Russia: Foreigners dominant on Russia's beer market

Since early summer, big foreign holdings have been scrapping to buy the few remaining independent breweries in Russia, RIA Novosti published on July 26. Dutch Heineken fired the first salvo by buying the Patra brewery in the Urals city of Yekaterinburg, apparently to gain a reliable bridgehead in the east of Russia on the eve of the major beer season.

A month later, the Dutch company decided to capitalize on its success, and announced its intention to purchase another brewery, this time in the Eastern Siberian city of Irkutsk, in a bid to bring its share of the Russian market to a record 10%.

But its rivals were not idle. In response to Heineken's onslaught, Baltika announced the purchase of a brewery in Krasnoyarsk, while InBev negotiated the purchase of the Russian brewery Tinkoff in St. Petersburg for �167 million ($201 million). Once the deal goes through, InBev will raise its share of the Russian market to 16%.

This is not the first beer battle in Russia. The beer industry has averaged 5% growth a year, and is expected to increase by at least another 5% to 7% in 2005, reaching production of 90 million hectoliters.

Investors continue to be interested in the Russian beer market because of its steady and long-term growth, which is not hindered even by the government's regular excise increases. Duty was first introduced at 12% in 2002, increased to 25% in 2003, and by another 10% in 2004. In 2005, duty has grown by another 8%, although this is still below official inflation. But the main point is that in the next few years Russia and China will account for more than a half of the world's beer consumption.

There are three leaders on the Russian beer market, whose rivalry is pushing it forward. Baltika is the leading player, accounting for more than 20% of Russia's market and owning 18 breweries in Russia and other CIS countries. The brand of the same name is Russia's most popular, although somewhat misleading, as the real owner is the Baltic Beverages Holding AB (BBH), in which a Scandinavian brewer holds a blocking share.

Baltika's main rival in Russia is SUN Interbrew, which has considerably increased its presence in Russia over the last two years. It is a Russian affiliate of global leader InBev, a Belgian-dominated company that owns eight Russian breweries.

Ranking third is Heineken, which emerged in Russia a little later than the first two. So far Heineken owns only four breweries in St. Petersburg, Nizhny Novgorod, Sterlitamak, and Novosibirsk, and accounts for 8.6% of the market in money terms. But it is increasing its presence in Russia much faster than the two leaders.

This season's maneuvers are not limited to the massive purchase of Russian breweries by foreigners. Russia's two surviving big independent beer factories, Ochakovo and Krasny Vostok, account for some 15% of the market. A purchase of either of these factories will considerably affect the market, but whoever buys it will have to pay through the nose: Unofficially, control of Ochakovo is estimated at $2 billion.

The stable position of the three leaders does not mean that one of them will necessarily gain control over the leftovers. The press is unanimous in predicting a serious change in the make-up of the Russian beer market. Another world leader, U.S. giant Anheuser-Busch, is expected to come to Russia before the end of this year, and it is rumored that it could swallow up one of the two surviving national producers.

There is one more serious player, SABMiller, which this year has probably been the fastest growing company in the world. Sales in Europe have gone up by 5%, and in Asia by 10%. SABMiller is already represented in Russia. Its Eastern European branch sells a number of popular local beers in Russia, as well as Czech and other foreign brands. For the time being, SABMiller prefers to go for holdings with different partners in Russia, and has not yet started buying Russian breweries one by one.

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