Russia has become one of the biggest beer drinking countries in the world, consuming 114.5 million hl in 2008 (Canadean) but consumption could plummet in 2010 because of a 200 per cent increase in excise duty that came into force on January 1.
Canadean estimates that the tax increase will combine with higher raw material costs to push Russian beer prices up by 20 per cent.
Market weakness
This will undoubtedly make things tougher for beer companies, already struggling to maintain sales in a weak economic environment. Canadean said its provisional figures for 2009 suggest beer volumes in Russia slid 6 per cent to 107.3 million hl. Adding a 20 per cent increase in prices to the equation is likely to lead to further deterioration.
Canadean predicts that volumes could fall 12 per cent to 94 million hl next year.
This is bad news for international brewers who control 75 per cent of the Russian market, and Carlsberg in particular. The Danish brewer has around a 40 per cent share of the Russian beer market after its acquisition of Scottish & Newcastle in 2008 gave it full control of Baltic Beverage Holding.
Canadean analyst Kevin Baker said that although Carlsberg is highly exposed to Russia, it has reacted swiftly to adapt to the changing market and has had a surprisingly good year.
Premium strategy
Like other international brewers, Carlsberg has braced itself for the new excise duty increases by increasing its prices (4-5 per cent in Q4, 6 per cent in January) and focusing on the premium end of the Russian beer market.
Baker said more premium beers are likely to fare best following the tax increase. The 2009 Canadean figures suggest that premium beer sales fared relatively well in the recession.
In addition, premium beers have bigger margins than cheaper beers allowing brewers to absorb more of the tax increase.
Cheap beers, often sold in Russia in big 3-4 litre plastic bottles, may have fared relatively well last year but are unlikely to do so well this year. Their brewers will have to pass on the beer tax rise to their price-sensitive consumers, who may then switch to harder, more affordable alcohols like vodka.
Public health
In their lobbying against the tax increase, big international brewers like Carlsberg warned that this likely switch to harder alcohols undermines the public health justification for the move.
Anton Artemiev, senior VP for Eastern Europe at Carlsberg said: “I find it very hard to understand the logic behind the disproportionate increase of excise duty on beer (+200 per cent) compared to strong alcohol (+10 per cent) which will inevitably favour the consumption of hard alcohol, including vodka, and is bound to have a negative effect on alcohol abuse in the Russian society.”
Baker said the policy is a reversal of previous attempts since Gorbachev to wean the Russian population off vodka by increasing excise on the drink and keeping tax on beer relatively low. He said the latest tax plans are simply a revenue generating measure designed to improve the state of public finances in the recession.
Jan Lichota, legal spokesperson at The Brewers of Europe, agreed that the tax plans were difficult to justify from a public health perspective. Although European brewers failed to dissuade the Duma not to pass the bill, Lichota said the Russian government had been persuaded not to present parliament with its original proposal of a 300 per cent tax increase but to opt instead for a 200 per cent rise.