Drinks Industry Logistics in the BRIC Markets - SWOT Analysis - Part II: Russia
This second part of the management briefing for March looks at the strengths, weaknesses, opportunities and threats for drinks companies in the area of logistics for drinks companies in Russia.
The quality of production, storage and warehousing in Russian can be high – although it can vary widely from industry to industry. The beer industry’s greatest strength is its professionalism, says Baltika Breweries’ president, Dr Isaac Sheps, who is also chairman of the Union of Russian Brewers. He notes that the country’s four biggest brewers - Carlsberg, Efes, Anheuser-Busch Inbev and Heineken – have introduced high-quality production, “technology and financial discipline and ethics.” The country is well-prepared for extreme weather and familiar with goods that may spend a good deal of time in transit, so storage and warehousing is generally efficient.
While the retail market remains fragmented, according to analysts, modern supermarkets use modern accounting, supply and distribution lines and generally operate professionally: “These will be key to foreign newcomers,” says one observer. On the other hand, retailers in provincial cities who handle smaller quantities of drinks will often have their own bespoke arrangements, and “can be either erratic or a safe pair of hands – often this depends on the individual concerned” says another analyst. Third-party networks operate widely and are seen as a key way of moving goods around – they are indispensible, analysts agree, but can come with challenges.
Analysts and drinks groups report that consumer confidence is reasonably high, and that Russians with disposable income spend it on a wide range of drinks across several price bands. Russia’s large population, large economy and large amount of natural resources make for resilient purchasing power and a consumer base that is receptive to foreign investment.
The vast distances involved in transporting drinks across Russia’s nine time zones is an unavoidable challenge to logistical operations in the world’s largest country. Baltika has ten breweries, but Sheps admits they are not all operating on full capacity: it is cheaper to maintain an under-used brewery amidst declining local demand than close it and transport beer thousands of miles. Meanwhile, almost all smaller drinks producers – for soft drinks as well as alcohol - often use outdated logistics technology.
So, long-term planning is required – but this can be tough in a country with a government that has as mercurial an attitude as Russia’s: for example, Western wine sales may have flourished since 2006, but that is in large part because of politically-motivated import bans on Georgian and Moldovan wines. The calculations that led to those decisions could easily be reversed.
Meanwhile, the market is weakened by an ageing and shrinking population, offering the prospect of diminishing rather than increasing returns.
A cultural issue to be mindful of is that Russian consumers – like their political masters – often express a harsh view of the West. “That’s a factor for Western companies to think about,” says one Russia-based analyst. “It shows itself in hard-nosed or unhelpful attitudes from authorities or even within supply chains, where foreign companies may feel as if they are being picked on or singled out for scrutiny that national companies avoid.”
There appear to be substantial opportunities for foreign logistics companies serving the drinks industry, particularly contract logistics involving the organisation of product flows, storage, transportation and the management of ordering and inventory information. “In terms of transportation and shipping, Russia is substantively behind,” says Tom Pirko, president of Bevmark Consulting, “There’s an opportunity for those in the business of supplying manufacturing and distribution facilities to do quite well.” Economies of scale offer the best opportunity to improve profits – as long as companies do not try to spread themselves too thinly. “They shouldn’t try and sell to all of Russia,” advises Richard Hall, director of Zenith International. Another analyst, who prefers not to be named, says the best approach is to target logistics for specific cities or regional areas: “Don’t try to tie up a plan that ships goods to Irkutsk and on to St Petersburg,” he advised, “even if you find that some Russian companies do that because of their well-established contacts.”
The best approach is essentially to “build a small, strong spider web, then expand it gently without breaking it,” advised another analyst. Several observers recommend that companies pay for good advice from any of the reputable international accountancy and financial analysis firms in the country. “They’ve been there for 20 years and have seen it all, including the mistakes,” was a typical comment.
Organised crime and low-level bribery is by some distance the biggest headache for drinks logistics providers. The system works on pay-offs, say experts, and companies must “make friends above board and below board … creating a business climate that is hard to deal with”. It can also be intimidating, and some senior manufacturers have felt it necessary to take the step of hiring armed guards to travel around.
This also affects third-party networks, with several interviewees (preferring to remain anonymous) expressing exasperation at being required on some occasions to pay bribes or cuts to every part of the supply chain. “It’s not something you ever feel comfortable with – even if over time some of the people who insist on these cuts are actually very reliable and trustworthy when it comes to delivering what you want them to do,” says one analyst. Generally, these tend to be characterised by long-term arrangements, as most operators prefer to establish a monopoly of their services.
To mitigate this, companies must identify trustworthy, local people for senior management or partners, but it’s a pot-holed road: “You have to get past the authorities, the taxes, the corruption, the red tape: It’s a very difficult climate to get a foothold in,” notes one seasoned observer.
There is a ban on sales of alcohol stronger than 0.5% between 11pm and 8am and on all alcoholic sales from kiosks, one of the most traditional of Russian retail outlets, and on sales from bars near schools and sports centres. Internet and newspaper adverts for all alcohol are banned, and a billboard ban for spirits, something fiercely opposed by producers across all sectors. “In response, you have to be really creative with your promotions,” warns Sheps, as well, others add, as your positioning of goods in shops.
To read the SWOT analyses of the other three BRIC markets, click here.
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