Baltika Breweries: the H1 results seriously impacted by forced PET-limitation

august 16, 2017

Baltika Breweries, part of the Carlsberg Group, announces H1 2017 results: 

According to Baltika Breweries internal data, in H1 2017 beer market continued to fall and declined by an estimated 5%.

Negative market dynamics was due to PET packaging volume restrictions of more than 1.5 liters on production and selling (except for sales in retail) that came into force on January 1st 2017, cold weather in parts of the country and continued challenging consumer environment.

While the beer market was declining, 5.7% volume sales growths of non-alcoholic beer has become the positive trend. The development of non-alcoholic beer brands is in line with the government targets to decrease harmful use of alcohol within the general trend supporting healthy and active lifestyle.

Baltika Breweries volumes in 1H were severely impacted by PET packaging volume limitation of more than 1,5 liters. In response to this significant change in the Russian marketplace, Baltika adopted a value-based approach to drive further value in the market. Some competitors chose to adopt a volume-based approach. Consequently, Baltika’s products in the PET segment are priced at a premium vis-à-vis the average price points in the market, resulting in market share loss and volume decline. However, the Baltika’s value approach was a key driver behind its strong profit improvement. Thereafter, Baltika Breweries’ market share declined, particularly within the downsized PET packaging formats, and amounted to 32.2% in volumes. Herewith Baltika keeps beer market leader position having left competitors far behind.

Good progress for 6 months of 2017 showed premium brand portfolio. In particular, Carlsberg – 1,4 p.p.* volume share growth, Zatecky Gus -  0,6 p.p.*, Tuborg, Baltika 3 and Baltika 0 –  0,1 p.p.* volume share growth. Seth&Riley’s GARAGE showed brand share growth of 0,2 p.p.* The aforementioned value-approach impacted brands in the lower mainstream segments and brands such as Bolshaya Kruzhka and Zhigulevskoe lost share.

In H1 2017 Baltika Breweries continued to focus on key brands development and maintained a high level of marketing activities**.

The company export continues to demonstrate positive dynamics. In H1 2017, the company’s commercial export volume sales increased by 1% compared to previous year. Baltika Breweries maintains presence in more than 75 countries of the world, in 43 of which the company is the unique Russian beer exporter.

Jacek Pastuszka, president of Baltika Breweries LLC, executive vice president Carlsberg Group Eastern Europe Region:
«The main challenge for us and the entire Russian beer market in H1 2017 has become adopted last year legislative amendments that came into force in January. Forced downsizing of PET bottles along with the challenging consumer environment as well as cold spring and summer in parts of the country influenced Baltika Breweries sales much and caused our market share decrease. At the same time, we significantly improved the company's profitability due to a strong price/mix and strict cost control. We will continue to execute our plans, based on Carlsberg Group's strategy SAIL'22 and aimed at strengthening our position #1 on the Russian market by using our strong beer brands potential and developing our winning culture».

Carlsberg Group Eastern Europe region results:

Net revenue in Eastern Europe was down organically by 1%. This was caused by a 9% volume decline, as price/mix was strong at +8%. Reported net revenue grew by 16%, supported by a significantly positive currency impact driven by the Russian rouble.

The strong price/mix was the result of price increases last year and this year, and the introduction of smaller pack sizes in Russia following the PET restrictions. Price/mix was less pronounced in Q2, as we took less price increases compared with the same period last year.

Organic operating profit increased by a healthy 17%, driven by the positive price/mix and strong execution of Funding the Journey. Supported by the positive currency impact, reported operating profit grew by 39%. Operating margin strengthened significantly, improving by 320bp to 19.1%.

***

Baltika Breweries, part of the Carlsberg Group, is one of the largest companies in Russia in the sphere of consumer goods production, №1 on Russian beer market since 1996. Baltika Breweries has got 8 breweries in Russia and a large brand portfolio. The company is being the significant part of Carlsberg Group and its Eastern Europe region, which also include Azerbaijan, Belarus, Kazakhstan and Ukraine. Baltika Breweries is the major Russian beer exporter: with the products available in more than 75 countries of the world, in 43 of which Baltika Breweries is the only Russian beer exporter.

** Baltika’s key marketing activities in H1 2017:

In June, following the trend of non-alcoholic beer segment growth, Baltika Breweries launched a new brand of non-alcoholic beer Baltika №0 Wheaten Unfiltered, a soft, refreshing beer with a unique taste. Today, the non-alcoholic brand is successfully produced on four company’s breweries: in Saint Petersburg, Tula, Rostov-on-Don and Samara, where innovative equipment for high-quality non-alcoholic beer production was installed in March 2017. Thus, Baltika retains its position of the undisputed segment leader with the share of about 60%*.

In April, the company released a new product - Seth & Riley's GARAGE Hard Ginger – a low-alcoholic refreshing natural drink Seth&Riley’s GARAGE Hard Ginger with the ginger taste.

In June, to the 170th anniversary of Carlsberg, a national advertising campaign dedicated to the legacy of the Carlsberg brewery was launched and anniversary limited edition of Carlsberg beer cans was produced. In July, in honor to the 25th anniversary of Baltika 3, a series of 8 cans, each of which has a unique design depicting all regions of Russia was released. The cooperation of the well-known musicians Major Lazer and Scriptonite continues within the advertising campaign of Tuborg and the created musical platform TBRG Open.

Company brands by tradition actively support major events. Thus, Tuborg became a partner of electronic music and contemporary art festival PRESENT PERFECT (Saint-Petersburg) and together with Seth & Riley's GARAGE supported Bosco Fresh Fest (Moscow) and STEREOLETO (Saint-Petersburg), Kronenbourg 1664 supported Usadba Jazz (Moscow, Saint- Petersburg), and Flash Up Energy sponsored high-mountain carnival BoogelWoogel at Rosa Hutor ski resort and the GrelkaFest music festival at Sheregesh resort, Kemerovo region.

*** Baltika’s export activities in H1 2017:

There is a double-digit growth of the company's sales in Central Asia. For example, the secondary sales volume in Kyrgyzstan increased by 20% compared to H1 2016. The countries of Central Asia and Transcaucasia - Georgia, in particular, demonstrated positive sales dynamics due to the stable development of non-alcoholic portfolio. Two times volume sales growth in both regions was due to the strengthening positions of Flash Up energy drink. There is double growth in on-trade channel sales in Georgia. A large-scale festival Tuborg Open – series of electronic music parties in Tbilisi was also held here with the support of Tuborg brand. In Kyrgyzstan, a new product, Seth & Riley's Garage, was launched. A major OpenAir 2017 festival in Bishkek was held with the company’s support.

Baltika Breweries export to Far Abroad countries also continues its growth. For example, sales to the Middle East grew by 67%, and to South America - by 64% compared to the same period of the last year. Baltika Breweries celebrated its 10th anniversary of supplies to Africa by launching exports to the Democratic Republic of the Congo. The first brand of the company to be available on the market will be a non-alcoholic malt drink Baltika 0 Grain. In addition, advertising campaign of Baltika in the Chinese metro (Shenyang city) was launched for the first time.

* Source:  Nielsen Retail Audit, Urban & Rural Russia

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