Focus - Carlsberg's Next Russian Adventure

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Carlsberg was keen to put on a show in Russia last week. The Danish company had invited the analyst community to its main Baltika brewery in St Petersburg and wanted to reassure folk that, despite recent travails in the country's beer market, the future looks bright for the market leader.

Russia is vitally important to Carlsberg: while the Eastern Europe region as a whole accounts for 40% of group volumes and 39% of total EBIT, Russia dominates the region, boasting 77% of Carlsberg's Eastern European volumes last year.

Baltika, which Carlsberg took full control of in 2008 when it teamed with Heineken to break up Scottish & Newcastle, is the country's market leader, with 37.2% share as of the first half of this year. The second-placed Efes/SABMiller tie-up is way back on 16.6%.

As for the more general lay of the land, Russia is still a land of opportunity for brewers, as Carlsberg was most keen to point out. Per capita beer consumption is surprisingly low, at around 64 litres. For perspective, the UK is at around 70, Poland is at 90 and Germany is at just over 100 litres. Beer's share of alcohol throat is also weak, at 25%.

Despite all this fertile ground, the country has not been a happy hunting ground in the last two-and-a-half years. Russia was not immune from the economic downturn: the beer market peaked in 2007 and 2008 at around 110m. As the clouds gathered, the authorities weighed in, approving a 200% leap in excise duty on beer in 2010. Since then, tax has continued to rise, curbing growth in the category.

After a tough four years, then, it would appear that the rollercoaster seems to have slowed its descent: In the first six months of 2012, Carlsberg saw its Russian volumes rise by 2%.

Good timing, then, for Carlsberg to throw the spotlight on its Baltika division.

Amidst all the talk of a market that has turned a corner – a growing populace with a keener interest in beer and more money to spend – the president of Baltika, Isaac Sheps, presented his vision for the unit's future. Considering his previous success in the UK, Sheps' take on the matter deserves our attention.

See, it's all about elephants: Blue ones are good, red ones are bad (Check out page 43 if you don't believe me).

Alright, there's a bit more to it than elephants. But the use of the animals in Sheps' thinking goes to show that this is not your run-of-the-mill beer industry exec.

According to Sheps, the ingredients of leadership are a unity of purpose, a clarity of direction, a consistency of message, a challenging target and a tolerance of mistakes. This last leg is something new for Baltika – the Russian way has always been to exclude the likelihood of making a mistake; if an option includes the possibility of making a mistake, then it's not an option to consider.

Within the unit, meetings and events play an important role. While senior management meet three times a year to review strategy development and alignment, and key employees meet quarterly to look at the main corporate agenda and progress, all employees gather once a year at special events to dole out awards and recognition.

All this is augmented by a bi-monthly corporate magazine, a bi-weekly blog from Sheps and direct emails to employees who have performed well. Add in a focus on “The three 'C's of management” - Competence, confidence and caring – and there you have Sheps' recipe for success in Russia.

Sheps' favourite management strategy book is Alice in Wonderland. Yes, weird in itself, but he's certainly tuned in to the way Russia works when he cites a passage from Lewis Carroll's masterpiece:

Alice says to the Queen, who is not playing croquet correctly: “You can't play like that.”

The Queen replies: “That's the way we play here.”

To access the slides from last week's presentation, click here.

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