Beer faces up to the Russian bear
Outstanding growth has characterised the Russian beer market for a number of years now, but the numbers are starting to slow. Many believe acquisitions are needed to sustain the investments made by the multinationals, though as Mark Rowe discovers not all are convinced this is the correct path to follow.
Is Russia's beer market, so buoyant for the past couple of years, about to become a bear market? For the first time since the turn of the century, growth forecasts for the industry have begun to dip. Beer consumption in Russia is forecast to grow by "only" 6% to 9% to about 75.7m hectolitres this year, compared to 11% in 2002 according to the Russian State Statistics Committee.
The gloomiest forecasts say growth will drop to just 1% by 2010, as increases in disposable income in Russia slow down. This raises concerns that the industry's major players will have to acquire in order to keep profits as high as investors have come to expect.
Yet while growth forecasts have just begun to dip, it is worth bearing in mind that a juggernaut that slows down from 70 mph to 50 mph is still travelling at a fair clip. In many respects, the beer market in Russia looks extremely rosy, particularly compared to the western European beer market, which the Russian Beer Brewers Union predicts should grow by less than 3% this year.
Beer accounts for 4% of total consumer spending in Russia and brewers are forecast to produce 86.8m hectolitres a year by 2007, from 70.9m last year, generating nearly US$8.7 billion in revenues. Russia is now the world's fifth-largest beer market after Brazil, Germany, the US and China.
According to forecasts by the Russian Beer Brewers' Union, consumption will reach 57-63 litres per capita by the year 2007. This is still some way short of the 156 litres in the Czech republic or 104 litres in the UK, but it strongly suggests that Russia is a long way from reaching the saturation point of many other European markets.
While the potential for a robust tendency toward growth remains, there is increasing concern that many of the great profits made so far have come by investing heavily in domestic production facilities to meet new demands for quality and in meeting the exponential growth in disposable incomes among many Russians. But competition is now heating up and income growth is starting to level off. In order to kick-start the market, analysts now believe investors keen to extend their share of this increasingly competitive market will have to buy more domestic breweries and could result in the biggest round of takeovers in Russia since 1987-1998 when the Baltika group began acquiring a number of local breweries.
The big companies are scrutinising smaller breweries that are dotted throughout the Russian federation for potential takeovers as the way forward for expansion. There are still many independent brewers, like Ochakovo and Red East, each accounting for 7% of the market and which look attractive, but are likely to strongly resist approaches.
There are also a number of smaller independents, seen as ripe for consolidation into bigger firms, and considered the most attractive targets for a takeover.
Indeed, the country's beer market is already characterised by ownership by foreign firms. As the biggest Russian brewers collectively control more than 50% of the market and are already owned by foreign firms (BBH's Russian brands, for example, account for 36% to 37% of the local market), such takeovers are likely to see these giants get larger and some other international firms increase their presence.
Baltika is now of course the market leader for beer in the former
Baltic republics and Russia and now owned by Baltic Beverage Holdings (BBH), which belongs to Carlsberg and Scottish & Newcastle Breweries, which also owns Russian brewers Pikra, Yarpivo and others. Other potential buyers include the bigger names, such as Heineken, which owns Bravo beer and just 4% of the Russian market. Thony Ruys, chief executive of Heineken, has intimated that his company would like to expand in the Russian market but would not be bounced into paying above market prices for acquisitions.
"There is no doubt we will see some consolidation in the next couple of years," said Alexei Krivoshapko, a consumer goods analyst for United Financial Group. "The big international players and large domestic companies will be looking to increase their geographical footprint.
There are a dozen or so smaller companies with capacity, which ranges from half a million to 1.5m hectolitres a year. They offer obvious attractions.
"But beyond that it is difficult to see," he said. "There are a number of domestic players that have a good market share but they also have a domestic pride. They are enjoying secure profits and have no reason or pressure to sell up. There may be some bigger mergers but in truth mergers haven't really worked yet in Russia."
Sun Interbrew, which owns eight breweries including Tolstiak, Klinkoye,
Sibirskaya, and owns about 15% of the market, is another thought to be looking to expand. Its main marketing objective has been to promote a domestic lager brand to be its primary brand in each market. Before its own US$130m merger with Interbrew, Sun's growth had been sustained on constant and relentless acquisitions throughout the regions of Russia. A spokeswoman for the company declined to comment in detail ahead of company results next month (September) but confirmed the market was "sensitive" at the moment.
Analysts also expect to see moves from players with smaller traditional holdings in the region including the Icelandic brewery Bravo, SABMiller and the Turkish producers of the Efes brand. Synebrchoff, the Finnish brewery, has also made overtures to the Vena brewery in St Petersburg.
However, Nigel Popham, an investment analyst with Teather & Greenwood, believes the big brewers should hesitate before accruing more companies in Russia. "Companies will tread quite warily because many of the smaller companies haven't really got a critical mass. People will always be wary of making acquisitions in Russia. There are still a number of business practices over there that would be frowned on in the West. I think it unlikely that BBH will buy up many more companies.
They will probably look to expand through organic growth and promoting the market share of the Baltika brand.
"While some observers are more cautious, we think BBH for example will grow by eight to 10%; the key is whether this dip in growth is a one-off blip or the start if a slower trend."
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