the future the company positions on the market of marginal beer can strengthen by the product range widening. In particular, in Russian portfolio of Efes the key brand is …, which judging by the distribution growth can start being output in Ukraine. As … is positioned in mainstream segment, … in the local version accordingly can become one more premium brand.

Bigger popularity among Ukrainian consumers was won by beer … by Oasis CIS. The success of the brand can be to a large extent explained by a brilliant marketing strategy, which was planned at the stage of the design development. It successfully leveled down the negative traits of nobody’s brand …, which harbored the main risks besides, the positive traits were underlined. Further development of … can only be stopped by competitors, who took up this “retro” concept and use it in their version of … . Though … managed to win appreciation of beer lovers practically without expenses for promotion, in 2013 there appeared outdoor advertisement and a commercial on TV, which emphasized the high standard of culture and the bar style of the beer with “…”.