By John Helmer, Moscow
The last time Russian beer drinkers did something unusual was in the unseasonably cool summer of 2011, when sales of the big brand beers dropped sharply. Read all about it. It is happening again, on this occasion during winter, only now the drop in consumption is even more dramatic. This time it looks like a combination of government actions and dwindling numbers of susceptible adolescents are driving the big-money big-brand, foreign brewing companies out of the market to the advantage of Russia’s smaller, regional brewers.
The first-quarter report just out from Inbev (Belgium), the Annheuser-Busch conglomerate which makes Budweiser, Stella Artois, Sibirskaya Korona, and Klinskoye acknowledges that “in Russia, beer volumes fell 17.0% driven mostly by a challenging industry impacted by the new sales restrictions, the carryover of the media ban implemented last July, and price increases following the most recent excise tax adjustment. Our estimated market share remains under pressure, and balancing profitability versus share is a major focus.” Just one Inbev beer brand, Bud, “continues to perform well and grew by over 25% in 1Q13.” This downturn follows a 12% decline in volume for last year, as well as a contraction of Russian market share, explained in the annual Inbev report as “driven by the implementation of tax-related and other selective price increases ahead of competitors, and promotional pressure in key account channels.” With higher priced beer, the loss of sales volume was offset for Inbev by a 19% jump in Russian earnings. Inbev currently claims a market share of almost 16%.
Other foreign brewers are also reporting a downturn in their Russian sales volumes. Heineken (the Netherlands), with a market share last year of 13.4%, reported that beer sales volume grew “in the low-double digits” over 2011, but in the first quarter of this year, the Russian sales volume “declined in the mid-single digits.” The blame, says Heineken, is on “new legislation banning the sale of alcoholic products in kiosks and a further excise duty increase.”
Carlsberg (Denmark), with the leading market share of 38.2%, concedes that in 2012 the Russian market was “flat”, but management has described this lack of growth as temporary, due to “short-term disruption from closures of non-stationary outlets”. That last phrase refers to the new government ban on the sale of beer from kiosks. This year, according to the Carlsberg forecast, there will be more “destocking” in the first quarter. A first-quarter report last week reveals that volume of sales dropped by “mid-single digit percentages”, and revenues also fell. The Carlsberg share of the contracting Russian market was up slightly to 38.4%.
Anadolu Efes (Turkey), the other big-brand foreign brewer in the Russian market (in 2012 it acquired SAB Miller with its own market share of 7%) is also acknowledging the downturn in its report for 2012. “Lower volumes on an operating proforma basis in FY2012 was mainly driven by weaker volumes in Russia, where our performance was negatively impacted by the integration issues and relatively high pricing. All operating countries other than Russia achieved significant growth rates in FY2012, ranging between mid-single to low-teens levels.” The Efes market share in Russia contracted last year to 16% from 17.4% in 2011. The company has yet to release its first-quarter result.
An analysis by Vadim Drobiz, director of the Center for Research on Federal and Regional Markets for Alcohol (TsIFRRA) in Moscow, suggests that the rationalizations of the big-four brewers are misleading. According to Drobiz, they will continue to lose market share and sales volumes, as the Russian beer market undergoes an irreversible change.
“In 2007 this was the peak year. From 1995 to 2007, western companies have monopolized the market; they have invested huge money in advertising; they really formed a generation of beer-drinkers and set a record unmatched in any other country. Consumption and production of beer from 1995 to 2007 grew by 5.5 times – from 15 liters per person to 81. This  is the peak year with peak demand. From then on consumption and production began to decrease for obvious reasons.”
“The first reason is the too rapid saturation of the market, its supersaturation. That is, the consumers cannot continue to grow. Either [the numbers and volumes] must stabilize or they must decline. The second reason — and this is probably even more important than the first – is demographic. Into the beer market have come young people in the 17-18 year old group. They have been drinking since 16, their active [drinking] fully starts from 17 to 18. In 2008, on to the market have arrived young people who were born in 1990-91. But then, between 1990 and 1998, the number of children born in Russia fell by 2.5 times. Therefore, from 2007 to about 2015, every year the the number of young people entering the beer-drinking market will be less by 2.5 times from the pre-2008 base. This is the demographic reason for the decline in beer volumes.
“Then there is the third reason. In late 2008 the socio-economic crisis began worldwide and in Russia also. In crisis times, in all countries consumption of low-alcohol level products falls (beer, wine), while the consumption of hard liquor rises, especially the varieties which are cheap and strong. There are nuances in this trend. In restaurants less alcohol is bought, more in shops. Still, the growth in consumption of strong [alcohol] is due to the fact that this is a more effective antidepressant than low-alcohol drinks.
“What has happened next on the Russian market? In 2007, foreign companies have occupied 92% of the beer market. Ochakovo took 4%, and the remaining 4% was taken by about two hundred small and medium-sized Russian beer companies. And it seemed that everything would be fine. But the market has declined even faster than the first reasons can account for. About three years ago the state banned the advertising of beer until 10 pm on television. This weakened the intensity of the massive information war against the consumer waged by the beer companies.
“Next, in 2010, the rate of excise duty has increased by three times. The rise in prices has not particularly influenced the consumption of beer or caused a reduction in the consumption of beer. Nonetheless, the government has had a victory. In 2009 the excise duty was 3 roubles per liter of beer, and the state has received 30 billion roubles of excise tax. In 2010 it received 87 billion roubles. That is, the rate has become 9 roubles. Today in 2013 the rate is 15 roubles. Next year it will be 18. And while this isn’t a powerful factor in reducing the consumption of beer, the state is gaining fiscally.
“But there is a negative effect. As soon as the excise tax on beer surpassed the 10 rouble mark, I believe that the illegal market of beer has grown dramatically. And first of all, of course, the supply of beer on tap. This beer is made by small and and medium-sized companies, primarily Russian. The market of illegal beer in Russia is not less than 10%.
“So what happened last year? In 2012, the share in the Russian beer market of foreign companies accounted for 82%. This compares with 92% in 2007, 85% in 2011. The market share of Ochakovo fell from about 4% to maybe 2 to 2.5%. Over the same five-year period the share of small and medium-sized brewing companies had grown fourfold. And this is despite the fact that they were subject to the same oppressive measures of the state as the larger companies. So now their market share stands at 16%.
“What else has the government done, in addition to increasing rates of excise duty? Well, in 2012 it dramatically reduced the number of sale outlets. These [trade] points were selling the beer of all sources – small, midsized and large companies. Even though the beer companies claim that about 60,000 stalls and kiosks have been removed, I estimate that not less than 200,000 kiosks stopped selling beer, at least legally.
“Furthermore, through 2012 and to the present day, the number of stores which sell alcohol, including beer, has decreased across Russia from 330,000 to 270,000. By the end of the year I believe there will be no more than 200,000 stores. This reflects the new regulation barring the sale of alcohol within a fixed radius of such social sites as schools. Thus, a significant number of shops will leave the market and stop selling alcohol. This applies to all alcohol sources.
“More than six months ago, in July of 2012, the ban on advertising of alcohol came into effect. What has happened is that the enormous spending on brand advertising by western companies has been curtailed. Until then, certainly the small and medium-sized companies could not effectively compete with them. So you see the growth of their share is evident. I thought that most western companies would intensify their advertising where it is still allowed in stores and restaurants, but on the results of the first four months of this year, this hasn’t happened.
“So I think that the share of foreign brewing companies in Russia will fall to 75%”; lower than that is unlikely. The small and medium-sized companies will increase their share to around 23% compared to today’s level of 16%. [Without the promotion by advertising of national or international brands] the domestic brewers compete primarily in quality. This does not mean that the beer of the small and medium-sized companies is much better. But they are trying to raise regional loyalty and local taste. This trend is likely to continue.
“With the help of advertising the [foreigners] sell more expensive beer . But today they do not enjoy such privileges. Let’s see if they will now deploy a massive advertising campaign in shops. It looks like they will not do this because in Russia today, there is another interesting law, in addition to the ban on advertising. This is the a law prohibiting the dissemination of publicity harmful to children and adolescents. And this law, I think, can be quickly applied if in shops the brewers start a beer advertising blitz. In Russia the number of specialty shops is very small, so all the beer and spirits departments are located in retail stores. So if there is a big noise from the advertising of beer, then I think consumers will very quickly take advantage of this ban on harmful information for the young. This is why I draw the conclusion that in al likelihood the international companies will continue to lose more market share.”