Belarus’ brewing industry will have to ramp up its performance
Seven years ago decisions were made in Belarus to go ahead with large-scale retooling of the breweries and to allow the world’s leading beer makers to access the domestic market. The brewing industry was supposed to increase its manufacturing capacity and rack up the output of Belarusian and foreign beer. Since then $300 million has been spent on modernizing the enterprises, including $30 million granted by the state budget and $160 million allocated by state-run and private companies. Considerable resources borrowed from Belarusian and foreign banks have been used, too. As a result, the manufacturing capacity of Belarusian breweries has increased. However, the breweries operate at 62% of their capacity nowadays, with beer import as high as about 30% of the market. To compare: in Russia and Ukraine beer import is under 5%. The situation definitely needs to be addressed. In April the head of state convened a government session to deal with the state and prospects of the national brewing industry and gave instructions to iron out all the wrinkles by 1 January 2015. What is going to be done to revive the country’s beer market, reduce import, and bolster the performance of Belarusian companies?
At present 14 private and staterun breweries operate in Belarus, including six compact ones. In 2013 the top manufacturers were OAO Krinitsa, IZAO Heineken Breweries, OAO Alivaria Brewery, and OAO Lidskoe Pivo. Only OAO Krinitsa has a state-owned share in its authorized capital, while the other three have a prevailing share or a 100% share of foreign capital. The foreign investors are represented by Heineken (Netherlands), Carlsberg (Denmark), and Olvi (Finland). The top four Belarusian manufacturers accounted for 98.9% of the country’s beer production. In 2013 a total of 42.5 million decaliters of beer was made or 99% as against 2012. By the way, the neighboring markets demonstrate a serious decrease in beer production that even leads to the closure of breweries.
Thanks to the accomplished modernization the manufacturing capacity of the Belarusian breweries has reached 68 million decaliters of beer per annum. 2007-2009 saw the second and third phase of the investment project to reconstruct OAO Krinitsa accomplished. OAO Brestskoe Pivo was modernized in 2008-2009. OAO Alivaria Brewery was retooled in 2007-2010 in addition to Heineken Breweries and OAO Lidskoe Pivo.
Belarusian breweries broadly use modern beer containers (glass bottles, Amosorb PET bottles, aluminum cans, and kegs). The containers allow the companies to improve beer quality and increase shelf life, optimize distribution flows. PET bottles represent the most popular kind of containers on the home market and account for 77.2% of the total. With the market demand in mind, Belarusian breweries have invested heavily in the installation of high-performance bottling lines to offer beer in PET bottles with sizes varying from 0.75 liters to 2.5 liters. The share of PET-bottled beer will increase thanks to the reduction of the share of glass-bottled beer. Specialists attribute the trend to the high cost of glass.
Barley malt is the main raw material used to make beer. OAO Belsolod is the only company that makes barley malt in Belarus. The factory completely satisfies the demand of the domestic manufacturers and exports the merchandise to Russia, Ukraine, Georgia, Armenia, Tajikistan, Kyrgyzstan, Moldova, Kazakhstan, Turkmenistan, and Uzbekistan. After the latest modernization the company’s barley malt output capacity has increased from 65,000 tonnes to 130,000 tonnes per annum. Apart from that, OAO Belsolod has accomplished an investment project to increase the capacity of the existing grain elevator by 100,000 tonnes per annum.
“Every year the company puts systemic efforts into creating the feedstock zones to grow barley malt. The technology used to grow the product is regularly improved; tight control over the entire complex of crop protection works is maintained. OAO Belsolod’s regional agronomists work in all the regions of the country,” noted representatives of the food industry concern Belgospishcheprom.
In 2013 Belarusian breweries sold about 43.3 million decaliters of beer primarily on the home market. The home market bought about 35 million decaliters of beer. Export rose from 6.1 million decaliters in 2011 to 8.2 million decaliters in 2013 (a 19.2% share in the total output). The domestic breweries export their make to Russia, Lithuania, Ukraine, Latvia, Moldova, Kazakhstan, Armenia, Georgia, Estonia, Germany, Poland, and New Zealand. Russia, Lithuania, and Ukraine buy over 96% of the exports. OAO Krinitsa is the top exporter (63.5% of the total export).
However, for the last three years beer production in Belarus has been declining while import has been on the rise. In 2013 Belarus imported 14.7 million decaliters of beer worth $91.7 million or 124.1% and 127.2% respectively as against 2012. In particular, a considerable increase in beer import from Ukraine has been registered — 4.1 million decaliters worth $21.2 million (a 212.9% rate and a 199.6% rate respectively). Beer import from Russia totaled 9.9 million decaliters worth $60.7 million (105.9% and 112.3%). Meanwhile, Belarus exported $70 million worth of beer and barley malt. Specialists believe that the Belarusian breweries, which are owned by transnational beer corporations, contributed to the state of affairs among other factors. The corporations were not interested in the production of new beer brands in Belarus in view of the falling beer sales in Russia and Ukraine. Instead the corporations opted for importing beer at lower prices.
Managing Director of IZAO Heineken Breweries Vasilen Tsanov remarked:
“We put huge efforts into developing the domestic beer market,
implementing the program for introducing import-substituting beer brands. Our company imports an insignificant amount of foreign beer, and these imports include only globally recognized brands Heineken, Krusovice, and Amstel. The company does not have the raw materials to make this kind of beer in Belarus”.
At present Belarusian breweries offer 90 beer varieties, including 23 import substitutes (analogues of imported beer and licensed sorts of beer that make up the premium and super premium segments). However, the production of importsubstituting beer sorts has dropped from 5.9 million decaliters in 2011 to 4.8 million decaliters in 2013.
“The increase in beer import can be stopped, provided conditions to develop the domestic brewing industry are enabled. For instance, Belarusian breweries are prohibited to import barley malt unlike Russian breweries, while Belarus and Russia are in the common customs space. The prohibition impedes the creation of new top-quality products to substitute imports,” believes OAO Lidskoe Pivo Director General Audrius Miksys.
In turn, Vasilen Tsanov is convinced that it is very difficult for Belarusian beer brands to compete within the framework of the Customs Union since the Belarusian brands are rather young in comparison with Russian brands. It is said that consumers tend to
choose the beer they recognize better and do not treat such beer as import. Therefore, the breweries believe it is necessary to remove some restrictions on beer advertising and promotion.
“One can say today that the quality of Belarusian beer is on par with imported beer. However, Belarusian beer lacks advertising. Marketing instruments have been virtually negated by the existing legislation. The reduction of advertising time on television by two hours and the increased cost of air time, the prohibition to arrange any events to allow us to explain differences in the image of different brands and taste peculiarities rule out full-fledged marketing,” noted Audrius Miksys.
To deal with beer import expansion the Belarusian government has taken a number of measures. Onetime licenses are now required to import alcohol-free and malt beer from outside the Customs Union to Belarus as from 1 May and through 31 October. The measure is laid down by Council of Ministers’ Executive Order No.365 of 18 April 2014. The licenses are issued by the Trade Ministry with approval of Belgospishcheprom. The validity period of a license is one year. However, the measure is temporary; therefore, licenses are valid for
six months. Belgospishcheprom approves licenses if the producer signs an agreement on terms of delivery. The agreement specifies minimal prices for the merchandise while the foreign trade contract enforces these prices and forbids dumping prices. By the way, Belarus used to license the import of Ukrainian beer from 2010 through 2012.
Another change on the domestic beer market will become noticeable on 22 July. A prohibition to sell beer in plastic containers larger than two liters will be enforced. However, retailers will still be able to sell the supplies they have until their shelf life expires. Apart from that, in Q2 2014 contracts will be signed with beer manufacturers to set forth beer production and beer import figures. A Belarusian brewery is supposed to export more beer than it imports.
Meanwhile, the auditing of economic operators will continue, focusing on the observation of technical regulations. A new trade law will come into force on 22 July to allow tighter control over the operation of large chains that work on the consumer market. This year the Trade Ministry will audit the operation of all the major chain companies. Plans have been made to negotiate the possible placement of licensed beer production at Belarusian breweries in the future with companies from Belgium, the Netherlands, the UK, Denmark, and Finland. Changes to improve import substitution are supposed to be achieved this way. But before licensed beer production can start, the brewery needs to secure a certain volume of sales to make sure the project will make economic sense.
Bringing Down the Alcohol Content
Nowadays the demand for beer in Belarus is stuck. Beer consumption per capita is 51 liters, with beer accounting for about 10-20% of the nation’s alcohol consumption. Specialists attribute the situation to poor drinking habits, the low number of restaurants, pubs, and beer bars. Small-scale beer production at compact breweries, for instance, in cultural and ethnographic centers, national parks, hotel complexes has been suggested as a way to address the situation. Beer festivals as part of the harvest festival Dazhynki and other festivals are also on the menu. At present Belarusian compact breweries can make 0.2 million decaliters of beer per annum, which is next to nothing.
By the way, small-scale beer production is vigorously developing across the globe. For instance, in Germany breweries that produce under 10,000 decaliters of beer per annum represent about a half of the total number of breweries. In Czechia small-scale enterprises account for over 70%. Compact breweries are now developing in Russia to flexibly respond to demand changes. The demand for small-scale breweries is on the rise due to the development of the hotel – restaurant – cafe segment.
Apart from traditional preferences of Belarusians, beer sales are also affected by prices. In the last 2.5 years excise duties on beer have been raised by ten times, sending prices through the roof. In particular, on 1 January 2014 the
excise duties on beer with alcohol content under 7% rose up to Br3,300 per liter of ready-made product. The excise duties on beer with alcohol content over 7% rose to Br6,600. The excise duties are scheduled to go up to Br3,500 and Br7,000 respectively as from 1 July 2014. In 2013 the state budget received $173 million from the brewing industry or nearly three times as much as in 2008.
As a way to encourage beer sales and consumption Chairman of the State Control Committee Alexander Yakobson suggests tying beer excise duties to excise duties on alcohol beverages. Apart from that, he deems it necessary to differentiate beer excise duties by granting preferences to beer with lower alcohol content. The measure is supposed to add to the financial stability of the Belarusian breweries that make such beer and to reduce alcohol consumption in the country.
Apart from having to pay higher excise duties, Belarusian breweries have to pay extra for control signs. However, in spring the Finance Ministry introduced new prices for control signs that will be used to mark beer depending on the volume of the packaging. Now control signs to mark beer in containers under one liter cost 3.3 times less or as much as Br150. The price for control signs for beer in containers between one liter and two liters has been reduced by 30% to Br350. At the same time the price for control signs for beer in containers of over two liters has been doubled to reach Br1,000. Up till now prices for control signs uniformly stood at Br500. The cost of control signs is included into the prime cost of products and into the costs taken into account for taxation purposes.
Despite the overall ambiguous picture of the Belarusian beer market, individual enterprises are successful, earn profits, have a high workload, and increase their output. Hence, it is possible for Belarusian breweries to operate at a profit. The decisions the government has made as well as the future implementation of the measures in development are supposed to produce the necessary economic effect for the country’s entire beer market.