Russia To Dominate European Beer Market?
Currently holding the number two spot, Baltika plans to gain ground in former Soviet satellite countries, along with a more aggressive sales push in the UK, Germany and Finland.
It is understood a licensing deal is being negotiated for S&N to brew and distribute Baltika 3 in Britain by next year in a bid to develop it into a sub brand on a similar scale to San Miguel.
Baltica is 92% owned by Scottish & Newcastle and Denmark’s Carlsberg through their Baltic Beverages Holding (BBH) company and so the move would have to be agreed by Carlsberg. The extent of its distribution, pricing and how it will be marketed is yet to be decided.
Baltika 3, a mainstream beer in Russia, is imported sporadically to a small number of bars in cities like London, Edinburgh and Glasgow.
But it is believed that more mileage can be wrung out of its Russian image. S&N chief executive Tony Froggatt said: “San Miguel has blossomed in a short period of time. We think there are brands like Baltika that have potential.”
The company, however, is realistic about its ambitions, and acknowledges Baltika will be a niche brand in Britain.
One City analyst, who preferred not to be named, said it was unlikely Baltika would even have the same cachet in the UK as a big Czech or German brand. “It’s a novelty brand. Nobody is ever going to think Russian beer is that great. It’s never going to be the next Budvar.”
The vast majority of the brand’s growth is likely to come from its strongholds in Russia and Eastern Europe. The brand has already managed to move from a standing start into the second position in just 16 years by focusing on those markets.
About 10.7 million hectolitres of Baltika were sold in 2005, a 13% rise on the previous year. That is just 1.3m hectolitres less than Heineken. But the Heineken brand is also boasting 9% annual growth figures.
One analyst said Baltika could overtake Heineken, especially if it exploits its recently improved distribution in Russia. But he warned: “Heineken is growing quite quickly. If it continues to grow at 10%, it will take Baltika longer than five years.”
BBH will spend $500m (£267m) over the next two years to expand its production capacity in Russia, Ukraine, Kazakhstan and Uzbekistan. That will contribute to Baltika’s distribution, along with its other beer brands.
BBH is adding capacity and reorganising its operations in Ukraine, replacing its top four directors after a poor performance last year that saw it lose market share to its competitors.
“We got tied up with issues in Russia, with people trying to stop the merger (of the Vena, Pikra and Yarpivo companies into Baltika),” said John Nicolson, chairman of BBH. “We took our eye off Ukraine. By having one bad year and not watching it, we lost three years.”
BBH is also launching a business in Uzbekistan where it will create a new local brand, as well as brewing licensed brands. The company, which is the first international brewer to enter the country, is working with a local partner. The brewery in Tashkent is expected to be up and running in 2007 and producing one million hectolitres of beer within three years. BBH plans to compete against a strong import black market with cheaper prices.
Nicolson said Uzbekistan, which has a population of 27 million and beer consumption of just 10 litres per capita, had the potential to grow like Kazakhstan.
Baltika is already the number one brand in oil-rich Kazakhstan, where the beer market is growing by 40% per year. Nicolson said BBH would also consider moving into other “stans” in the region if the right opportunity came to light.
These expansion plans could prove significant for Edinburgh-based S&N, which now derives 25% of its profits from BBH. Froggatt said that BBH could well account for as much as 35% of its profits in future. But while most analysts are pleased with S&N’s Russian performance, it still has much to prove in its biggest overseas market, France.
Beer sales in that country have been stymied by a difficult economy, operational inefficiencies and a cultural preference for wine. Froggatt said last week that the beer industry had not catered well enough to the French taste buds and would have to become more innovative. But he defended the company’s focus on Western European markets.
“Western Europe is still the largest profit pool in the world. We still have an opportunity to build brand value. We’ve done that in Portugal. We’re starting to get things working in France,” he said. S&N is selling the Champigneulles brewery, improving its on-trade sales force and setting up a national contact centre for Brasseries Kronenbourg.
Meanwhile, Froggatt reiterated his stance on whether there could be a future full-blown merger between Carlsberg and S&N. S&N’s share price has benefitted from speculation that the company could be acquired, with Anheuser-Busch, SABMiller and Carlsberg touted as possible suitors.
Froggatt said he would like to have “a closer relationship” with Carlsberg, but that could be defined as anything from more marketing agreements to a merger. He added: “At the end of the day, you can’t really work on a deeper relationship unless it goes both ways.”
“Neither of us needs to do something. We’re very happy doing what we’re doing. And we’re not going to do anything that is value-destructive for our shareholders.”
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