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Beer slump skims froth off Russian brewer euphoria
By Melissa Akin
MOSCOW, Nov 5 (Reuters) - Could there be trouble in paradise for Russia's brewers?
Brewers are suddenly feeling the pinch after a two-year spree during which customers would knock back as much as brewers could throw at them and consumption shot up by half.
Russians, traditional vodka lovers, have been lured by an array of light, dark, porter and even fruit-flavoured beers.
Foreigners, often reluctant to invest in Russia, cashed in. Interbrew, Carlsberg, Scottish & Newcastle, Heineken and SABMiller have all bought into local brewers as the market has let rip.
Russia's biggest brewer Baltika says its soaring sales growth suddenly stopped short in September, when sales fell by eight percent from September of the previous year -- despite a 22 percent overall rise in the first nine months.
In October they were 11 percent lower than in October 2001, Baltika, a unit of Danish Carlsberg and Scottish & Newcastle, told Reuters in a statement. "This autumn has seen a decline in the entire Russian market," it said.
The Russian Beer Union, an industry group representing around 70 percent of total Russian beer production, said the fall in October for the industry was about eight percent.
Companies saw a variety of factors contributing to the sudden drop in demand, including an unusually cold autumn, which discouraged country excursions and other outdoor activities for which beer is a favoured accompaniment.
The Beer Union says Russians drink about 45-46 litres of beer per head, just over half the average for Western countries. It says the market can support 55 litres per head.
BAD FOURTH QUARTER EXPECTED
Analysts say that should still permit growth rates above those in European markets for a few years to come, but the sudden autumn drop in demand is likely to mean a bad fourth quarter for the brewers and a cut in forecasts.
"If we saw a one-off month (of year-on-year decline), okay, but if it's a trend, it's obviously worrying," Brunswick UBS Warburg Financial analyst Vladimir Savov said.
"This may result in actually lower consumption, so we would have to scale down our forecasts if this is the case, if the fourth quarter is so much weaker than expected," Savov added. He had predicted 15.5-16 percent growth in beer consumption this year.
Savov said lower growth predictions would also have to factor in an attempt by parliament to ban beer advertising at peak television viewing hours and advertisements targeting young drinkers.
The Beer Union also says the government is favouring vodka distilleries by hiking excises on beer faster than on vodka this year and next.
Baltika says the government is discouraging beer producers with tax policies that make investment in factories more expensive and has forced brewers to hike prices, pushing consumers back to vodka.
"The price of beer in some regions is now the same as the price of a bottle of vodka," Baltika spokesman Alexei Kedrin said.
CUTTING COSTS
Kedrin said Baltika was now considering cost-cutting measures to keep prices down and investing more in its own distribution facilities rather than in factories.
Competition is getting more cut-throat as growth slows.
"Beer prices are behind inflation, which says that consumer demand is falling and competition is getting tougher," Vice President Inna Kochetova of the independent Ochakovo brewery told Reuters in answers to written questions.
Troika Dialog analyst Andrei Ivanov said that until this year, all that beer companies had to do to grow was churn out ever more beer.
"The market has become more competitive and companies' ability to retain position and keep market share is defined by other things," said Ivanov.
As competition becomes tougher, industry consolidation is like to intensify. The Beer Union said some smaller brewers have already gone under.
"(The industry) will move toward brands that are already successful and bring real profits, and small and midsized companies will disappear," said the deputy head of the beer union, Alexander Troitsky.
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