SOURCE: The St. Petersburg Times DATE: Issue #1088 (54), Tuesday, July 19, 2005 ************************************************************************** TITLE: Heineken Vies for No. 2 Spot in Russia AUTHOR: By Yuriy Humber PUBLISHER: Staff Writer TEXT: Two years ago the head of Heineken in Russia, Roland Pierme, set a target of capturing 15 percent of the Russian beer market. “Russia is a very big country, and in order to survive you have to be a big company. Our market share should be at least 15 percent,” Pierme said in September 2003 to business daily Vedomosti. “This goal could be reached either by increasing our own production or by acquiring competitors.” At the time, Heineken’s market share was just 6 percent, and Pierme’s declaration seemed more than optimistic. This year, in the space of three months, that perception has radically changed. Between May and July the Dutch brewer has made three acquisitions, considerably bolstered its production capacity and swooped up almost 11 percent of the country’s beer market, according to analyst estimates. The company now owns six breweries in Russia: Bravo and Stepan Razin in St. Petersburg, Patra in Yekaterinburg, Shikhan in Sterlitamak and Volga in Nizhny Novgorod. This makes Heineken Russia’s No. 2 brewer and about 5 percentage points behind the country’s No.2 brewery, Sun Interbrew. However, Alexei Kedrin, spokesman for Russia’s leading brewery, Baltika, says the Dutch firm “has a very big chance of becoming No. 2.” Alexei Krivoshapko, an analyst with United Financial Group, estimates that an organic change at No. 2 could take place in two to three years. Aton brokerage already lists Heineken’s next target as Pivindustria Primoriya, a brewery Sun Interbrew sold its 29 percent stake in to Alfa Eco last month. In addition, one of the country’s last independent plants, Ivan Taranov, put itself up for auction last month. Alfa Bank analyst Yelena Borodenko estimates Ivan Taranov’s market share as 5.3 percent. Industry watchers say Heineken is a potential buyer. Sun Interbrew could not comment last week as it prepared to list financial results on its bourses in Europe. BUYING CAPACITY A heightened focus on acquisitions and consolidations on the Russian market has come about just as the country’s “beer boom” is set to fizzle. Heineken said they expect the Russian beer market to grow by 5 percent this year — a massive drop from the 12 percent surge in 2004 beer sales. Troika Dialog’s analyst Victoria Grankina said that even 5 percent may be too optimistic. As the beer industry matures, annual growth will decline to be almost in line with the traditional beer markets of Europe and the U.S. Expansion of production volumes and breweries’ market shares will become more and more expensive. Analysts estimate that Heineken has already spent $170 million on acquisitions this year and the stakes for new purchases are set to skyrocket. Just this Monday, Sun Interbrew paid $201 million for St. Petersburg’s Tinkoff brewery — twice the sum that analysts estimate Heineken paid for the Stepan Razin brewery, which has a similar production capacity. Tinkoff commands just 2.1 percent of the Russian market, though Sun Interbrew said the buy will be important primarily in bolstering their presence in St. Petersburg. The No.2 brewer accounts for just 3.7 percent of beer sales in St. Petersburg, Russia’s largest beer market where local brands dominate. With all major players apart from Baltika complaining of production capacity constraints, the last few independent breweries will hold out for handsome premiums should an acquisition offer come along, says Alfa Bank’s Borodenko. She estimates the independent Krasny Vostok beer plant in Razan as worth close to $1 billion, while Reuters quote the starting price for Ivan Taranov as $400 million. In a research note to investors, Aton predicts that alongside Krasny Vostok, Pivoindustria Primoria, two more local breweries — VINAP and Barnaul Brewery — will be snapped up by multinationals over the next year. “Ochakova is the only independent Russian brewery that, in our view, will withstand a takeover in the short term,” the note said. Baltika’s Kedrin says that despite the costs, acquisitions still make sense in Russia, since building new breweries may be as expensive, if not more. Furthermore, construction is time-consuming, requiring at least two years per plant, he said. WHO’S ROUND IS IT? Although analysts agree that Russia’s remaining independent breweries will be snapped up come year’s end, who will pick up the bill for them has been the subject of much speculation. Of those already present in Russia, Turkish brewer Efes and American SABMiller get the analysts’ vote alongside the expansion-eager Heineken. Also praising Russia’s potential are global brewing giants Asahi and Anheuser-Busch, though the companies remain tight-lipped over possible moves to set up production in the country. “Russia is an attractive beer market because there is good volume and per capita beer consumption is rising,” Stephen Burrows, the CEO and President of Anheuser-Busch, said in an e-mail. Buying a relatively small brewer like Ivan Taranov would be an unusual move for Anheuser, which controls almost half the U.S. market. Troika Dialog’s Grankina does not rule out that the Americans could be interested in more. “It’s not impossible that Anheuser-Busch would come in and buy a major player in Russia,” Grankina said. One attractive possibility for Anheuser could be Efes brewery, the country’s No. 4 beer company, with an annual production capacity of 11 million hectoliters. Meanwhile, Kedrin points out that the country’s leading beer brand Baltika could yet activate its purse. “Theoretically, Baltika too could make more purchases,” he said. Although the brewery belongs to Baltic Beverages Holding, the country’s largest beer company with a 33 percent market share, the Baltika brand by itself accounts for only 24 percent of the market — less than the third the antimonopoly service draw as the limit, Kedrin said. TITLE: Tinkoff Brewery Absorbed By InBev AUTHOR: By Yuriy Humber PUBLISHER: Staff Writer TEXT: InBev, the owner of Russia’ No. 2 brewery Sun Interbrew, agreed to acquire St. Petersburg’s popular Tinkoff brewery for 167 million euros ($201 million) to alleviate production capacity constraints, the company said Monday. In addition, the company hopes the move will also boost its standing in the country’s largest beer market. St. Petersburg accounts for 13 percent of Russia’s beer sales, and has hitherto been a weak spot for InBev, which held just a 3.7 percent local sales share, the brewer said in a statement. “We had, of late, been experiencing constraints in serving our customers in Russia due to capacity restraints,” Gautheir de Boilley, InBev’s senior vice president of external growth, said Monday during a conference call, Bloomberg reported. Last year Sun Interbrew, which brews Stella Artois, Brahma and Beck’s, had production capacities of 20.5 million hectoliters, 18 percent up on the 2003 volume of 17.3 million hectoliters, the company said in its annual report. However, a source close to the Tinkoff deal said Monday that the brewer was severely strapped for capacity during the summer months, which may have affected sales. Tinkoff’s brand new plant plus a city-center microbrewery will lend 2.3 million hectoliters to Sun Interbrew immediately, and could provide up to a 4.8 million hectoliter capacity in the future. Although this will not translate into a significant increase in market share — Alfa Bank’s analyst Yelena Borodenko rates Tinkoff as holding a 2.1 percent national market share — the company says the effect will be seen in the mid-term. Sun Interbrew controls 17.2 percent of the Russian market, according to a source familiar with the company’s financial figures for the first half of this year. “This is a great deal for both parties: Tinkoff [beer] will be put through InBev’s distribution system, and InBev acquires a local super-premium brand — something they had been looking for in Russia for a while,” the source said. Borodenko said that Tinkoff could even be named as Russia’s top premium beer brand in terms of price and reputation. The Tinkoff brewery is wholly owned by founder Oleg Tinkov, a popular entrepreneur in the city, who started the business in 1998 as a live microbrewery and restaurant in St. Petersburg. InBev said that according to the acquisitions agreement Tinkov will join Sun Interbrew’s board of directors and keep the Tinkoff beer restaurants. Dresdner Kleinwort Wasserstein advised InBev on the sale. TITLE: Slowing Cocktail Sales Get Producers’ Creative Juices Flowing TEXT: THE MARKET IN FIGURES The market for low-alcohol drinks lies mainly in the hands of four large producers that govern 60 percent of sales, according to the Business Analitika research agency. The rest is split between local producers. The big four consists of Happyland with a 28 percent share, Ochakovo with 13 percent, and Borodino and Bravo with about 10 percent each, the agency reports. Cocktail sales divide up into several segments. Economy-class drinks account for just one percent of the market, the middle segment has a 26 percent share, the upper-middle — 66 percent, while premium class cocktails make up the remainng seven percent. Despite its relatively small size, the premium class segment offers the largest profits and is still growing in share and prices. Not all the main manufactures enjoy an even market coverage, since the leading companies employ different distributing strategies. “Bravo enjoys large sales in St. Petersburg and the regions, but is practically not sold in Moscow. Ochakovo brands, on the contrary, are well known in Moscow as well as in the regions but not in St. Petersburg,” Happyland said, adding that their own brand has the widest national coverage. Yekaterina Dranitsyna Staff writer Market experts and producers have become locked in an intricate dispute over one simple question: whether Russia’s low-alcohol industry is still booming or stagnating. Whatever the real answer, survival in the overcrowded low-alcohol market has turned into a race for innovation, as only the most imaginative products can hope to lure consumers that are turning very moody and very picky. AGREE TO DISAGREE “For the first time in recent years market players marked a slowing down in production rates. The National Alcohol Association, the State statistics committee and other sources showed a 15 percent decrease in low-alcohol cocktail production for the first half of this year,” said Yelena Shevchenko, marketing director of Bravo Premium. According to research by alcohol-maker Peterburgskaya Shirota, the country enjoyed a low-alcohol output of 23 million decaliters between January and June this year. The figure represents a 90.3 percent decrease on the volume produced during the same period last year. In St. Petersburg, the situation is more positive: low-alcohol products account for almost half the alcohol market. In contrast to a falling national trend, local companies produced 2.3 millions decaliters in the first four months of 2005 — almost as much as last year’s total, Peterburgskaya Shirota reports. However, city-based companies say that such a surge in production cannot be sustained. “We are no longer looking at annual growth rates of 30 percent to 35 percent, which was possible in an emerging market,” said Igor Barbashov, general director of Happyland. If in 2003 the growth of St. Petersburg’s market hit 22 percent; last year it was only 10 percent, according to the Business Analitika research agency data. The agency predicts an 11 percent market growth for this year. This is still a few percent above the producer’s own estimates. Barbashov believes that in 2005 an eight percent growth is possible, Shevchenko — five percent. The National Alcohol Association, however, predicts a negative market dynamic altogether. IN YOUR FACE The uncertainty and possible market stagnation has considerably sharpened competition as all industry players announced expansion plans. Bravo Premium plans to become the No. 2 cocktail maker in terms of market share (see The Market In Figures.) “In terms of distribution we’re already in second place,” Shevchenko said. “We have increased our direct advertising budget at the expense of BTL marketing actions to reach out to the end-consumer. Direct ads enlarge market share, forcing out competitors,” she said. Alongside the promotion of familiar brands, most producers have tinkered with some eye-catching options. Bravo Premium launched cocktails that contained a higher percentage of juice — up to 50 percent. Usually the percentage of juice in a cocktail is between five and 20 percent, Shevchenko said.