Going Premium in Russia is a Short-Term Tactic

The Russian beer market has taken a hit in the past five years as a consequence of the financial crisis in 2008, legislative changes in the beer market since 2011, and economic sanctions in response to the Russian government’s actions in the Ukraine. According to Euromonitor International, over 2008-2013, beer volume sales in Russia declined at a CAGR of 4%, with 2013 showing a 5% drop. The macroeconomic beating taken by the Russian market in recent years and legislative changes have pegged its volume sales performance below that of the rest of Europe. This has resulted in brewers changing emphasis from volume sales expansion to protecting margins.

Russia vs Europe Beer Market Volume

Source: Euromonitor International

What might save the Russian beer market?

One tactic applied to protect profit margins by the number one brewer in Russia, Baltika Breweries (Carlsberg A/S), is via product differentiation, emphasising the promotion of premium beers to push up value sales. The brewer launched Kollektsiya Pivovara, a ‘craft-positioned’ beer in 2014, as part of what it dubbed the Brewer’s Collection series, which is intended to meet the demand for craft beers in urban Russian markets. This is an action similar to Moskva-Efes Breweries’ 2014-released, 387 Osobaya Varka craft-like beer, but without displaying its multinational source on the label.

Russian brewers have applied other tactics to ebb the tide of above-inflation unit price increases, advertising ban, and restrictive retailing legislation. They have modernised the design and packaging of their beers, mixing this with extensive investment in advertising to justify a premium image and price. Brewers have also utilised smaller packaging to give the impression that unit price levels per bottle/can remained level, but that has raised the litre value per rouble.

The Russian beer market looks somewhat gloomy, but there is some light at the end of the tunnel. The ban on advertising beer has been lifted for a period of time in the run up to the 2018 FIFA World Cup that will be hosted in Russia. However, the ban was and partially lifted as it limits advertising to print media, on broadcast sport channels, and around sport facilities. There have also been some positive results for imported beers, especially from the EU, and specifically around ales, wheat beers, and pilsners. This is derived from the popularity of imported beers due to the Russian consumer perception that they are superior in quality to domestic brands. Further to this, brewers have been pushing non-alcoholic beer ranges that have the benefit of not being restricted by advertising legislation, which is helping to indirectly promote alcoholic beer.

What barriers does the Russian beer market face?

Let’s not be too optimistic about the aforementioned tactics. The success of the craft beer positioning is not necessarily attainable, since Russian consumers identify craft beers as those made by local microbreweries. The ‘Baltika’ label on the Kollektsiya Pivovara bottle does not hide its multinational credentials and so it is does not fit in Russian consumer perceptions of what constitutes a craft beer. It is right to doubt of the performance success of ‘craft-like’ line extensions by multinationals trying to bandwagon on the craft beer trend. The modernising and resizing of packaging, the popularity of imported beers, and emphasis on non-alcoholic beers trends and tactics will work in the short term by reducing any further volume sales decline and attempting to maintain healthy profit margins via an incremental increase in unit prices and promotion of the premium market.

Beer market recovery is nowhere to be seen yet in Russia as macroeconomic recovery is far from attainable. The continued impact of sanctions on imports and the natural lag in economic recovery following any future withdrawal of sanctions post-conflict resolution in the Ukraine will drag on market contraction. Major brewers, like Baltika Breweries, must think of maintaining their market equity by supporting beer volume sales in lower price bands. Beers will become less affordable if there is an increase in unit prices at an above-inflation rate, so consumers will seek to shift to other categories within alcoholic drinks, which offer better value for money, unless brewers offer them a mid-priced or economy option.

 

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