Integration heralds new phase for Baltika
The integration of Baltic Beverages Holding's ten Russian breweries is set to take the Baltika beer business into a new period of development, as Russia's leading brewer seeks to benefit from the efficiencies in sales and distribution the integration will bring. Dean Best reports.
Having expanded to become Russia's largest brewer, Baltika is entering a critical phase of its development. Baltika's origins only date back to 1990 when the first batch of beer rolled off the production line at the brewery's flagship site in St Petersburg. Now, after just 16 years, Baltika is looking to shrug off its recent growing pains and flex its muscles as a fully-fledged, grown-up brewer.
In the last year, Baltika's owner Baltic Beverages Holding (BBH), a joint venture between Scottish & Newcastle and Carlsberg, has pushed through the integration of its ten Russian breweries, which are spread over nine time zones.
BBH wanted to merge Baltika with three other breweries in which it held majority stakes. As BBH's Russian business had grown, the breweries, with separate brand portfolios and independent sales forces, had begun competing with each other - a potentially damaging situation as rival multinationals stepped up their investment in the country.
At times, BBH faced fierce opposition to its plans from minority shareholders in the three brewers but last month investors waved the merger through. The company hopes the integration will enable Baltika to take advantage of the scale it enjoys across Russia to drive efficiencies in sales and distribution.
The company also plans to take a more strategic role and give Baltika's management on the ground more power to run the company. "We needed to take out some layers of the business - people in the local markets should run the business," says BBH vice chairman Jorgen Buhl Rasmussen.
After over a decade of development, BBH believes a restructured Baltika can now push on and build on its position as the country's leading brewer. "The footprint of the business is unrivalled," says BBH chairman John Nicolson. "It's now of the scale where it can leverage its local and international brands. With a scale of twice the size of the nearest competitor, we feel that we're in a very good position."
Baltika believes its new structure can help it drive value across a Russian beer market where volume growth is not as buoyant as it once was. There's no doubt that the brewer looks well placed in Russia's regions. The move to integrate its businesses means its brands can now be brewed and sold locally, rather than transported large distances across the country.
Brewing closer to market should guarantee a higher quality of beer reaching the consumer, which is vital in encouraging brand loyalty in the competitive premium and what is often referred to as the "licensed" segment. These are internationally known beer brands, marketed as super-premium in Russia, either brewed under licence or by breweries owned by the international groups themselves.
Baltika has a 36% share of the Russian beer market, just under twice that of its nearest competitor, SUN Interbrew. The company is the leading brewer in each of Russia's key regions apart from West Siberia. Baltika is also the leader in each category of the beer market, except for the licensed segment where it lags some way behind SABMiller.
Nevertheless, the dynamics of the Russian beer market have changed. Buoyant consumption in the last decade has made Russia the world's fifth-largest beer market. The industry has enjoyed annual growth in the high single digits as the Russian economy bounced back from the chaos of the immediate post-Soviet years.
However, industry growth is slowing. While per capita consumption of 60 litres a year is still low by Western standards, Russia can no longer be regarded as an emerging beer market in the same vein as China, India or Vietnam. Nicolson said he expected Russia's beer market to expand at 3% a year "in the medium term" as growth in major cities like Moscow and St Petersburg slows.
To counter slower growth in some urban areas, brewers are looking to bolster their presence outside Russia's cities where per capita consumption is low. Inside the major conurbations, brewers are now focusing on building sales of their premium and licensed brands.
However, Baltika's position in Russia's licensed segment is a concern. "We're still a little bit light in share," Nicolson admits. "We will correct that and aim to grow our value share."
The Russian capital is, for now, the only key beer market in the country that has a substantial licensed segment. Nevertheless, over the medium to long term, the category will become a key battleground in Russia as local markets become more saturated and multinational brewers look to their premium and licensed portfolios to drive earnings.
As such, it's important that Baltika, despite leading in all other categories in Russia, does not let SABMiller get too far ahead in the licensed segment. According to figures from Russian industry analysts Business Analytica, for the first half of this year, Baltika held a 20.8% share of the segment, behind SABMiller's 31.8%. Baltika says it will generate US$60m to US$80m in cost-savings from its integration, money it intends to use partly to spend on marketing its brands - and the brewer has earmarked further investment for raising the profile of Foster's in Russia.
Baltika's acting vice-president for marketing Teimur Akhundov says the company has "plans in place" to boost sales of Foster's in Russia but insists it is "premature" to detail what strategy it has for the brand.
Akhundov also points to a raft of product innovations over the past year. The brewer has launched a slew of brands including Baltika Cooler and Tuborg Twist to tap into rising demand for premium and licensed beer. The success of a new product can never be guaranteed but Baltika's activity is a clear sign of its belief that innovation will be vital in Russia's consolidating beer market.
Baltika has grown to become the country's largest brewer as well as, the brewer claims, Russia's largest FMCG business. But after such a rapid period of growth it was vital that Baltika took a step back and re-assessed the business, especially given the signs of slower growth in the country's beer market and investment from global brewing giants like InBev, Heineken and Efes. The next decade will be as crucial for Baltika - and its multinational owners - as its first.
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