Duty & Regulations Pose Fresh Challenges for the Russian Beer Market

Wednesday 14 August 2013, Amsterdam

A hostile regulatory environment - which has imposed significant restrictions on the advertisement of beer - and further increases in the excise tax burden suggest a bleak future for the Beer market in Russia, according to leading consumer specialist Canadean’s new report: Russia Beer Market Insights 2013. This is despite innovative efforts - especially from microbreweries - to attract new clients through the creation of new types outlets for on premise beer consumption, and is compounded by the expected implementation of a new law to prohibit the packaging of beer in plastic bottles larger than 50cl from January 2014 that will drive low-income consumers to lower priced spirits.

For organizations that have a stake in the Russian beer market, a proper understanding of the broader context of life in Russia, and beer’s place in it, is paramount to successfully capitalizing on the opportunities the market presents.

Prohibitive Prices
Whilst Quick Service Restaurants such as McDonald’s have been growing in popularity, and ‘traditional eating’ outlets still have significant presence in medium and small-sized towns and villages, eating out every day is still too expensive for the majority of Russian consumers.

Food and drink prices in on-premise channels are fairly high (from two to three times higher than in retail), though are usually less expensive in small-sized towns; even in these more moderately priced outlets, only comfortably middle class consumers can afford to frequent them on an everyday basis.

Shifting Tastes
In the Soviet period, alcohol consumption was mainly focused on spirits – predominantly Vodka. However, the past twenty years have seen a shift in consumption patterns, with the younger generations and most advanced middle class consumers gradually switching their preferences from vodka or other homemade spirits to low alcohol beverages, such as beer, wine, and flavored alcoholic beverages.

In terms of the most popular beer types, Russian consumers traditionally give preference to lager, but recently there has been a rise in the popularity of light lagers or ‘coolers’ – flavored beer and beer cocktails, with lemon and orange flavors being favored most. These drinks were targeted primarily at female consumers, with male consumers still favoring the taste of traditional beer.

Non-pasteurized & Unfiltered Beer on the Rise
Another trend in the Russian Beer market is the rise in popularity of non-pasteurized and unfiltered beers. Previously, these products were offered by large and medium sized breweries in insufficient quantities to satisfy demand. This gap in the market, coupled with the higher retail prices of bottle beer in recent years, has created favorable conditions for microbreweries to compete effectively with larger breweries in this segment, despite small volumes of production.

With the challenging cultural and economic environment for Beer in Russia, brewers must be highly sensitive to current and emerging trends in the market in order to capitalize on revenue boosting opportunities.

Production Down Due to Restocking
In 2012, production of beer in Russia declined by 4% following marginal growth the previous year. This was a consequence of significant pre-stocking at the end of 2011 by leading retail networks and wholesalers ahead of the 20% increase of excise tax on beer that was implemented from January 2012, thereby leading to diminished purchasing orders for breweries.

Consumption of Beer
Consumption of beer in volume terms for 2012 was almost the same as in 2011, with a marginal decline driven by the migration of a significant proportion of low income consumers from beer to low priced spirits, which became more price-competitive after several consecutive increases of excise tax rates for beer.

Consumption of beer brands was also negatively affected, by legislative restrictions on beer advertising that forbade all advertisement in communication media, barring BTL advertising in retail outlets. Adding further fuel to the fire of declining brand beer consumption was the restrictions placed on beer retailing through small-sized retail outlets (ie: with areas less than 50 sqm), such as kiosks.

Microbreweries
Seeking to take advantage of the overall price increase of branded beers, along with the new limitations on advertising and retail distribution, microbreweries sought to expand their customer base by attracting new clients to newly opened economy format outlets for the on-premises consumption of beer, which were exempt from the newly imposed restrictions on the small-sized retail outlets, thereby increasing sales volume and share.

Favorable summer weather
The summer weather was good in most of the regional markets, and positively impacted beer consumption. In fact, in Q2-12, when the weather was warm and sunny, the beer industry demonstrated positive sales dynamics compared to the same period the previous year, with the sales volumes turning negative only in the second half of the year.

Premium Prices Perform
Dynamics of consumption varied significantly depending on price segment. The more positive sales dynamics were registered in the premium price segment, with the highest growth rates demonstrated by the leading national and foreign beer brands – produced locally under licesne – as well as by imported superpremium beer brands, which were driven by rapidly growing consumer demand among wealthier consumer groups.

In the economy (discount) segment, consumption dynamics were also positive, though characterized by a low single-digit growth rate. This growth was driven by consumers downgrading from mainstream beer brands to economy beer, motivated by the increased retail prices of mainstream beer in 2012 – at an average of 10%.