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Knights of the Vine RUSSIA


Re-thinking the National Drink
As beer overtakes vodka as Russias tipple of choice, huge multi-nationals are jockeying for position to claim their share of this growing market.
By Elizabeth Buchanan

As the Russian saying goes, "Beer without vodka is money in the wind." In other words, if getting drunk is what youre after, beer alone wont get the job done; youll be wasting your hard-earned cash and leaving yourself far less satisfied than the loud group throwing back vodka next door.

Whether used to wash down a shot of vodka, or mixed right in (a drink nicknamed "Yosh" in Russian), beer has long been considered a drink for lightweights a brown soda to be drunk in the morning, afternoon, or with a snack. Beer is not, many Russians will tell you, a serious social beverage.

During the Soviet era, most of the domestically produced beers available for general consumption were low-quality, tasteless brews. Its not hard to understand why the popularity of beer lagged far behind other drinks for most Russians.

But all thats changing. From the white-collar banker in Moscow to the retirees playing chess in the sunshine on a dusty stonewall along the Volga River, consumption of beer in Russia has taken a huge leap in recent years. In the last three years alone the average Russian has increased his beer consumption from 36.6 liters in 2000 to 53.4 liters per person in 2003, making Russia the second fastest-growing beer market in the world after China.

That means that Russians may soon be drinking as much as the average European, who now consumes 73 liters a year. And beer producers are happily responding, producing beer in enough quantity and variety to satisfy almost everyone. Look in local kiosks and supermarkets, or in that fashionable new beer pub and you will find more than 100 brands of beer from which to choose: light, dark, ale, filtered and unfiltered, sometimes mixed with lemonade, lime and tequila.

There are the low-priced brands popular among the budget-conscious drinkers and the under-25 set: Baltika, Tolstyak, Afanasii and Sibirskaya Korona, all patriotically marketed as "nashe pivo" our beer. And then there are the higher-end brews like Tinkoff, which markets its brews as ultra-premium, and operates a growing network of successful microbreweries.

In between, there are dozens of others, many of which appear to be produced by small independent regional brewers. But looks can be deceiving, and despite this long list of brands, the ownership and production of Russian beer is surprisingly consolidated among a handful of players most of them huge foreign-owned holding companies reaping profits for shareholders based far from Moscow.

An Early Toast

One of the original and most interesting foreign players in the Russian beer business is Shiv Khemka, a teetotal vegetarian with a degree from Wharton. Khemka, whose family has been doing business with Russia since 1958, moved to Moscow after the collapse of the Soviet Union to consolidate his familys investments. When he analyzed all the industries ripe for growth, beer came out on top.

With his habit for making toasts with mineral water instead of vodka, Khemka is perhaps an unlikely candidate for business success in Russia. But as head of the Sun Group, which together with Interbrew of Belgium owns Sun Interbrew, he has managed to carve out a whopping 15% share of the Russian beer market. (Baltika Brewing Company, now owned by Scottish & Newcastle and Carlsberg breweries, currently controls the largest share of the market with 20%.)

"In the beginning, we looked at different industries, but we wanted to work in the consumer goods market," Khemka said. "At the time beer consumption in Russia was 13 liters per capita, compared to 100 in the U.S. There was clearly room for this product to grow." After a number of thwarted attempts to buy controlling interests in regional breweries, Khemka finally acquired a brewery in Perm in 1992. At the time, it was a moldy, rat-infested operation on the outskirts of the city. Today, it bears little resemblance to its former self. A sleek, modern production facility that produces Viking Beer and a number of other popular Ural brands, it is one of nine factories in the Russian Sun Interbrew network. (The company also owns three breweries in Ukraine.) "It was a supply problem, not a demand problem," Khemka said. "We upgraded assets and upgraded technology."

Whos Brewing Who?

Tinkoff`s founder, Oleg Tinkov, proposes a toast to his companys rapid growth.

Foreign-held breweries, like Turkish-owned Efes (with brands Stary Melnik, Bely Medved and Sokol), the South African/American SAB-Miller (Zolotaya Bochka and Bogatirya) and Sun Interbrew (Klinskoe, Sibirskaya Korona and Tolstyak), all do a clever job marketing their products as "hometown" Russian brews the drink of choice among real men. The fact that in many cases these brands were created by market-savvy foreigners doesnt seem to matter.

"Beer is a peoples drink," says Alexei Murigin, a 22-year-old graphic designer living in Moscow. "Our beer is made in Russia. Sure, maybe the equipment is foreign-but they are our factories." (Well, sort of.)

You dont see too many Russians walking around with bottles of Corona, Heineken or Budweiser in their hands. And it may not be just because of the cost difference between these premium imported brands and the cheaper, Russian ones. Cost is a factor, but culture is important too. Beers like Baltika and Tolstyak are portrayed as the ultimate in democratic drinks, meant to be shared on the street or around a table with friends. These images resonate with many patriotic Russians, and have helped in strengthening this more affordable segment of the market.

Nevertheless, as incomes have steadily risen over the past few years, many beer drinkers have been switching to imported beers, which are generally perceived to be of a higher quality and, at least to some, more fashionable to drink than domestic brews. And as imports become more popular, these same giants that are brewing Baltika, Bochkaryov and Stari Melnik have also begun producing "imported" beers like Carlsberg, Heineken and Warsteiner under licensing agreements here in Russia.

Today, the Russian beer market can be broken down into segments which include Economy, Mid-range, Local Premium, Licensed, and Premium Licensed, and the major "local" brewers are represented in most of these segments in an effort to provide something that will appeal to almost every taste and budget.

So has beer replaced vodka as Russias drink of choice? The answer is yes, sort of, but not everywhere, and not with everyone. "We see different trends in demographics," says Alexei Krivoshapko, a retail and consumer goods analyst at investment bank United Financial Group. "The older generation is slowly adding beer, while continuing to drink vodka, while the young generation is switching to beer from vodka." Experts make a case that the increased consumption of beer is a strong indicator of economic growth, and a sign of a trend toward lower rates of alcoholism. But while the beer market has boomed, doubling in growth since 1996, vodka sales havent declined sharply. In fact, vodka sales grew until 1998, when they began a very slight decline overall. "Most urban Russians need to get up in the morning and go to work. Beer allows them the after-work unwind, but not the listing drunk that happens with vodka," explains Gary Krueger, an economist at Macalester College in St. Paul, Minnesota who studies the Russian beer market. "Outside of the urban areas it still seems that vodka is the currency of choice. This explains why vodka consumption has not fallen by much."

Another explanation could be that its illegal to advertise vodka and other potent potables on Russian television (though this law is currently under review). Beer, on the other hand, is technically classified as a "soft drink" in Russia, and therefore can be advertised. Humorous beer ads, featuring friendly cartoon animals or happy young adults, resonate with young drinkers, increasing brand awareness and creating loyal consumers.

Expanding The Market

As Russians begin earning more money their tastes in alcohol are undergoing a shift. Many Muscovites treat themselves to more expensive vodkas, higher-priced beer, and evenings out at beer restaurants with their own mini-breweries. In cities like Moscow, there seems to be a beer pub for almost every taste and lifestyle.

Behind the bar at local beer restaurant Probka.

Efes made headlines in the spring of 2003 when it opened the Phlegmatic Dog, an Internet pub in the Okhotny Ryad shopping center. The concept, which was developed by the companys marketing team in Turkey, has given Efes a foothold in the restaurant sector, but perhaps more importantly provided them with a very visible vehicle for promoting their beer brands. Customers can order from the online menu by touching the screen, and surf the web while they eat and drink.

"We feel that in Russia, many of our consumers are also well-acquainted with the computer and the Internet. On the other hand, not all Muscovites and Efes drinkers have a computer at home," said Efes Beverages Group President Mukhtar Kent, in an interview following the Dogs opening.

A much larger venture was that of Oleg Tinkov, a Ukrainian miners son, who opened the first Tinkoff brewpub and restaurant in St. Petersburg in 1998. That first venture was so successful was that the young entrepreneur has since opened several more in Moscow and other regional centers and plans to have a total of 15 by the end of this year. Hugely popular among white-collar Russians and expats, the Tinkoff brand includes six varieties of filtered and unfiltered beers which are sold at the companys brew pubs and through retail channels.

A hip, rebellious image has helped Tinkoff to expand its market share to almost 5%. Not bad for a local start-up, fighting it out with some of the most powerful brewers in the world. The companys website proudly states that its mission is to "propagate liberal values and respect the consumers freedom of choice." Tinkoffs explicit television ads ("Why Choose?" shows a man lying on a boat in between two naked women-one white, the other black) have been attacked by government officials, while being praised by the advertising community.

Last November the company spiced up its creative efforts further with the hiring of Oliviero Toscani, the Italian advertising guru who was once denounced by the Vatican for his "Love Without Barriers" campaign for Benetton which pictured a nun and a monk kissing. A recent press release cautions the public to "get ready" for the next Tinkoff ad. Unconventional? Perhaps, but the strategy seems to be paying off. The company expects revenues of $72 million in 2004, and is planning an IPO in 2005.

Given the dynamic growth of the Russian beer market, should the rest of the world "get ready" for an onslaught of imported Russian brew-skis? UFGs Krivoshapko doesnt think so. Despite rumors that Tinkoff plans to begin sales in the United States, "there is a limited export potential to countries with a Russian diaspora, but no more than that," he says. "The CIS, however, offers better opportunities."

Nevertheless, a few things do seem certain: the quality and taste of Russian brews are steadily improving, marketing is getting more clever and entertaining all the time, and as beer continues to grow in popularity more and more Russians are drinking it instead of vodka. At the end of the day, Russians like a pokhmel (hangover) no more than the next personand vodka mixed with beer is a guaranteed headache.

Major Local Competitors And Their Main Brands


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