Ukraine: SUN Interbrew, Obolon, BBH Ukraine and Sarmat to fight for market share

The Ukrainian beer industry continues to be dominated by four producers that control 95 percent of the market, but competition between them is expected to be ferocious in the upcoming year, the Kyiv Post informed June 22.

Ukraine’s four largest beer companies – SUN Interbrew, Obolon, Baltic Beverages Holding Ukraine (BBH Ukraine), and Sarmat – have infused massive investments into aggressive advertising campaigns and product development, are expanding their already sizeable brand portfolios, and upping distribution to ensure that their products are available at as many points of sale as possible – ideally in kiosks and stores in every small town and village in the country, where newer brands are still largely unavailable.

All four beer producers have increased their market share over the last couple of years, partly by squeezing out small local breweries, such as the Gambrinus brewery in Odessa, which closed last year.

Currently, the market share of small breweries is estimated to be around 4-5 percent, although Dragon Capital’s June 14 market report showed that it has further declined by 1.1 percentage points year-on-year and currently stands at just 3.5 percent in May 2006.

However, Ukraine’s customer base is still not growing fast enough to absorb this heated competition on the beer market, industry experts say, and even though they’ve siphoned off market share from smaller breweries, SUN Interbrew, Obolon, BBH Ukraine and Sarmat have been actively competing with each other to win over new customers.

At 40-48 liters per capita per year, Ukraine’s beer consumption remains much lower than levels observed in traditional Western European beer-drinking countries, such as Germany, Belgium and the Czech Republic, whose consumption ranges from 120 to 150 liters per capita per year, as well as Russia, whose residents drinks 60 liters per capita annually.

According to Aleksandr Vaypan, a consultant for Spetkor, Sachs and Company, a Kyiv-based investment banking and management consulting firm operating in Ukraine since 1996, these differences are partly cultural, with Ukrainians historically drinking less beer. However, Vaypan said that Ukrainians’ lower beer consumption levels can also be attributed to lower incomes, weaker distribution on the part of Ukrainian companies, as well as Ukrainians’ very low consumption of draft beer, largely due to the relatively few typical American bar or Irish pub-type establishments in Ukraine compared with, say, Russia, where consumers drink slightly more draft beer.

As competition over this limited customer base intensifies, Oleksandr Slobodyan, president of Obolon, a company 100 percent owned by its employees, noted that “the question of customer loyalty remains critical … as almost all companies have expanded production capacities and introduced new varieties and brands.”

Moreover, the rising cost of TV advertising makes it more difficult to promote new local and licensed international brands by increasing on-air exposure. This is forcing Ukraine’s major market players to go further than just marketing their products creatively and demands more creativity in the development of the product itself.

“If last year it was possible to secure one’s position in the market by increasing distribution, merchandising or through aggressive marketing strategies, this year it will be imperative to – in addition to these methods – look for innovative ways to retain customers,” Slobodyan added.

Obolon is Ukraine’s largest exporter of beer, accounting for 80 percent of all exports in 2004 and 83.4 percent of exports in 2005. In 2005, Obolon had a 26.2 percent share of the local market and produced 7.7 million hectoliters of beer, 75 percent of which (5.5 hectoliters) was sold locally, with one hectoliter being equal to 100 liters of beer. The company’s share of the local market grew to 28.4 percent by the end of the first five months of 2006, according to Slobodyan. The company estimates that year-on-year growth in production was 37.8 percent in 2005 and 21.8 percent in the first quarter of 2006.

Natalya Kostrova, Band-Activation & Event Manager at BBH Ukraine, agrees that the easiest way to show that competition exists on the Ukrainian beer market is to look to points of sale, where the high number of stock keeping units (SKUs) exceeds by several times the size of the shelves at shops throughout the country.

With Sun Interbrew, Obolon, BBH Ukraine and Sarmat all aggressively distributing their products, these companies are also actively bringing new brands to the market to entice a growing, but still limited, beer-drinking consumer base.

The premium beer segment of the market in particular, where there is no clear industry leader according to BBH Ukraine’s Kostrova, targets young beer drinkers, and with the introduction of new licensed international brands, should see some shifts in the upcoming year.

Spektor, Sachs & Company’s Vaypan said that “young people are the most desired segment for every beer producer, because young people drink more premium and super-premium brands and that’s more expensive. There are more and more affluent young people who are more eager to try international brands and imported brands, and for young people, it’s important to show off to their friends.”

Just this past week, BBH Ukraine announced that it produced its first consignment of Carlsberg beer, one of Europe’s top 10 premium brands at the Kyiv-based Slavutich brewery on June 16, Kostrova said. The company also produces the licensed Tuborg and Baltika brands here in Ukraine.

By producing the Carlsberg brand in Ukraine, BBH Ukraine expects to minimize logistics expenses [those associated with importing] and decrease the price by 5-10 percent, as well as increase sales by 5-7 percent this year, according to Kostrova.

In 2005, BBH Ukraine’s share of the local market was 22.4 percent, and based on a resource-retail audit conducted by AC Nielson, the company controlled roughly 22 percent of the local market in January-April 2006.

BBH Ukraine sold 3.6 million hectoliters of beer in 2004 and 4 million in 2005. In 2005, the annual turnover of its Slavutich and Lvivske breweries was Hr 1.08 billion (US$217 million) and Hr 205.6 million (US$41.1 million), respectively.

Sun Interbrew Ukraine, established in 2000, remains the country’s largest beer producer, controlling roughly 34.4 percent of the market in 2005 by most estimates, and 35.8 percent based on statistics provided by the company. Sun Interbrew reported in a May 31 press release that it increased sales by 30 percent from 2004 and that its net revenues increased by Hr 80 million (US$16 million) to Hr 410.8 million (US$82 million) in 2005. Sun Interbrew’s net profit last year totaled Hr 21.3 million (US$4.26 million) compared with Hr 22 million in 2004.

The company announced plans to invest 80 million euros in its own expansion this year.

Sun Interbrew also brought several licensed premium brands to the market in the last few years. Introducing the Czech brand Staropramen in 2004, Sun Interbrew began producing this licensed premium beer in May 2005 at its Kharkiv Rohan brewery due to its popularity. In addition, the company introduced one of Brazil’s largest brands – Brahma – to the Ukrainian market in May 2005.

The company runs Kharkiv’s Rohan Brewery, Chernihiv’s Desna Brewery and Mykolayiv’s Yantar Brewery, and produces the Stella Artois, Brahma, Beck’s and Staropramen brands, in addition to local brands Chernihivske, Rohan and Yantar.

Ukraine’s two multinational beer conglomerates are clearly importing and producing more licensed international brands, which is expected to affect the country’s premium beer segment. Moreover, according to Obolon’s Slobodian, with their experience in distributing products on the global market, their access to ingredients at prices lower than those offered for local producers, and their huge budgets for advertising give them a significant edge on the Ukrainian market.

The market’s only independent player, Obolon, as the other local producer Sarmat, is owned by System Capital Management, the principal holding company of Donetsk tycoon Rinat Akhmetov. Although Obolon increased its market share by several percentage points last year, it remains Ukraine’s biggest exporter.

According to Spetkor and Sachs’ Vaypan, “Obolon is among the top 10 brands in Moscow. Because they position Obolon in the cheaper segment of the market, they are very competitive and very popular.”

In the immediate future, Ukraine’s four largest beer companies will continue to compete with one another for market share and customer loyalty. However, Vaypan noted that on the horizon is the possible market entry of two other international players, Heineken and SAB Miller.

“If they do decide to come, this will most likely be through an acquisition of either Sarmat or Obolon, because for a big company entering Ukraine it doesn’t make sense to acquire a smaller brewery too small to play a significant role on the market,” Vaypan said.

“These two companies, Heineken and SAB Miller, have operations in other Eastern European countries and Russia, so for them it’s a natural step to expand into Ukraine.”

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