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Posted December 2014

Russia – Beer market woes take their toll

Dr Isaac Sheps, CEO of Baltika Breweries, who resigned on 27 November 2014, is the most high-profile casualty of the Russian beer crisis to date. Only three years ago he had been posted to Russia from Carlsberg UK and replaced Baltika’s then head Anton Artemiev, who had failed to prevent a slump in Baltika’s profits amid declining beer volumes and steep tax hikes.

The situation in Russia has not got any better since. In fact, the beer market continued to decline every year, taking total volume losses to over 20 percent between 2009 and 2013. Things got somewhat worse this year as the Russian economy has been struggling with a weakening of domestic demand and high levels of inflation, amid geopolitical issues with the Ukraine.

Worse still, the ruble currency has slumped by close to 40 percent against the dollar since the start of the year, and over 30 percent to the euro. As Carlsberg reports in Danish krone, which is pegged to the euro, you can work out for yourself what this could mean for Carlsberg’s 2014 profits from Russia.

Carlsberg said in November that it is sticking to its latest forecasts for a decline in profit of under 10 percent for the full year. Let’s hope Carlsberg did its currency hedging transactions in time.

Carlsberg is not the only international brewer struggling in Russia. All are burdened with production overcapacities. Carlsberg, AB-InBev and Efes have reported brewery closures this past year and, as early as 2009, Heineken started closing breweries. That’s why it will make interesting reading how much the three international brewers will write down the value of their Russian assets in their 2014 annual reports.

But the practical question remains: what to do with a brewery in Russia that is surplus to your requirements?

Heineken was the first foreign brewer to close two breweries. In 2009 it turned the Stepan Razin brewery in St Petersburg into a logistics centre and shut down the Ivan Taranov facility in Novotroitsk close to the Kazak border. These brewery closures came before the recent beer market malaise and were aimed at improving overall efficiency and profitability.

AB-InBev came next. Over the past two years its subsidiary SUN InBev has shuttered four plants: Novocheboksarsk, Kursk , Perm and most recently Angarsk in East Siberia. AB-InBev would not say what has become of the plants made redundant, but rumour has it that at least the Siberian brewery’s kit will be re-used once shipped to near-by China.

Already at the end of 2013, Efes Rus, the Russian subsidiary of Turkish brewer Anadolu Efes, announced the closure in Russia of two breweries in Rostov-on-Don and Moscow. Observers say that Efes is currently clearing its Moscow site because it is confident it will find a buyer for the remainder of its lease on the land.

Carlsberg’s Baltika with ten breweries across Russia has longest resisted any brewery closures. Only in September 2014 did Baltika stop beer production at its Chelyabinsk and Krasnoyarsk plants. A spokesperson said the two breweries are to be mothballed and “production is expected to resume as required by market demand”. That may turn out to be a pious hope because from what we hear Baltika’s flagship brewery in St Petersburg is only working at 40 to 50 percent capacity and more breweries could be shut down.

People familiar with the situation say that, while tanks as well as bottling and packaging equipment from all these disused breweries could find new homes, several brewhouses might end up as scrap metal because there is no second hand market in Russia for such large plant items.

It may have escaped our notice that over the past four years, the number of breweries in Russia has doubled: from 250 to 540 according to estimates. Obviously, this figure also includes brewpubs. Nevertheless, domestic brewers’ total market share has risen from 14 percent in 2009 to 24 percent in 2014, or from 15 million hl beer to 21 million hl. Read on

 

Russia – Minister slams Western dairy companies

The business climate in Russia seems to be getting icier. The Russian subsidiary of France’s Groupe Danone has demanded an apology from the country's agriculture minister after he slammed the company for its reportedly substandard dairy products in the latest Kremlin assault against a Western company.

Russian media reported that on 28 November 2014, Nikolai Fyodorov accused Danone, which runs Unimilk, and PepsiCo, the owner of the Wimm-Bill-Dann’s dairy line, of diluting their dairy products with cheap additives.

These products contain a maximum of 20 percent real milk; the rest is coconut, palm oil and other additives processed into a dairy mixture,” Mr Fyodorov was quoted as saying.

He also said that Russian regional authorities should “prevent them [Danone and PepsiCo] from pumping out funds from the regions and skimming the 'cream' off the cheap raw product that our poor peasants produce,” TASS reported.

Government subsidies are being used to support the dairy industry, they [Danone and PepsiCo] then buy it on the cheap and rake in huge profits,” Mr Fyodorov said.

Danone has been doing business in Russia for two decades. In 2010 it took over Unimilk, a Russian dairy producer. The acquisition resulted in Danone becoming the biggest company in the dairy market. Also in 2010, PepsiCo bought the dairy products and fruit-juice maker Wimm-Bill-Dann for USD 5.4 billion. Reports say that Danone and PepsiCo are the largest buyers of milk from Russian farmers.

In a reaction to the accusations, Danone said it viewed Mr Fyodorov's statement “as direct slander, which damages our reputation in Russia, as well as in the whole world,” and demanded a public apology.Read on

USA - Coca-Cola to sell milk

Apparently, any beverage will do for Coca-Cola to help it reach its self-set target of doubling its business by 2020. In December, it launched its own brand of milk, which it claims could become so popular that it will “rain money” for the company.

Fairlife, which is the product’s brand name, costs twice as much as regular milk and has 50 percent more protein and 30 percent less sugar.

Sandy Douglas, Coke’s global chief customer officer, was quoted as saying in November 2014 that Fairlife was “a milk that’s premiumised and tastes better and we’ll charge twice as much for it as the milk we’re used to buying”.

He told a conference: “We’re going to be investing in the milk business for a while to build the brand, so it won’t rain money in the early couple of years. But like Simply [Coke’s premium fruit juice line], when you do it well, it rains money later.” Read on

 

Colombia – CCU and Postobon become trust busters

SABMiller’s monopoly in Colombia is coming under attack. In November 2014 it was announced that Postobon, Colombia’s major soft drinks maker controlled by billionaire Carlos Ardila Lülle, will be joined by Chile’s biggest brewer CCU to start selling beer in Colombia.

Postobon and CCU plan to invest USD 400 million, spread over three to four years, which includes the construction of a 3 million hl brewery near the capital Bogota, with capacity equivalent to about 15 percent of the current beer market.

Bavaria, SABMiller’s Colombia unit, which it bought in 2005, controls about 98 percent of the country’s beer sales, making the Andean nation the brewer’s biggest source of revenue after South Africa, it was reported.

The end of decades of security issues means Colombia has fast become a fertile hunting ground for consumer goods companies. No wonder, Postobon thinks it has a chance to expand beyond its core business by using its distribution network to sell other products.

Behind Postobon, SABMiller and CCU are three powerful Latin American families. Bavaria used to be owned by the Santo Domingo family which still holds a 14 percent stake in SABMiller. Alejandro Santo Domingo, who sits on SABMIller’s board, is the second richest Colombian according to Bloomberg’s ranking, while Mr Ardila Lülle’s USD 3.8 billion fortune makes him the nation’s third-wealthiest person.

For decades, the two families competed for control of Colombia’s drinks, aviation and media markets. In the 1990s, they broke a truce not to tread on each other’s businesses after Postobon had built a brewery, only to sell it a few years later to Bavaria when it failed to make a dent on the latter’s monopoly.

Now Postobon has returned to the beer market, having teamed up with CCU from Chile. CCU is controlled by the Luksic family, Chile’s richest, and Heineken. They have 50 percent each of the holding company that owns a majority stake in CCU. The company is the largest brewer in Chile and the second largest in Argentina.

Several observers believe that Colombia may face a new beer war. In view of SABMiller’s 98 percent market share, “war” may turn out to be an exaggeration. Once a single company enjoys full penetration of a market, cracking this kind of dominance is really hard, not matter how deep the attacker’s pockets.

It will be remembered that SAB in South Africa in recent years managed to repel a full frontal attack by Brandhouse (a joint venture by Heineken, Diageo and Namibia Breweries), thus protecting its above 90 percent market share of total beer.

Similarly in Peru, where SABMiller’s unit Backus faced off the Ajegroup, a local soft drink company, which aimed at 10 percent of the market when it built a brewery in 2007. Seven years later, Backus still controls about 96 percent of the Peruvian beer market.

Last but not least, in Venezuela, the local brewer Polar forced Brazil’s Ambev to admit defeat (AmBev closed its brewery in 2013), having seen its share of Venezuela's beer market drop to less than 1 percent from 9 percent over seven years, it was reported.

However, on a positive note, it is to be hoped that the Colombian beer market will become more interesting and newsworthy in the near future.

 

Australia – More power to craft brewers

Things are getting political. The Australian Real Craft Brewers Association (ARCBA) is calling on the World Trade Organization (WTO) to push for equality and fair trade for small independent craft breweries. In a press release dated 27 November 2014, the ARCBA attacked its government for not taking a stand for Australian industries in a clear unfair trading position. Arguing that Australia’s government has not brought the taxation on beer into line with OECD 33 countries and WTO member countries, which puts Australian craft brewers in a disadvantageous position in trading terms vis à vis imported beers, the ARCBA has asked the WTO and the Australian Government to move to an international definition of ‘small brewery’ across all member countries and for all countries to extend the same level of government support and subsidies to these ‘qualified’ breweries irrespective of their country of origin.

The ARCBA is miffed that other countries are providing substantial reduced tax rates for their small brewers, which means they enjoy quite some price benefit when selling their beers in Australia. In particular U.S. craft brewers have been able to gain an unfair advantage in the Australian market, according to the ARCBA. Read on

 

Australia – Cricketers Arms strikes again

Will Cricketers Arms become the Blue Moon of the Australian craft beer market? Billed a more mainstream craft beer brand, sales of Cricketers Arms have jumped off the back of a recent revamp.

Acquired by Asahi Premium Beverages 18 months ago, Cricketers Arms was relaunched at Melbourne Cricket Ground at the end of November 2014.

Three out of four of the Cricketers Arms beers won bronze medals at the 2014 CBIA Craft Beer Awards and recent sales results provided another vote of confidence. Read on

 

South Africa – Coca-Cola and SABMiller join forces in Africa

Since the announcement early this year that SABMiller would move further into soft drinks, observers have been waiting for something to happen. Here it is: Coca-Cola and UK brewer SABMiller plan to combine their soft-drink bottling operations in southern and eastern Africa, in a deal that reflects both companies’ efforts to broaden their beverage offerings.

The deal will see them merge their bottling assets in 12 countries in southern and eastern Africa in several steps to create a new company which will be called Coca-Cola Beverages Africa (CCBA). It has the potential to transform SABMiller into Coca-Cola’s main consolidator in the continent.

As part of the deal, which was announced on 27 November 2014, Coke is paying USD 260 million in cash for the world-wide rights to SABMiller’s brand Appletiser, a carbonated apple juice, and the rights to another 19 non-alcoholic brands in Africa and Latin America.

For both SABMiller and Coke this joint venture is supposed to be a win-win. Coke has been diversifying beyond its core soda brands of Coke, Sprite and Fanta as more consumers shift to other beverages, while SABMiller is moving its focus to carbonates and other non-alcoholic beverages as global demand for beer stagnates and targets for consolidation become harder to find. Soft drinks already make up a fifth of SABMiller’s total sales by volume, compared with 17.2 percent in 2009, it was reported. Read on

 

United Kingdom – Revolution brewing in pubs

It may only be a temporary victory but it was still extraordinary. The UK government was defeated in a vote in Parliament on the degree of control that parent companies can exercise over pubs. On 18 November 2014 MPs voted 284 to 259 in favour of an amendment, which would allow landlords an independent rent review and give them the right to buy their beer on the open market.

Currently, so-called “tied pubs” are required to buy supplies - often at high prices - from the companies that own the pubs. Read on

 

USA – Redundancies at AB-InBev

Anheuser-Busch has recently completed a round of layoffs, U.S. media reported. But it would not say how many employees were affected, how many were in St. Louis, or give a date the layoffs occurred.

The trade publication Ad Age reported on 19 November 2014 that the cuts included brand marketing positions. It also wrote that the brewer recently eliminated jobs in its in-house media unit, Busch Media Group. AB-InBev said in September it would outsource its media buying to an outside agency.

On 20 November 2014 U.S. media reported further that Anheuser-Busch will cut an unspecified number of jobs in its U.S. sales division as part of a consolidation. Next year, it will reduce the number of sales territories in the U.S. to seven from eight. Read on

 

New Zealand - Asahi settles Independent Liquor lawsuit

Their creative accounting was not rewarded. Two private equity firms will have to pay Asahi Group Holdings' local subsidiaries USD 200 million (EUR 160 million) to settle a dispute over the Japanese company's acquisition of Independent Liquor in 2011. Asahi paid Pacific Equity Partners and Unitas Capital USD 1.3 billion for New Zealand’s beverage company Independent liquor, which was the Japanese brewer’s biggest purchase at the time.

Asahi launched court proceedings in early 2013 alleging misleading and deceptive conduct by Pacific Equity Partners and Unitas Capital. Asahi claimed that the two private equity outfits had significantly inflated Independent's earnings during the sale process. Read on

 

Greece – A new Olympic mythos

What kind of tourists visit Greece these days? Misers? Tee-totallers? Although inbound tourism to Greece has been on the rise over the past few years, beer consumption declined to 3.9 million hl in 2013 from 4.5 million hl in 2008 according to data published by the Brewers of Europe. In the past, thirsty tourists proved a boon to the country’s brewers. Not any longer, it seems.

That’s why it is hoped that the forecasted benefits from the merger of Olympic Brewery and Mythos Brewery will not turn into a mythos. On 18 November 2014 Carlsberg announced it is to strengthen its market position in Greece through a merger of the country's third largest brewery, Olympic Brewery, and its own Mythos Brewery. The enlarged group will be called New Olympic Brewery and will hold a market share of 29 percent, making it Greece's second largest brewer behind Heineken’s Athenian Brewery at 49 percent. Read on

 

Czech Republic – Heineken’s sales talk with Molson Coors gone quiet

You snooze, you lose. Or “those who are late will be punished by life itself“. Mr Gorbachev’s famous words will be ringing in Heineken’s ears. Heineken is the number three brewer in the Czech Republic, which it entered late, in 2003, when it acquired the Czech brewer Starobrno. In 2007, it bought the then German-owned Krusovice brewery from Radeberger, increasing its market share to 8 percent. But even with the purchase of Drinks Union in 2008, Heineken's share has languished at around 13 percent. Same with Molson Coors. It acquired Staropramen in 2012 when its then owner, the private equity-controlled brewer StarBev, was sold for USD 3.5 billion. Staropramen, which is the country’s number two brewer, has a market share of 18 percent. SABMiller’s Pilsner Urquell is number one with a market share of 47 percent. Budweiser Budvar ranks fourth at 8 percent.

It really came as no surprise when in September 2014 Czech media reported that Heineken was in talks about selling its Czech operations to Molson Coors. Needless to say, both Heineken and Molson Coors declined to comment on the rumour.

The reason why Heineken may be willing to part with its Czech unit is that it has not advanced significantly. The former SAB and Staropramen were buying up outlets and signing up hotel owners with generous but restrictive contracts, particularly in Prague, before Heineken came on the scene. A standard technique to squeeze out the competition.

Further, if you look at a map of the Czech Republic, all the Heineken breweries are in economically depressed regional areas, off the beaten tourist track. When Heineken acquired the breweries, it gained many brands, a couple of nice plants but not much market and limited areas for growth, observers say.

Molson Coors, on the other hand, has three breweries in the Czech Republic. The site which the Staropramen brewery occupies in Prague is now considered prime city real estate. The Heineken offer might be of advantage for that reason. Were Molson Coors to sell the site, Heineken’s Krusovice brewery, located 55 km to the northwest of Prague, could come in handy – depending on capacity, of course.

In theory, Heineken and Molson Coors would make a nice fit in the Czech Republic. Why the rumour mill has gone quiet remains a puzzle. Perhaps the two parties could not agree on price?

 

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