By John Helmer, Moscow
Global warming should be so good for Russia that, as long as St. Petersburg can be jacked up by a metre or so, it may pay for the Kremlin to accelerate the melting of the Arctic ice-pack, if it can. But will that be so good for the beverages Russians like for slaking their thirst? Beer, for instance.
According to the latest announcements from Denmark-based brewer Carlsberg, profits of 3.3 billion Danish krone ($591 million) have fallen by 20% in the third quarter, ending September 30. And because almost half of Carlsberg’s profits are earned from beer sales in Russia, the bad news must be Russian in origin. Carlsberg sells 45 brands of beer in the Russian market, ranging alphabetically from Baltika to Nevskoye, Uralskoye, and my favourite, Zhigulevskoye (as aerated and rusty as my old car).
The way Carlsberg tells it, this year its share of the Russian market is declining after years of growth. The company report on its third quarter and nine-month results, issued on November 9, says: “In the first nine months of 2011, Carlsberg Group’s beer volumes grew by 2%, net revenue growth was 4% while operating profit declined by 12% in line with expectations. In Northern & Western Europe, the total beer market declined slightly in the first nine months with poor weather conditions in July across the region making the trend worse in Q3. Excluding the tough comparisons due to very favourable weather conditions last year, the underlying Russian market declined in Q3 in line with Q2 and full-year expectations. The market is still negatively impacted by the high price increases to compensate for the significant excise tax increase in 2010.”
According the Carlsberg’s chief executive, Buhl Rasmussen, “2011 has been a challenging year and we have faced headwinds from rising input costs, adverse weather conditions and soft trading conditions in our largest market [that’s Russia]. Whilst we have been trying to compensate for the negative impact of these challenges through continued focus on driving efficiency in all that we do, we have at the same time kept our focus on profitable development by balancing volume and value growth.”
On the one hand, Carlsberg is claiming that the heat wave in Russia in the summer of 2010 was very good for beer sales, the cooler weather this summer wasn’t so good at all. But even when weather is taken out of the assessment, Carlsberg is admitting that its Russian market is shrinking. Why?
Carlsberg’s answer was to fire its Russian head, Anton Artemiev, and put in his place Isaac Sheps, who has been running Carlsberg’s British business. The company has also been telling industry analysts and brokerage touts that the fault is also the Kremlin’s for raising excise tax on beer in an effort to reduce alcoholism. Then there has been more than the usual amount of summer rain in Russia, which, falling on the grain crops, has reduced the quality of the brewer’s raw materials, especially barley, raising its cost. Finally, the Danes edge close to an awkward truth – competition in the Russian beer market is intensifying. Does that mean that Russian beer drinkers no longer esteem the Carlsberg products as they once did? And if so, what does this tell you about Russian taste in general?In August, Carlsberg had warned that because of its “price leadership” – real meaning: high prices for beer – it might make more profit, even though the volume of its beer consumed was declining. “Over the past 18 months, consumer prices on beer have been increased by an average of 30% reflecting the duty increase. Russian consumers have not yet fully adjusted to these substantially higher price levels resulting in an extended period of declining consumption delaying the overall recovery of the Russian beer market. Furthermore, unfavourable weather conditions during the second quarter also impacted consumption negatively.”
CEO Rasmussen explained that Russia was right to tackle alcohol abuse, but unfair (for Carlsberg) that the Kremlin was attacking beer rather than vodka. “In other countries that have been through this process,” the chief executive told a financial newspaper, “beer and wine have gained much higher share when overall alcohol consumption goes down. If they don’t reduce spirit consumption they won’t be successful in reducing alcohol consumption.”
This is what the summer did to Carlsberg’s share price (in Danish krone):
Whatever Carlsberg claims, Russian beer drinkers haven’t been cutting consumption this year, and the market has grown in volume. Vadim Drobiz, director of the Center for Research on Federal and Regional Markets for Alcohol (TsIFFRA), says that state statistics indicate that in the first nine months of this year, beer consumption has risen by 8%. That is the figure from Russian State Statistics (Rosstat). AC Nielsen surveys suggest the trend is moving in the opposite direction — down 3% this year, compared to last year. “But the market share of foreign companies has been on the decline for more than one year, while the market share of local companies is increasing. The reason for that is that people prefer cheap products. There’s another factor – there has been a decrease in the registered market (that is, in the legal market), but [consumption in] the illegal market is increasing. It’s so because of the higher excise rate. About 7% to 10% of the beer market in Russia is illegal, and it is growing.”
In the past, the domestic tax on beer has been much lower than for vodka or wine. But starting in 2010 and culminating this past July, in a campaign President Dmitry Medvedev claimed personal credit for promoting, beer consumption was explicitly targeted. Excise was doubled, and new restrictions have been imposed on age limits for public consumption, time limits on sales; as well as bans on popular forms of beer advertising. By statute for the first time, beer was classified as an alcoholic drink. These measures were explicitly introduced, according to the preamble to the new law, “to reduce the abuse of alcoholic beverages and prevent alcoholism among the population of the Russian Federation”, as well as “to prevent alcohol abuse among young people.”
According to Drobiz and other Russian market analysts, it had been a mistake on the government’s part to target its anti-alcoholism campaign in prior years on vodka, because this released cheap beer to rise in popularity among the young. Raising the tax has attacked their drinking habit, Drobiz said, and for foreign beer companies this has meant dwindling sales. “Beer in Russia is a very expensive product; for example, the cheapest beer in Germany is half the price of the cheapest beer in Russia, while Germany’s minimum wage buys more than three thousand bottles of the cheapest beer; Russia’s minimum wage buys just 184 bottles. But we don’t have an alternative to beer, and the situation on the beer market in Russia doesn’t have an impact on other alcoholic drinks. The Russian proverb ‘drinking beer without vodka is a waste of money’ is just a stereotype.”
|Imported beer – import duty is €0.6 per litre (Rb25)
domestic beer – excise duty:
– for beer with less than 0.5% of alcohol – Rb0.
– for beer with up to 8.6% – Rb10 in 2011, Rb12 in 2012 and Rb13 in 2013.
– for beer higher than 8.6% – Rb17 in 2011, Rb21 in 2012 and Rb23 in 2013.
Tigran Hovhannisyan, analyst for the Russian consumer products sector at Uralsib Bank believes the main reason for the contraction in the Russian beer market is the high excise rate. He adds that some consumers prefer soft drinks to beer, while there is no connection between the beer market and other alcoholic drinks. “Each of them has its own audience.”
Natalya Zagvozdina, the Renaissance Capital analyst for the sector, reports that not only Carlsberg, but other big companies too, are having problems. “The prices have increased by 30% and consumption of all alcoholic drinks (except for expensive ones) is declining. This happens because of policy. The government tries to make alcohol less accessible in time and place.”
VTB analyst Ivan Kushch acknowledges that the sharp increase in excise duty is making an impact over the past 12 months, but points out that the decline in market shares for the leading, foreign-owned brands of beer began back in 2007. As of 2010, according to the last study of beer market shares, he said Baltika led with 38%; Anheuser-Busch (InBev of Belgium), 15%; Efes, 11.5%; Heineken, 10.5%; SABMiller, 5.5%; and Ochakovo 3.5%. In October, SAB Miller, the South Africa-based brewer, bought out Fosters of Australia, and took a 24% share in Anadulo Efes, swapping its Russian and Ukrainian beer businesses for the stake in Efes, thereby hedging some of its vulnerability to the shrinking trend in the Russian market. The consolidation puts SAB and Efes ahead of Inbev in combined market share. According to Kushch, Carlsberg is falling in consumption volume, sales and market share because of the excise duty effect, and because sales are falling for other reasons.
In 2010, the last period for which the popularity of all consumer brands was measured in Russia, this is how beer shaped up, compared to the previous measurement in 2008. Note that in this study by Interbrand, the top three – all Carlsberg brands – were on the decline. By contrast, domestic origin brands Klinskoye and Sibirskaya Korona were gainers.
Does advertising make a difference, with the bigger spending capacity of the foreign brewers giving them an advantage over domestic beers? The answer appears to be that bigger brewers can overdose the market with cash. Vladimir Melikov explains that too much beer advertising spoils the taste for the stuff; he is quantitative research co-director at A/R/M/I Marketing, a member of the Millward Brown International network. “Beer brands in Russia for the past seven years have advertised with the strict limitations. These include a ban on the use of images of people and animals, and the opportunity to go on television only at later times of the day (which creates a sort of ‘beer evening clutter’). Of course, in these circumstances, it is unlikely that beer advertising in general will be as effective as for the other product categories. Our tracking researches confirm this – the average response to beer ads is almost one-half times lower than the response to advertising in Russia in general.”
“However, as elsewhere, one thing is the success of the average product category, and quite another is the effectiveness of targeted campaigns or advertising of specific brands. Our data on pre-test advertising – in Russia in recent years we have tested about 3,000 TV commercials – shows that the quality distribution of beer advertising on most of the parameters is not very different from other product categories. That is, there are those who are able to advertise much more effectively than their competitors.”
According to Melikov, two success stories among beer promotions are the Baltika and Velkopopovitsky Kozel brands. He believes that in case of Kozel, a Czech product, the creativity of the advertisements “provides good memorability for ad clips, and for brand itself — maintaining the image and stimulating demand.”
According to the report of the Interbrand study of 2010, Baltika is having trouble promoting itself as the beer for all Russians, and that its appeal to national patriotism (“true Russian beer”, etc.) has worn thin. Arsenalnoe, another Carlsberg brand, has been dropping, apparently as its “real men” consumer image has lost appeal. Klinskoye – owned now by Inbev, but originally a Klin-brewed beer from 1981 – is assessed by Interbrand as more effective than the Carlsberg promotions. Sibirskaya Korona started as a local Omsk beer in 1996, and has been taken over by Inbev and promoted nationally as a high-quality product. According to the Interbrand study, Sibirskaya Korona is “one of the historically very well perceived Russian beer brands – which has succeeded in building up an historical perception that does not actually represent reality. This is done through one of the clearest and most consistent communications campaign on the Russian market. Our research shows that the brand Sibirskaya Korona is well appreciated and is the purchase of choice because of its high quality, which some say is the best of all Russian beers. It is vital for this brand to keep up this standard and make it one of its core brand values. Some customers say this has already not been the case in recent years.”
One distinctive feature of the place which brand recognition and ad spending play in the current consumer culture of Russia, compared to China, is shown in these charts where alcohol branding is twice as potent in Russia, and telecoms branding also twice as powerful.
By contrast, after three financial and bank busts since 1990, Russians can’t be persuaded by bank (finance) branding to the same extent that Chinese are.
Advertisers acknowledge that consumer beer preferences are changing from image to quality. Igor Efimov, director of strategic planning for BBDO in Moscow, says that the restrictions on use of people and animals in beer ads, as well as their concentration later in the broadcasting schedules, have reduced the impact of image campaigns. “Instead, the brands that are growing now focus in communication on distinct origins and understandable, clear associations with quality.”