Russia: Report on the Russian beer market as totals of the Q3 of 2005

According to the totals of the third quarter of 2005, the growth in beer production in comparison with the same period of the last year has amounted to 4.6%, and the total score for the entire 2005 per branch will make up, according to our prognosis, not more than 5 % , stated the Association of Russian Brewers in its report elaborated with the participation of Business Analytica Company and is based on data related to the status and development of the Russian beer market.

The results of the third quarter afford ground for assuming that the further growth of the Russian brewing market will be within the limits of 5-7 %, and may be characterized as being "steadily moderated". As main reference point of the market development shall serve the industrial parameters of the basic players - the largest manufacturers which produce approximately 80 % of product release. However, in opinion of experts unforeseen jumps and falling of rates of development of the entire brewing branch are not excluded. Thus, the observed increase in production according to the results of 8 months of 2005 in comparison with the similar period of 2004 has amounted to 4.6 % while in 2004 the corresponding parameter consisted of 12.9 %.

The branch totals for the first six months became the lowest lately. According to data provided by the Federal State Statistics Service (Rosstat), the growth of the brewing market with reference to the corresponding period of the 2004 consisted of 3.7 %. “The given parameter is the worst for the branch in the last five years” - the Chairman of the Executive Committee of the Union of Russian Brewers Vyacheslav Mamontov makes comments on Rosstat data - “… recession of production growth rates becomes more and more obvious - even traditional seasonal market growth during summer could not cardinally affect the situation as a whole”.

The industrial indices of 20 main brewing companies speak on redistribution of their market shares. The most successful companies according to the results of the third quarter of the current year have provided a substantially higher growth of volumes of production released (12-15 %) in comparison with the average branch indices. However some of the smaller players have shown negative production growth.

We may draw a conclusion that the process of further market consolidation lies in the hands of the main players and shall continue. As a consequence of this, an interest of the large companies towards medium and small regional breweries with small capacities may arise in the nearest future. Naturallyit is impossible to say that the process of absorption of small and medium breweries will immediately begin. Nevertheless, the messages regarding acquisition of several regional independent brewing companies became indicative for the identification of the future development tendency of the brewing market.

A series of regional transactions were concluded by the Dutch concern “Heineken NV”, which has purchased 100 % of shares of the “Combine named after Stepan Razin” in St.-Petersburg, and 100 % of “Baikal brewing company” shares in Irkutsk. According to a member of the Executive Board of directors in “Heineken NV”, Jean-Francois Van Boksmeer, due to these takeovers, “Heineken” will consolidate its regional production and distribution network in Russia even more, as well as will own regional brands with long-term traditions and national potential.

The “Baikal brewing company” is located in Irkutsk and is the only large brewery in Eastern Siberia, which holds 6.3 % of the Russian beer market. The company productivity amounts to 10 million dal per year. Its purchase can become a starting point for a fundamentally new loop of merges and takeovers across all Russia.

Given the annual growth of the Russian brewing market of 5-7 %, in 5 years the production capacities of the whole branch should be increased by 150-200 million dal. On the other hand, as we already said earlier, as basis for the further market growth may serve the regional development of distribution. In this connection, building of new facilities from the very beginning can be less effective than the “selective” strategy and takeover of regional breweries with a capacity from 1 up to 7 million dal. The basic choice criteria, obviously, will be the favorable geographical location of the factory with a developed transport infrastructure, as well as a stable position of the enterprise on the regional market. As of today, the cumulative capacity of the enterprises with a production volume from 1 up to 7 million dal amounts to 90 million dal.

Amongst the large transactions we can accentuate the decision of Heineken NV which has informed on signing of a purchase contract for 100 % of shares of “Pivovarni Ivana Taranova” (PIÒ) company, registered in Cyprus, owing three breweries in Kaliningrad, Novotroitsk and Khabarovsk, as well as the information released by “InBev” about the purchase of brewing company “Tinkoff” for an amount of 200 million US dollars, with a total production volume of approximately 20 million dal.

“Tinkoff” was one of the last independent players on the market which was the leader among domestic manufacturers in the high-growing and profitable segment “super premium”. In information message released by “InBev” with respect to the given transaction it is said that “Tinkoff” will provide for regional presence at St.-Petersburg for “InBev”, as well as will successfully complement their product line. Stephen Deshemaker, the president of “InBev” for Central and Eastern Europe, has commented on the situation: “The given transaction does significantly increase the opportunities of “InBev” organic growth in Russia and corresponds in full to our strategic approach to selective merges and takeovers, which raises the company value”.

At the same time, a number of the companies carry out modernization of existing and construction of new production facilities.

“Heineken” Company made the decision on reconstructing the “Volga” beer factory. Due to the implementation of the given project which volume of investments consists of approximately 60 million Euros, the taxable base will be increased, additional workplaces are created and the city budget revenues will increase. After reconstruction, the company plans on producing on this beer factory both regional and all-Russian brands.

The largest of the independent domestic enterprises, the Open Society MPBK “Ochakovo”, expands its regional presence on the market, investing in construction of new industrial platforms. A launch of new brewing manufacture took place in Penza. Its capacities are calculated for release of 26 million dal of beer per year. Thus, the Penza factory, investments into construction of which have amounted to 50 million euro, becomes third of operating factories belonging to “Ochakovo” company. The next company move will be the commissioning of a new industrial platform in Tyumen which creation has begun several years ago.

Regional expansion of large players, in its turn, promotes essential changes in various segments of the market. Most interesting “events” lately have occurred in distribution of tared beer sales per packing types.

The history of competition and development of various kinds of tare was formed, on the one hand, under the influence of market demand, and on the other hand, in many respects was defined by the brewing companies and tare manufacturers.

For example, formation of canned beer segment of in many respects has been predetermined by the interests of the largest manufacturers of aluminum cans. Up to 1998 this segment was insignificantly small and was formed basically due to imported and licensed beer. The canned beer market share for that moment was less than 1 % from the total volume of tared beer*. Since 1999 active marketing, advertising and lobbying campaigns aimed at increase of the “can” segment in the total volume presented on Russian market of tared beer, have commenced their implementation. Manufacturers of aluminum cans for the brewing branch then declared that their goal is to provide growth of the canned beer segment share in 5-7 years up to a 15 %-level of the total volume of beer produced. Due to this fact, in the first quarter of 2002 the "can" share in the total volume of tared beer has already reached 7.2 %, and by the end of 2004 has reached its maximum value (13.9 %)* (chart 1). However, during the current to year this parameter started to decrease, and to IÀ 2005 consisted of 13.0 % (which is comparable with the results seen at the end of 2003 - beginning of 2004)*. The fast and confident growth of canned beer segment up to 2004 can be explained by the fact that on the one hand, this kind of tare has filled its market niche, answering the consumers’ expectations; and on the other hand, this process was stimulated by active measures taken by manufacturers of aluminum containers. The further formation of this market segment was determined largely by market factors. Generally, for the development of beer market the fact itself of appearance and making of the can segment was important.

An equally important and interesting event for analysts was the fact that leader of sales at the end of the first six months of 2005 per packing became the PET form*. Such an event demands an additional and more detailed examination.

The first batches of beer in Mylar on the Russian market began to appear from the moment of commissioning within the domestic enterprises of equipment which allowed for an increase of product storage period from 10 days to approximately one and a half - three months. Such packing type has immediately won popularity. Preferring large-volume containers, the domestic consumer, unlike Western, has practically completely refused to buy small containers (such as a 0.33 l bottle or can), popular in the European countries.

Since the middle of 90’s, the Mylar segment has commenced its ascension to a leading positions among types of packing, winning on annually in each quarter some percentage from the competitors, first of all from the “bottle”. A forced growth of Mylar market share was observed during 1999-2000, when its share in cities with a population above 100 thousand people has increased from 10.16 % up to 18.13 % during just a year*. As per results seen in the first quarter of 2002 already Mylar held 29.2 % of the all-Russian market, the bottle segment occupying 63.6 %*.

It is interesting to track the further relation of these two types of packing in terms of dynamics. For the 2003 period the Mylar segment has grown by 2.1 %% while the “glass bottle” share has decreased by 3.8 %%*. In 2004 this tendency continued - these parameters were 2.4 %% and 3.4 %% accordingly*. The glass tare during these years has obviously undergone pressure not from Mylar only but also from the actively developing can segment. The data on 2005, which is not yet over show a continuation of this tendency. According to July-August 2005 results Mylar has increased its share by 2.3 %% while the "bottle" has lost 1.7 %% in total volume of tared beer produced in Russia*.

The qualitative change of situation in tared beer segments per types of packing on the brewing market, in our opinion, is due to several reasons. On the one hand, the stable demand for greater tared beer capacities stimulates manufacturers to launch on market and actively support advertising campaigns for new or renewed brands in new types of packing, which creates an additional impulse for Mylar segment growth.

On the other hand, the “bottle” segment loses its share firstly because of structural transformations in the glass industry and secondly due to redistribution of the main players’ attention from the “middle price” segment on development of brands in highly profitable and “cheap” segments. At that, the growth of discount brands occurs mainly due to PET form.

According to experts’ estimations, the annual need of the Russian brewing market for glass bottles amounts to 12-13 billion pieces. Domestic manufacturers produce only two thirds of the necessary quantity. At present over 70 enterprises in Russia make glass bottles, however the capacity of the majority of them, firstly, is insignificant (on average, not more than 50 million bottles a year), secondly, the quality of empties does not always meet the modern requirements set by its industrial consumers.

In 2004 the beer market experienced a sharp increase of competition in the license segment, and during this year practically all large beer companies have launched new premium brands on the market. And at this particular time many companies began to actively promote beer packed in glass, transparent tare. In opinion of experts in marketing, the drink packed in transparent glass is associated with quality for which the consumer is ready to pay. Analysts predict that the growth of the license segment will lead to a situation where in 2005 already the manufacture of glass beer bottles for the first time in several years will grow by 7%. Such a situation, logically, should ensure growth instead of decrease in the glass container share. However, as the data below indicate, the activity of manufacturers in highly profitable segments has provided an increase in popularity of “bottle”, basically among licensed brands, which, however, did not compensate its fall among “medium-priced” brands, which meanwhile dominate the market.

In order to assess the dimensions of occurring changes we shall cite the following data: in 2003 in the “medium-price” segment 230 million dal of 0.5 l glass bottled beer were produced, and in the license segment – 17.6 million dal. In 2004 these parameters have amounted to 196 and 31.6 million dal accordingly. As these figures show, the decrease in glass container share of the medium-price category in 2003-2004 occurred not only in the percentage ratio relative to the total amount of the beer produced, but also in life.

Let’s carry out a further analysis of changes that intervene in the structure of share distribution per basic types of packing. The strongest changes in sales breakdown per types of packing have occurred in the “cheap”, “medium-priced” and “licensed beer” segments. We shall consider them seriatim.

The “cheap” segment

The low-price brands share has grown from the beginning of 2005 in total volume of tared beer by 1.3 %% and according to data for IÀ2005 amounted to 15.5 %. This increase has occurred due to availability of various capacities.

From all types within Mylar line maximum growth in the “cheap” segment was achieved by the 1.5 l packing. For the last 2.5 years its share has grown from 2.9 % up to 7.7 %, and from the beginning of current year has increased by 0.7 %%*. The 1.0 l Mylar type in 2003 held a volume of approximately 0.4 % of the market*. From the beginning of 2005 a new 2.5 l maximum volume Mylar tare was introduced into the “cheap” segment and to JÀ2005 has occupied 0.4 % *.

The “bottle” dynamics in this segment was opposite. However during the second and current third quarter the situation has somewhat stabilized, and its share has amounted to 4.6 % of the market*.

Generally, within the “cheap” beer segment the Mylar tare of different capacity occupies 70 %, the 0.5 “bottle” – 29.8 %*. The aluminum can is practically not used in the given price segment and that, in our opinion, is a fact that is indicative enough.

The medium-price segment

The bottle share reduction has been most pronouncedly expressed in the medium-price category. If in the first quarter of 2003 the “glass” share made up to 33.6 % then to JÀ2005 it has dropped to 18.5 %*. Since the given price segment occupies more than a half of all beer produced (56 % in JÀ2005) the given decrease has actually “pushed” the general falldown of the “bottle” share on the market in whole.

The 1.5 l Mylar share which dominates over other types of packing within the medium-price segment, having reached its maximum of 23.9 % during the second quarter of 2004, has slightly decreased subsequently (to 22.8 % in 2005). The 1.0 l Mylar, having received a new impulse for its development in 2004, showed a rather good growth up to the second quarter of 2005, reaching a level of 3.2 % from the total volume of beer produced*.

Large-volume Mylar tare of 2.25 and 2.5 l in 2005 show exactly the opposite, antithetic tendency. Launched on the market at the beginning of 2005 the 2.5 l Mylar in JÀ2005 already has occupied 1.0 % of the market, while the 2.25 Mylar share has decreased from 2.8 % to 1.9 %* during the same period.

The can share in the medium-price segment has increased (with insignificant fluctuations) during 2003-2004, having reached 5.4 %, and during the current year has decreased inconsiderably*.

Generally, in the medium-price segment the share of Mylar of different capacity occupies 57.5 % of tared beer volume, the “bottle” holds 33.1 %, and the “can” occupies 9.4 %* (see chart 9). Such breakdown of sales of the basic types of packing in the largest by volume price category creates a basis for Mylar popularity on the whole market as well.

Premium segment

The dynamics of premium segment development during the entire 2005 disappoints the experts who believed in its further development. Having reached in the fourth quarter of 2004 its historical maximum of 22.4 %, the premium share begun to decrease, and in JÀ2005 has dropped to the third quarter of 2003 indices – 21.1 %*.

The general decrease in premium segment popularity during the current year has occurred due to the “can”: from the end of 2004 its share has reduced from 7.3 % to 6.4 %, which lies below 2003 indices*.

The Mylar, presented in this segment only by a 1.5 l capacity holds an insignificant share: during almost entire 2004 it occupied not more than 0.1 % of the market, and during the current year has increased to 0.5 %*.

The 0.5 l glass container is highly popular in the premium segment. Thus, according to data available for JÀ-2005 the expensive share in this type of packing makes 13 % from the total volume of beer produced*.

Eventually, the leading position among various types of packing of expensive domestic brands is occupied by the “bottle” - its share amounts to 65.3 % of the segment. The “can” holds 30.6 %, and Mylar has in this category the least specific weight – 3.8 %*.

Licensed segment

The licensed beer segment, (like the “cheap” one, being on the opposite end of the price spectrum) shows stable increase of its share in the total sales volume. According to JÀ2005 totals, the licensed beer share has amounted to 7.4 %, which exceeds by 0.5 %% the indices of the first quarter of 2005, and exceeds by 4.5 %% the first quarter of 2003 indices* This increase was a consequence of both the activity of main players towards international brands launch on the Russian market, and increase in population well-being. The major part of this category production is bottled, which share in the total volume of beer produced in the summer of 2005 occupies 6 %*.

Let's consider another factor of influence on distribution of shares among the basic tared beer segments - production price increase per different types of packing.

In our opinion, the price setting factor became one of the main reasons of Mylar demand growth and reduction of the “bottle” share. Such a conclusion may be drawn from the data indicated in table 1 where the average retail price growth dynamics per different types of packing is shown. The prices have increased to the greatest extent in the bottle segment: for the period starting from the beginning of 2003 until August, 2005 it has amounted to 31.77 % * while for Mylar this index consisted of only 12.15 %*.


We must mention that the high growth rates of the average prices for “bottle” are not as much conditioned by the increase in separate brands’ price as a result of inflation, but mainly by the change in the structure of production and this type of beer packing consumption in favor of more expensive segments. It pushes away in some degree the mass consumer focused on cheaper brands.

But what factors will influence the development of the most popular types of packing in the future?

In our opinion, the potential of glass bottle application in brewing remains to large enough. Currently, as we have already mentioned above, the majority of the large companies do actively develop the brands with a high marginal component (first of all, licensed brands), which holds great perspectives for the increase of production profitability. It creates preconditions for the development of bottle tare that prevails in the given segment. At the same time, the experience in European consumer goods markets' development suggests that sooner or later the conditions which will economically stimulate both the manufacturer and the consumer to come over to reusable tare will be created in Russia on the legislative level. Probably, in this case Mylar becomes less attractive to be applied in brewing industry.


[1] Percent point (%%) is an index obtained by means of subtraction of one quantity measured on a percentage base from another.

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