The industry indices Evaluating the regulation results Market reformation

The industry indices

In the first half of 2012, when the beer sale limitations were not brought to force yet, the market started demonstrating signs of recovery and the production dynamics was not obviously negative. However in the second half of the year, due to the state regulation measures the output started falling and stabilized only in June 2013. All in all in 2012 the beer production fell by …% to … mln hl, and in the first half of 2013 by …% to … mln hl according to the on-line data of Rosstat. Certainly, this dynamics cannot be considered a tendency, but the industry experienced abrupt sales falls twice in the heat of the economy crisis 2008/2009 and after a threefold increase of excise in 2010/2011. The period of relative lull was short.

Under our rough estimation, at the end of 2012, … mln hl of beer was produced, which can be called excessive volume, intended for realization in 2013. This volume roughly corresponds to the previous volume of overproduction and so it did not influence the output dynamics. Thus, the brewers can somewhat mitigate the excise raise, which took place at the beginning of the year.

Let us consider the volume of Russian beer market to equal the total of the trade balance. To calculate it we will turn to the statistics of the Federal custom service.

In 2012 the volumes of import and export grew, and in absolute terms the volume of exported beer increased much more. This means that less beer came to the domestic market. At the same time, expecting the excise growth, the brewers output more beer than the previous year and this volume, having been transmitted to 2012, not only made up for export, but also leveled the negative dynamics a little bit. Under our estimation, by the end of 2012, the market shrank by …% to … mln hl.

In the first half of 2013, under our estimation, the external trade and the formed stock led to a dynamics which was less negative than that of the market. Thus, according to our assessment, Russian market in the first half year decreased by …% to … mln dal.

Provided the low base of the second half of 2012 and the hot summer weather in 2013, one can expect the results of 2013 to be moderately negative. We assume that the reduction of the beer production and market will be roughly at the level with the last year and equal about …% (to … and … mln hl accordingly).

The retail prices for beer have grown by …% to … rub./l since June 2012 according to Rosstat data. The price dynamics has sped up by … p.p against the relevant period of the previous year. The main component of the higher retail price for beer was excise, which since 1 January, 2013 has increased by …% to … rub/l (in 2012 the excise grew by …%). According to the preliminary assessment, average income in June 2013 grew by …% to … thousand rubles. The index of beer affordability (the share of a beer liter in the average income) practically stayed the same, at the level of …%. At the same time, one should note a negative factor, which was connected to the constant exceeding of the beer price growth rates the dynamics of consumer’s goods, that is, the difference in the growth rates equaled … p.p. June 2012 and January 2013 constituted exception, when the ban of beer sale in kiosks came into force. Obviously during these periods the stocks of beer in non-stationary outlets which had to stop their operation were sold out. By value, if we base on our estimations of the trade balance and Rosstate data on the dynamics of retail prices for domestic and import beer*, the beer market in the first half year of 2013 increased only by …% to … bln rub. This is a very low growth level, as the same period of the last year saw …% growth. * One should keep in mind that the market volume by value is an imputation, as about 8% of beer is realized in HoReCa establishments, where the trade mark-up can vary, but as a rule, much higher. As in the first six months of 2013 the ruble rate perceptibly declined against the relevant period of 2012, in dollars the beer market shrank by …%, having amounted to $… bln. Perhaps, in order to compensate the consumers’ excise rate growth and to unload the stock, built up after the trade ban in kiosks, at the beginning of 2013, the producers at a range of regions decreased the selling prices for beer. At the average in Russia the price decrease amounted …% from December 2012 till February 2013. However, as early as in May, the producers’ prices spiked, so the common trend of the selling price increase of beer fell just a little. Thus, the producers’ price growth over 12 months, sited in June 2013, reached …% to … ruble for a beer liter, and over the relevant period of 2012, it comprised …%. Basing on these data and the volumes of beer supplies, one can roughly estimate the revenue volume of Russian producers from their main activity kind. In the first half year of 2013, it declined by …% to … bln rub*, which sharply stands out against the background of …% growth in the first half of 2012. Such difference can be explained by a period of price reduction. When evaluated in dollars, the fall was even deeper – about …%, to $… bln. * Without regard of VAT and excise, on the basis of updated information by Rosstat

The beer market segmentation reflects several tendencies. One of them is that lesser significance of kiosks as a channel of beer distribution on trade, in the first place increases the importance of minimarkets (small self-service shops) and of groceries.

Another tendency is connected to the increasing share of the most expensive beer and decreasing share of the cheapest beer. This trend can be explained by the growth of beer average price, as well as by high marketing activity of the companies in the import segment and by higher popularity of brands with luxury positioning.

Evaluating the regulation results

The period from the second half of 2012 to the second half of 2013 turned out to be another “obstacle course” for Russian brewers as the state regulation became much stricter. Fist the process of eliminating of such an important distribution channel as kiosks, was progressing steadily and undoubtedly. Additionally, it was prohibited to sell beer at night. Furthermore, brewing companies were banned to advertise their production anywhere but at the outlets. Finally, the government represented by Rusalcoregulation set eyes on the process of beer production and made brewing companies install counters of final production (recently this requirement has been abolished for businesses outputting more than 300 thousand liters per year). The only positive moment for the brewers was that the excise policy of the state has been recently foreseeable.

While the advertisement ban and complicated process of counter installation could rather influence the distribution of sales among companies, the market was really affected by the prohibition to sell beer in kiosks and other objects of non-stationary trade. In particular, the both stages of the prohibition introduction were followed by significant fluctuations of production and sales, the total of which was negative.

The first stage of the prohibition, i.e. introduction of transitional limitations began on June 1, 2012, when kiosks were prohibited to sell beer containing more alcohol than 5%. One could expect this transitional prohibition not to have big influence on the sales as non-stationary outlets could have changed their product range and continue selling beer. However a host of other limitations came to force – it was prohibited to sell beer at transport stations, at wholesale and retail markets, at railway stations and many other places. Besides, regional administrations obtained wider authorities for beer trade regulation and they surely took advantage of the opportunity. Control became much more complicated and obligatory contribution for beer trade went up. According to our rough estimation about one third of kiosks had to stop beer selling.

Consequently, as early as in July 2012, brewers’ supplies fell by …%. Then the dynamics gradually leveled, but in general it was apparently negative during the second half year, and the reduction was …%. Absolute prohibition to sell beer in kiosks came to force on 1 January, 2013. The brewers’ shipments shrank for the second time, as by the end of the first half of 2013 their decline amounted to …% again.

Under different estimations, non-stationary outlets accounted for …-…% of beer sales. If we assume the base to be 12 months, that is, the volume of beer market from the second half of 2011 to the first half of 2012, the kiosks will accordingly account for … to … mln hl of beer. During the relevant period 2012-2013, the market reduction amounted to … mln hl. If we consider that the decline was fully caused by the ban to sell beer in non-stationary outlets, then we can say that about …% of beer sales went to other distribution channels. But if we compare the period of absolute prohibition (first half of 2013) to the period before any prohibition (first half of 2012), the share of compensated sales will be significantly less – …%. This corresponds to market loss of about … mln hl of beer yearly.

Kiosks belong to impulse purchase places. Besides, buying beer in kiosks was associated with street style of consumption. Additionally, kiosks to some extent make up for lack of democratic HoReCa establishments. One could expect beer lovers to attend bars and restaurants more actively. But the volume of losses that we calculated approximately equals all beer sales in HoReCa. Possibly, if regional and federal authorities do not suppress this initiative, small bars can spring at some the places of former kiosks. The number of HoReCa establishments including networks is currently growing too.

Besides, the potential of market recovery is connected to corner stores expansion, and they can acquire development impetus on getting beer category. Apart from it, the role of specialized beer retail will increase too, as most of shops selling draft beer belong to stationary outlets.

Market reformation

In the recent years, the competitive situation on the beer market has undergone changes, as well as the preferences of Russian beer consumers. In the context of competition of the leading producing apparent redistribution of positions could be observed. At the same time, the pendulum swung in favor of big federal companies, which had been rapidly gaining market weight till 2007, and seemed to absolutely dominate the market. Loss of stability by many Russian mass brands became a new tendency.

And on the contrary, sorts by medium and small producers, are gaining market weight. The emphasis is no longer placed on “live” beer, which was an attempt of medium breweries to distance themselves at the first stage of their recovery. Neither the focus is made on “craft” by small producers, which accounts for only several per cent of the market, and does not have a serious impact on the market volumes. Beer lovers are somewhat tired of standard flavors and many variations of mass brands and aggressively swanky advertising campaigns. However, the total prohibition for advertisement outside supermarkets draws the flavor, package, and the product identity to the foreground.

Если в 2008 году совокупная доля рынка ведущей пятерки производителей составляла …%, то к 2012 году она опустилась на … п.п., составив …%. В натуральном выражении TOP-5 компаний за этот период сократил продажи пива на …%, до … млн. дал. Зато региональные производители и импортеры вместе с 2008 года увеличили продажи на …% до … млн. дал. Таким образом, сегодня уже каждый четвертый литр пива выпускается средними (как правило, региональными) компаниями или же импортируется из-за рубежа.

While in 2008, the aggregate market share of the leading five producers comprised …%, in 2012 it went … p.p. down having amounted to …%. By volume TOP-5 companies over this period cut their beer sales by …% to … mln dal. Instead, the regional producers and importers together since 2008 have raised their sales by …% to … mln dal. Thus, currently every forth liter of beer is produced by a medium sized (usually regional) company or is imported from abroad.

We should say that this tendency did not immediately influence the market leader. Under our estimation, Russian subdivision of Carlsberg Group perceptibly yielded their positions to regional producers as far back as in 2010. Further, Baltika experienced slow market share reduction which continued till 2011.

The negative dynamics was connected to the attack to the company’s big brands from cheaper local brands by medium sized producers. Baltika tried to resist this attack by own economy regional brands, however, in our view, this strategy was not very successful. At the same time different sorts of the title brand Baltika demonstrated multiple-valued sales dynamics. According to the report in 2012, the company kept profit in Eastern region and did not reduce the market sales, though it cut supplies to distributors.

The presentation of Baltika activity in 2012 pointed out a tendency which in our opinion is dominating the present beer market: “The consumers’ behavior reveals stronger demand for beer of higher quality or special formula. Besides, the location of production and history of certain product are growing more important. This is demonstrated by growing popularity of more expensive brands, local, so called “nostalgic” sorts and draft beer”.

Branding activity of the company in 2012, in general corresponded to this tendency and was high as compared to other federal companies. Brand Holsten moved from SABMiller portfolio to that of Baltika and got enriched by wheat sort. Provided the sales stagnation, such expansion can make small but significant contribution into increase of Baltika market share. And in December the production of another license brand, Finnish beer Koff was started. Besides, Baltika Razlivnoe and regional sorts expanded their flavor range. Under our estimation, in 2013 Baltika has showed stability against the background of falling market, still taking up a share from the immediate competitors. Russian subdivision of AB InBev continues rapidly cutting the production and losing the market share, yielding it to regional producers, Baltika and Heineken. The economy and mainstream brands which form the bulk of the company’s sales are the first to lose in this competition. Besides, the company is constantly under growing pressure in the network retail, where the main competition takes place after the ban to sell beer in kiosks. The efforts of AB InBev to keep the profitability conflicts retaining the same volume. Giving the major shelf space to the marginal brands such as Sibirskaya Korona, Bud and Hoegaarden, the company, in our opinion loses chance to compete in the current conditions, when the possibilities to advertise a product are limited. Though the launch of “Tinkoff. Avtorskoye” brand evidences that AB InBev is trying to adjust to new conditions within the chosen category. The company faced the most difficulties in the regions where beer consumers are not willing to pay more for branded production, namely the Volga region and Central Black Earth region. The brewery in Kursk had to be closed. Besides, judging by AB InBev statements and press announcements, subdivision in Novocheboksarsk (Chuvash Republic) is closing. In order to load capacities of Ivanovo plant, the production of beer Tinkoff. Avtorskoye was started using equipment brought from Saint Petersburg. There is an interesting tendency to raise effectiveness of distribution by partnerships with distributing companies. Report for 2012 announced the creation of such schemes. On the one hand, distributors have less work due to the ban for beer sale in kiosks, but on the other hand the intensity of work with the remaining channels of retail has grown. AB InBev used to be a pioneer in creating the modern distribution system based on agent schemes. But today the company will probably again have to take a hold of the distribution system. Company Efes failed to stay the second on Russian market for a long time. Complex integration processes had a dominant role in the rapid reduction of the market share. The joined portfolio of Efes and SABMiller looked balanced, as Efes brands were better represented on the market of inexpensive beer and SABMiller brands had better position in the premium segments. But significant expansion of the product range collided with the present market realias. Thus, according to Efes report for 2012 the integrated portfolio received … brands. By contrast, Baltika has a little more than … national and regional brands in its portfolio, while its share is twice as large as that of Efes.

Such expanded range would be “cramped” on shelves and in fridges even in favorable market conditions. The sales of some brands on “the second tier” are inevitably falling, due to difficulties with their promotion and low loyalty of Russian consumers. Besides, famous brands by SABMiller are squeezing out of the market Efes brands which compete with them in the subsegments.

Nevertheless, Efes continues bringing new beer sorts to the market. In April 2012, there appeared premium brand AmberWeiss which is positioned as “original wheat, unfiltered beer brewed by classic formula”. Obviously, idea of AmberWeiss belonged to SABMiller and was developed by Efes. As for Efes own developments, last year there appeared unfiltered sort Stariy Melnik iz Bochonka and apple sort of premium women’s beer Redd’s.

According to our estimation, simple sum of the companies’ shares in 2011 provided Efes and SABMiller with about …% of the market but in the first half of 2013 the share of the joined company comprised …%. That is why the integration cannot be called successful regarding the sales volumes.

Company Heineken is actively restoring the sales it lost in the midst of crises, though it has not achieved the positions of 2008 yet. The company reached its turning point in autumn 2010, since then the natural volumes of Russian subdivision of Heineken have been growing and the market share is steadily increasing. Even in 2012 the company sales grew by nearly …% and in the first half of 2013 the sales were decreasing slower than the market in general. Heineken positive dynamics was attained mostly due to active steps in the economy segment both at the federal and the regional levels.

In competitive war between the market leaders Heineken was once thrown out of the mainstream segment. In the present situation the company made the choice that lay basis for its further steady development. Alongside with premium and superpremium international brands Heineken took to developing affordable regional brands with clear geographic link, such as Okskoye, Shikhan, Stepan Razin and other brands, of which there are more than 10. Some of them ranked first on the local markets.

Sizable marketing budgets were directed to federal economy brand Tri Medvedya. In accordance with the popular tendencies, it has recently received a “bar” sort Tri Medvedya Z Pivnice, which took some of Zatec hop from the competitor and unfiltered sort Tri Medvedya Osoboye.

As a result, according to company statement in 2012 brand Tri Medvedya increased sales by …%. At the same time the sales volume of Okskoye, bottled by subdivision Volga, grew by …%. According to the company data, Okskoye leads the pack in terms of the sales volume in Nizhniy Novgorod region. Basing on the statistics, other regional brands also made a contribution into the company growth last year. In recent years there has appeared an interesting tendency of their expansion outside the domestic markets, which again can be explained by Russians’ growing loyalty to brands connected to the original place of production. Regional brands by Heineken can become extra valuable assets due to the ban against beer advertising.

Certainly Heineken, being a European and international player sets the greatest value upon development of own premium brands. According to the company information, in 2012 its major brands, namely, title Heineken and Amstel Premium Pilsener forged ahead. Their promotion is fostered at the global level. Beside import brands, the biggest among which are popular in Russia brands such as Krusovice (far-abroad beer sales leader) and draft Guinness Draught, are getting ever more significant for the company. According to our estimation, the both brands demonstrated some sales growth last year. Finally, flavored sorts of federal brands Zlaty Bazant and Doctor Diesel made their contribution into the positive dynamics.

Regional beer production, ths. dal. Source: Rosstat, our calculations