New Ambitions for Russian Beer

The market share of Russian suds is rising at home and abroad, and Baltika plans to overtake Heineken as Europe's No. 1 brew

For generations, vodka has been nearly synonymous with Russia, but recently the strong spirit is having to make room, domestically and abroad, for its less alcoholic European rival, beer.

The trend is fueled in part by changing habits at home and renewed Russian confidence on the world stage. Indeed, if this year proves as successful as 2006, the top Russian brewer will soon be the best-seller across Europe.

In May, Baltika Breweries started production of its No. 3 Classicheskoye beer at the Camerons brewery in Hartlepool, England. Baltika management says it's inevitable that Russian beer will become an important part of the European market.

"The start of licensed production of Baltika in Western Europe is a natural step in the process of integrating Russia into the world economy," Baltika president Anton Artemiev said. Artemiev believes Russian beer has a bright future abroad, and not just in countries with large Russian expatriate communities, such as Britain.

Baltika began exporting its products in 1999, and it entered the British market in 2003, when it signed an import agreement with Scottish & Newcastle brewers in Edinburgh. Scottish and Newcastle and Denmark's Carlsberg bought a majority share of Baltika in 1993.

Baltika now accounts for more than 80 percent of Russian beer exports. In 2006, the sales volume of Baltika brands abroad, including licensed production, amounted to 11.6 million hectoliters, a 27 percent increase over the preceding year. Only Heineken sold more beer on the European market.

Numbers like those could help explain why Russian brewers seem undaunted by the fact that their country has never been among the world's leading beer makers.

"The international interest in Russia and Russian business is great, and in my opinion it would only be natural for foreigners interested in Russia to try some Russian beer," Artemiev said. "And once they've tried it, the

product's quality will eventually win out -- just as was the case with Corona beer, which was originally a Mexican brand. Mexico was nowhere among the world's top beer makers but that did not prevent Corona from becoming an internationally popular brand."


Baltika No. 3 is positioned in Britain as an international specialty beer, commanding a premium price of 2.20 euros to 6.60 euros per half-liter bottle, depending on where and how it's sold.

St.Petersburg-based business journalist Yekaterina Dranitsyna said Baltika has chosen a winning strategy.

"Russians have a high profile in the U.K.: Most ordinary Brits have heard at the very least of the Russian billionaire Roman Abramovich, who owns Chelsea soccer club, and his young deep-pocketed compatriot Nikolai Smolensky, who bought British sportscar maker TVR," Dranitsyna said.

"Wealthy Russians regularly make headlines in the mainstream British media, and in this context a Russian beer, especially positioned as a premium product, is bound to spark substantial interest among consumers," she said.


Baltika's ambitions to become the Gazprom of beers have been boosted by its placement this year on the list of the top 100 global brands compiled by the London-based research firm Millward Brown Optimor for the Financial Times. The only other Russian company to appear is oil giant Lukoil.

While the oil company was noted in the rating for its profits, Baltika won recognition for customer loyalty and development speed, and was declared the most promising brand.

According to Millward Brown Optimor, the value of the Baltika brand, which now amounts to $897 million, has increased by 68 percent over the past year.

Baltika's share of the Russian market doubled in three years, to 36 percent in 2007. Its four leading competitors -- Sun Interbrew, Heineken, Efes, and SABMiller -- control another 50 percent of the market.

In the first quarter of this year, Baltika's overall sales volume grew by nearly 42 percent from the same period a year ago, as did the resulting revenue, to nearly 409 million euros.

"Millward's optimistic estimates confirm our own forecasts," Artemiev said. "We are already one of Europe's largest beer makers.

We now expect to become Europe's biggest beer producer within a few years."


The Russian beer market overall has been growing as fast as Baltika.

"During the massive anti-alcohol campaign launched in the USSR by Mikhail Gorbachev in 1986, the entire industry was almost completely destroyed," said Anatoly Temkin, deputy editor of the St. Petersburg bureau of the respected nationwide business daily Vedomosti.

"The campaign was successful, and alcohol consumption in the country dropped drastically. Beer consumption until the 1990s was under 10 liters per capita per year. Then, as the market economy arrived in Russia, and foreign investment started to flow, it sparked rapid expansion of the industry. The market potential was huge and it still has not been completely fulfilled."

According to a recent survey by the Moscow-based market research agency Business Analytica, Russia's beer market has grown by 60 percent since 2001. In 2007 alone, Russian beer production has been growing by 15 percent to 20 percent per month. In 2006, beer sales amounted to 98 million hectoliters, second in Europe behind Germany.

At the same time, according to the international mark]et research agency Euromonitor, vodka sales in Russia have been dropping by 15 percent annually since 2000. Euromonitor predicts sales will continue to slide by 3 to 5 percent per year.

"The tendency of people to drink less vodka is most obvious among the young," Temkin said. "Drinking a lot of vodka is now seen as escapism, while drinking beer is fun and part of an easygoing lifestyle. It is essentially a sign of growing economic stability in Russia and shows that the country's middle class is increasing, too, and is absorbing European standards in many different ways. Another reason is that Russians are becoming more cosmopolitan. They travel more, and now show more interest in strong drinks from other countries, like, for instance, whiskey or cognac."

As beer consumption continues to grow, Russia's leisure landscape is changing to accommodate it -- in a symbiotic trend that can only help beer sales to climb further.

Beer restaurant chains have mushroomed across the country, especially in the larger cities, with the number of venues doubling each year. The average bill in such eateries amounts to a modest 300 to 350 rubles (8 to 10 euros) per person, making it accessible to the mass market.

Meanwhile, Russia's football fans who have wanted to drink at matches have had to smuggle in their alcohol -- until now.

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