Beer Af­fairs

Be­larus’ brew­ing in­dus­try will have to ramp up its per­for­mance

Economy of Belarus - - FRONT PAGE - Irina KONTSAVENKO

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?

Key In­di­ca­tors

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).

Ex­pan­sive Im­port

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.

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