Russian breweries are facing stiff competition for the coming beer season. They are directing their efforts to optimize distribution and find new marketing ideas

Maxim Borisov

Growth rates on the Russian beer market are no longer in the double digits like back in 2001. In 2003, the Russian beer market grew by a mere 6.5%, and this expansion surpassed its players’ expectations. Breweries are attempting to retain their market shares by any means necessary. They are focusing on improving in-house efficiency, increasing advertisement budgets and looking for non-standard marketing and bold creative solutions that would enable them to stand out among their competitors.

License to grow

The licensed beer (beer brewed in Russia under a license from a Western company) and Russian premium beer segments are most dynamic on the Russian beer market. “Thanks to rapid growth in the Russian premium and licensed beer segments, overall dynamics of market growth exceeded the projected 5%,” says Andrei Rodionov, Sales Director at Tinkoff Company.
According to Business-Analitika Company, in 2003 beer brewed in Russia under license accounted for 3.5% in natural terms, and its production output increased by 70% versus 2002.
The licensed beer market began to develop actively in 2002, when Czech brands Staropramen and Kozel began production in Russia. In 2003, Russian companies began to bottle Altstein, Heineken, Warsteiner, and Carlsberg. More new brands will appear this year. No other segment of the beer market can boast such a mass launch of new brands. Licensed brands immediately win over domestic rivals as they belong to European beer traditions while beating imported counterparts with a more affordable price.
The premium segment of the Russian market came in second in terms of growth rates: in 2003, it expanded by 11%. “It is clear that the growth in these two segments is linked with the growth of household incomes. It is also due to the fact that over the last two years, consumers have established certain taste and brand preferences. They have begun to select brands rather than simply buying beer of a certain price category,” says Andrei Rukavishnikov, Marketing Director at Baltika.
Today, however, Russian breweries make most of their money from inexpensive and medium-priced segments where the situation is not so optimistic, rather than in rapidly growing, but relatively small premium segments. “The cheap beer segment is growing very slowly. The medium-priced segment isn’t growing at all, but it is so large that competition has become noticeably tougher just recently,” says Andrei Rukavishnikov.

Distribution reform

First of all, companies started implementing large-scale changes in their sales policy. Breweries are trying to reduce the number of middlemen and rule out mutual competition between different sellers of their brands, as well as control prices and markup at all levels. Just a year ago, both distribution companies and wholesalers with large discounts and perks supplied beer to one and the same region.
Baltika was the first to reform. Last year, the company built a new distribution system and its own network made up of a hundred trade representatives based on the principle of “one area –one supplier.” After reorganizing its distribution system, this year Baltika has proceeded to tighten control over product flow to end consumers.
While implementing distribution reform, companies inevitably lose their market share but make these sacrifices which they believe will be temporary. Thus, for example, Baltika’s sales growth turned out lower than the market, and the company’s market share shrank in 2003. Nevertheless, Baltika believes distribution optimization will enable the company to win back its previous share as soon as this year (in late 2002, it amounted to 22%).
Last year, Ochakovo Company began distribution reform, too. They decided to significantly reduce distributors. This year, Ochakovo plans to turn distribution companies into subsidiaries by buying out large or even controlling stakes in their capital. Investment in this project will amount to about $1 million. “The distribution reform resulted in a reduction of Ochakovo beer output of 7.5% in 2003. However, we plan to reach 5-percent sales growth as early as this year thanks to the implemented changes,” says Vyacheslav Merkulov, Sales Director at Ochakovo.
Last year’s reform of the distribution system has also enabled Vena Company to carry out successful expansion into regions. However, although reforms of distribution schemes enable companies to slightly improve their position on the market, they are really designed for the long term. Only a successful advertising campaign or an uncommon marketing move can bring rapid sales growth.

Not a dull moment

Tinkoff was the first to dare to produce downright provocative marketing. It is the rare Tinkoff ad campaign that passes without notice from regulators, and the Anti-Monopoly Ministry altogether banned the commercial “Black-and-White Dreams” launched in late 2003. However, the company is not going to back down. Late last year, they made Italian Oliviero Toscani, famous for his scandalous Benetton campaigns, creative director. In the early 2004, the company launched a new series of commercials that provoked a public response and calls once again for them to be banned. Tinkoff’s leaders were happy with the result: “The new advertising campaign was timed to coincide with a doubled production output at our brewery. Judging by the fact that we have had no problems selling our beer and that distributors are lining up, our ads can be considered successful,” says Andrei Rodionov.
Following Tinkoff’s example, other beer companies are ready to experiment. Bigger ad budgets and more contracts with advertising agencies from companies that previously preferred to advertise on their own point to this. Thus, for example, Ochakovo plans to set up a network of pubs under the company’s name. The company will also build two more restaurants – a casual sports bar and a VIP restaurant – at the Ochakovo Brewery in Tyumen. They will be located immediately on the brewery’s premises, and visitors will be able to see the beer brewing through a glass wall.
Promotion by most beer producers involves re-branding. Well-known brands, lost in a sea of new beers, have been resurrected. The old beers get new packaging and design accompanied with an advertising campaign. Typically, most revived brands are repositioned in a higher price category.
For example, Vena managed to gain a 20-percent increase in sales thanks to its re-branding of Nevskoe Beer in 2003. Today, this brand is rated second nationwide in premium beer segment, its market share being 17% in monetary terms.
Starting this year, Baltika is to radically change its promotion strategy: from now onwards, advertising will be aimed at supporting each particular brand as an independent product rather than supporting the Baltika umbrella brand.

The end of vodka?

Breweries hope that at the very least their combined efforts will keep beer market growth at previous levels in the near future. Thus, for example, beer consumption in 2004 is projected to increase by around 5.5%. “Given that over the last 17 years, global beer consumption has been growing by 2% a year, the Russian market can be said to be growing confidently, if not rapidly expanding,” says Yuri Vertoprakhov, General Director of the Zolotoi Ural (Golden Ural) Brewing Company.
From the first two months of this year, it is clear that market is actively expanding, as it has grown by more than 20%. However, it’s too early to say if the market will continue this upward climb and expand considerably more than it has in the last two years.
As experts believe, the licensed beer and premium Russian beer segments will grow most dynamically. Only limited growth is in store for medium-priced and mass segments. “The competition will result in large companies strengthening their positions, while regional beer producers either go bust or go local. There is also another option: they will be incorporated into large brewery holdings,” Vertoprakhov believes. The beer market is seeing considerable consolidation at the moment: the eleven largest Russian breweries hold nearly 75% of the market, and the remaining 290 enterprises account for a mere 25%. Thus, the beer market is becoming increasingly similar to the consolidated tobacco market where over 80% is under the control of companies with foreign capital and where two years ago, companies also implemented large-scale distribution system.
However, the distinction of the beer market is that it has room to grow: “The present consumption rate is 50-51 liters per capita. However, given the trends on the Russian and the Eastern European market, which our market resembles, consumption will increase to 75 liters in the next few years. That is to say, the market will grow by 50% compared to its present state,” believes Daniil Briman, head of Pikra.
Furthermore, thanks to breweries, Russia seems to be saying goodbye to vodka: Russians’ preferences are gradually shifting from hard liquor to lower proof drinks. In 2003, the volume of the beer market in monetary terms exceeded the vodka market for the first time. According to Business-Analitika, about $6.5 billion in beer was sold, the vodka market amounted to $6.2 billion. This trend will continue for the next few years.  

More in Russian>> www.expert.ru