Ben Aris in St Petersburg -

Baltika, the market leader in Russia's rapidly growing beer market, is preparing to go international.

The drive to Baltika’s factory through the windswept marshlands that surround St Petersburg takes about an hour and the landscape is peppered with the discarded hulks of failed Soviet industry.

Baltika used to be one of these, a brewery commissioned in the late 1980s but unfinished for lack of money.

Not anymore. Sweeping through the gates is a little bit like entering Willy Wonka’s chocolate factory – there is still something slightly surreal about entering the factory grounds.

The stream of blue and white trucks pulling in to load beer is to be expected. Maybe, though, it’s the stables across from the main entrance, home to four magnificent draw-horses that pull the company beer wagon around Russia’s northern capital in the summer dispensing beer to gleeful revellers during St Petersburg’s annual summer beer festival; or perhaps it’s just the Oompa Loompa-like activity of the uniformed factory workers. Whatever it is, this isn’t a typical Russian factory.

MORE MONEY, BETTER BEER

But it used to be. When the Baltika factory was founded, it was the smallest of St Petersburg’s four breweries producing tea-coloured unpasteurised Soviet beer that tastes of wheat and goes bad in a week. The factory began to do well when it was privatised in 1990, but really began to rock after it was taken over by a Finnish/Swedish joint venture in 1992. By 1996, Baltika was the market leader in the CIS and last year became the sec- ond largest brewer in all of Europe, producing 10 million-12 million hectolitres (hl) of beer a year, passing Amstel and Heineken, but still behind Carlsberg.

“The growth began in 1990 as Baltika was the first private label in Russia,” says Anton Artemiev, Baltika’s president. “The investment made all the difference. In the beginning we were investing $10 million a year, which was a lot in those days, but now we regularly spend $100 million to $200 million a year on development.”

Moscow remains by far Russia’s biggest market, but St Petersburg has become the country’s pre-eminent production base. The road leading from the airport to the prerevolutionary Tsarist capital is lined with factories: Wrigley’s, Coca Cola, Proctor & Gamble and more recently Russian producers like Russky Standart have moved in.

“It is cheaper to operate in St Petersburg – land costs less, wages are lower and the bureaucratic problems are fewer,” says Artemiev. “Yet you have a big local market and good transport links to Moscow, the rest of the country and abroad via the ports.”

St Petersburg relies on the industrialists and is keen to attract more, but it is a two-way street.

Since Valentina Matviyenko took over as governor, the region’s budget has doubled. Still, the local companies meet the regional government halfway when it comes to building up the supporting infrastructure and some regions are easier to work in than others.

“We need infrastructure – good sewage, clean water, power – so we support the municipal authorities’ plans to improve these services,”

says Artemiev. “In some regions the dialog is more constructive; others simply see the company as a source of money. The problem is all the different cities are at different stages of development.”

THE FOREIGNERS ARRIVE

Baltika had already established itself as the number one brand in the 1990s, but the game really only started in earnest in the last three years when Russia’s consumer market took off. Having blazed the trail, Baltika saw several other beer producers arrive and competition is The average consumption of beer in Russia reached 60 litres per year in 2005, almost at the Western European average of 80 litres but not as much as the world champion beer drinkers the Czech Republic, whose annual consumption is 160 litres.

Major cities like Yekaterinburg and Novosibirsk are already consuming as much beer as Moscow, but most growth comes from the smaller urban centres and the countryside, says Artemiev.

BRINGING BEER TO THE MASSES

As Moscow loses its position as the pre-eminent market, distribution has become the key. Until recently, distribution was an ad hoc mix of a few company-owned distribution centres in the most important cities and a system of small wholesalers who in turn relied on traders to get the beer out into the far corners of Russia.

now fierce. The apolitical brewing business is one of the few sectors in Russia where there has been unhindered foreign investment, and Baltika and its main rival Sun Interbrew are both joint ventures with major international producers:

Baltika’s owners were bought out by Carlsberg and Scottish & Newcastle to form the current controlling group Baltic Beverages Holding, while Sun joined forces with Interbrew, the world’s biggest producer of beer, a few years ago, but has since sold out.

The sector has gone through a rapid period of consolidation and there is only one significant independent brewery left in Russia.

Baltika has five breweries scattered around Russia, including two greenfield sites. However, in March shareholders agreed to merge with the Pikra, Vena and Yarpivo breweries, which should be completed by the end of this year.

“Until recently we were not sure how our products got to the far reaches of the country, as it is carried there by small traders,” says Artemiev. “But you could still find Baltika beer in any market in the country and as far away as the bazaars of Central Asia.”

In 2003, the company dramatically reorganised the system and has now built up 30 distribution centres all over Russia. Sales dipped briefly as Baltika rationalised the system, dropping the smaller players and concentrating the work in the five biggest distributors.

Sales recovered quickly and the company has more control over the distribution channels, which is becoming important as it also allows more control over the marketing effort across Russia’s 11-time zones.

The development of the Russian market is not finished, but the company is already looking toward the next horizon. Exports are growing by a quarter each year and account for 6% of sales as Baltika taps into Carlsberg and Scottish & Newcastle’s international distribution channels.

Domestic sales are growing more slowly than exports, but still account for the lion’s share of the new volume. Growth in the Urals and Siberia still easily outstrips exports to London and Berlin.