Trying To Swallow `Part Of The Czech Soul'

In 1290, King Wenceslas II granted 260 families the right to brew beer in the Bohemian town of Plzen. For six centuries, they brewed in their homes--until the 1838 Beer Tragedy. That was when the mayor ordered 36 barrels of suds gone sour to be dumped in the town square. But it was only a temporary setback. The locals hired Bavarian braumeister Josef Groll to instruct them in modern beermaking techniques. Four years later, a new beer was born: smooth, golden Pilsner Urquell, the world's original pilsner.

Today, annual beer consumption in the Czech Republic has reached 155 liters per head, the highest in the world. And international brewers are eagerly trying to tap the market. Anheuser-Busch Cos. has been courting Budweiser Budvar for years to settle a long-standing dispute over the use of the name Budweiser. Heineken, in contrast, has spent three years courting Pilsner Breweries, the largest domestic brewer, with 16% of the market.

The Czechs don't appear eager for a Heineken buyout, preferring to lock up the world-renowned Pilsner Urquell brand like the family silver. The postcommunist brewers have some ambitious plans of their own. "Why should we sell out cheaply now, before trying to run it ourselves?" says Vladimr Perina, chairman of Pilsner Breweries.

OAK AND FUNGUS. Czechs have never been modest when it comes to their beer. Local connoisseurs gloat over competitors' failure to replicate the secrets of Pilsner Urquell's malty, tangy taste. Some credit the soft, low-saline water from wells behind the old hangman's hill or the Bohemian hops. Then there is the 12-week maturing process in oak kegs. Some even suspect the fungus that grows inside the five miles of underground passages where the brew is fermented. Spies have scraped some off, but Chairman Perina just laughs at the myth. "No one has proven why it tastes so good," boasts Pilsner Urquell's brewmaster, Vaclav Milota. "It's part of the Czech soul."

At least, that's the image Perina hopes to cash in on. His strategists are studying Coca-Cola Co.'s philosophy of promotion, while managers are boning up on marketing and other capitalist techniques. "They've got the comparative advantage of this trademark," notes beer analyst Vladimr Jaros of Wood & Co. in Prague. "Now it's up to the management to use it." One problem: The term "pilsner" has evolved into a generic description, even on cans of Miller Lite. "Millions of people are drinking what they think is a Pilsner," frets Vaclav Vitovec, director of strategic development for Pilsner Breweries. "We are the only one."

Pilsner's immediate priority is to get a lock on its home turf. What used to be a regulated market of 40 regional breweries is now saturated with 70 competitors, many trying to ship nationwide. With wine drinking on the rise, beer consumption actually dropped 7% last year. To fight back, Perina last year added Primus, a cheaper, lower-grade option, to his two-brand lineup of Pilsner Urquell and Gambrinus. He racked up bank debt to pump some $125 million into a new bottling line and shiny steel vats that by 1997 will have expanded capacity by 45%. Sales rose 7%, to about $105 million in 1993, but depreciation charges helped knock profits 75% lower, to $2.1 million.

In such a tight market, analysts say a foreign brewer's best shot is to buy into an existing brewery. Growth isn't buoyant enough for a startup, and imports are too expensive for mass consumption. So Heineken is in pursuit. "We haven't scored yet, but we're not ready to drop out of the game," says Heineken Chief Executive Karel Vuursteen.

"GOLDEN SHARE." It could be a tricky maneuver. Only current shareholders, all Czech, can own the stock for the next five years, and the government will keep a "golden share" to regulate any trademark agreements for 10 years. In a characteristic nod to history, 200,000 of the shares will be set aside for families who inherited brewing rights from the Middle Ages.

The way forward will have to be through strategic alliances, which both sides are keen to pursue. Already, Heineken distributes Pilsner Urquell in the Netherlands and France. Germany, the largest export market, is still a problem because Pilsner is locked into a 10-year contract with Binding Brauerei, signed in 1989. Through distribution accords with Guinness PLC, kegs of Pilsner Urquell reappeared in American bars for the first time in decades in September, 1992, and U.S. thirst for Pilsner is expected to grow nicely.

So even though Heineken wants to use Pilsner Breweries to crack a promising new market, the Czechs are looking for ways to carve out their own global role with their foreign partners. Heineken has excelled for years at maneuvering its way through such delicate spots. If the Dutch can strike the right kind of balance, Anheuser-Busch could be left far behind.

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