Heineken has lost market share to rivals in Russia

Heineken has lost market share to rivals in Russia

Heineken has emerged as the immediate loser from Russia's three-fold tax rise on beer and is expected to report market share decline in its half-year results next week.

Heineken is almost certain to report next week that its volume share of Russia's beer market has dropped in the first half of 2010. The Netherlands-based brewer faces a challenge to recover lost ground at the same time as improving profitabilty in Russia, which remains the world's third largest beer market.

Brewers have been severely tested in Russia in the first six months of this year after the country's Government introduced a three-fold tax rise on beer in order to help reduce harmful drinking. Yet, all of Heineken's major rivals in Russia have either gained market share or held relatively steady in a market that has shrunk by around 9% when compared with the first half of 2009.

SABMiller has reported volume declines largely in-line with the market, while Carlsberg said yesterday (17 August) that its Baltika Breweries business has extended its leadership of the market by around 1%, to 40%. Meanwhile, Anheuser-Busch InBev, which operates the number two player, Sun InBev, regained ground lost last year with a volume sales decline in the first half of 2010 that was nearly 3% lighter than the average. Finally, Efes Breweries International has reported volume sales gains in Russia since the start of the year.   

All brewers have largely passed on the tax rise to consumers via price increases, but Heineken has struggled.

Sanford Bernstein analyst Trevor Stirling told just-drinks today that Heineken suffered after raising prices early following the tax hike. "They led the charge on pricing," he said, adding that the brewer has also been "deliberately rationalising" its portfolio in Russia in order to improve profitability in the business.

Bernstein estimates that Heineken's market share has fallen by 2.7% in Russia between the first half of 2010 and the same period of 2009.

If this erosion continues, then the brewer could lose its third-place spot in Russia to Efes. Heineken had an 11% volume share of the beer market at the end of June, with Efes on 10%, according to figures compiled by Russian research group Business Analytica and published by Carlsberg.

"Heineken's profitability in Russia is not what it should be," said Stirling. He added that the brewer needs to create "a smaller, more profitable business and then rebuild from there". 

Heineken has started working to achieve just that in Russia over the last 18 months. As well as focusing on more premium beers, including the Heineken brand, the group announced 270 planned job cuts in the country in the second half of last year. The cuts were part of a plan to consolidate brewing operations and meet targets under the firm's global, three-year 'Total Cost Management' project. At the same time, Heineken Russia has doubled capacity at its Patra Brewery in the last four years and invested to increase capacity at its Volga Brewery. 

Favourable winds on Russia's beer market could aid Heineken's restructuring. Russia's beer market has not fared as badly as some feared following the excise duty hike. Market leader Carlsberg originally predicted that the market would shrink by up to 14% in 2010, but yesterday said the decline would be less than 10%.

Over the longer term, the market is expected to return to growth. "Normally, beer has grown in-line with GDP in Russia," said Stirling. "I don't see any reason, once we're at the far end of the excise problems, why we won't see growth occurring again."

Russia's GDP rose by 5% in the second quarter of 2010, the country's Federal Statistics Service said last week, which is a positive sign. There are also indications that the Government, having hiked tax on beer, is now more interested in curtailing sales of illegal vodka in order to reduce alcohol misuse in the country.
That said, Russia's econ omy has been topsy-turvy at best since the break-up of the Soviet Union and volatility seems to be one of the country's few constants. The current grain shortage and, from a socio-economic point of view, the deadly forest fires enveloping certain parts of the country, are a case in point and could threaten brewers' performances.  
For now, though, it is Heineken that has the most work to do. The group will report half-year figures on 25 August.