Global brewers gain an edge over Belarusian state-run competitors

By bne IntelliNews April 9, 2015

Sergei Kuznetsov in Minsk -


Over the past decade, three international beer makers – Carlsberg, Heineken and Olvi – have gained a solid foothold in Belarus through the acquisition of local companies. Currently, their subsidiaries in Belarus are producing strong results, in contrast to local state-owned competitors, whose inefficiency is regarded as a direct result of Minsk’s failure to privatise them in the past.

The state-controlled brewer Krinitsa is the biggest beer producer in Belarus. The company made 31.8% of all beer brewed in Belarus in 2014. However, despite its potential the brewer has suffered heavy losses in recent years and relies on financial support from the government. “At present, the company is one of the leaders of the Belarusian economy in terms of losses,” Oleg Andreyev, managing director of investment banking at Minsk-based EnterInvest, tells bne IntelliNews.

In April 2014, the brewer’s situation came under the steely eye of Belarusian President Alexander Lukashenko, who commented: “Only 55% of Krinitsa’s capacity is being used... A great amount of money has been injected into the company's production and only half of it is in operation. And now the company is asking for money to pay off its loans.”

Despite this telling-off, the company’s predicament has not significantly improved since; just 63.6% of the brewer’s production capacity was in use in 2014. This stands in stark contrast to three foreign-controlled beer makers – Alivaria (owned by the Carlsberg Group), Lidskoe Pivo (owned by Olvi) and Heineken in Belarus – which have produced significantly better results in terms of capacity utilization.

Experts believe that Krinitsa lost its chance to improve its situation many years ago, when the authorities refused to sell the company to foreign investors. Andreyev explains that in 2003 the government handed Krinitsa over to Priorbank, Raiffeisen Bank International’s subsidiary in Belarus, on a five-year trust basis, whose “investment unit carried out active measures to attract investors during that period.” By 2007-2008, the company’s share of the local market had reached about 50%, so many international companies, such as Oasis Group and Efes Beverage Group, expressed an interest in buying it. “Success was close enough,” Andreyev says.

However, the government eventually ruled out such a move, and Andreyev says the unwillingness to privatise has always seemed paradoxical. “There is a feeling that Krinitsa had a patron [inside the government] who put aside the asset ‘for themselves’.”

Too much froth

A second state-owned beer maker Brestskoe Pivo, situated in the Brest region near the border with Poland, is also experiencing chronic problems. The brewer’s capacity usage is the lowest among the country’s brewers, at just 42.3% in 2014, and in November it was declared bankrupt by a Belarusian court.

The Belarusian authorities were also unable to agree a privatisation deal for this brewery with potential investors in previous years. According to Andreyev, the sticking point was the asset’s price, as well as some social and production conditions set by the authorities that made the project “completely unprofitable and inefficient”.

The regional authorities, which control up to 90% of the brewer, have since made a last resort decision to try to offload their stake to investors through a tender that is scheduled for May 5. The initial price of the stake is BYR163.6bn (€10.3mn). However, the authorities are in danger of repeating past mistakes, by imposing extremely tough conditions for any potential rescuer of the brewer. In particular, the new owner should invest at least $10mn in the beer maker's development within 12 months, as well as repay its debts to the state. The social burden is also significant: the investor has to keep the current number of employees unchanged for three years, and their salaries should remain on par with the regional average.

Daniel Krutzinna, managing partner with Civitta consulting company, notes that Obolon, Ukraine’s largest beer maker, and Detroit Investments, a Cyprus-registered beer and beverages producer, once expressed interest in the privatisation of Brestskoe Pivo, though having been shunned in the past it’s a big question whether they would still be interested. “The brewer should have been sold long ago, when it was in better financial shape and when greater demand existed,” Krutzinna tells bne IntelliNews.

New challenges

Looming on the horizon for all the country’s beer makers is the challenge that they face from deteriorating market conditions in the region. In 2014, three major brewers – Krinitsa, Heineken in Belarus as well as Alivaria – saw their exports fall significantly, in particular due to the reduction in demand from Russia. According to the Russian brewer Baltika, the beer market in Russia declined by more than 30% between 2008 and 2014. “This negative dynamic can be changed only by means of predictable regulation of the industry in Russia,” the company said in a statement in January.

And Andreyev reckons that, “Belarusian [beer] producers will continue to experience problems on the Russian market in 2015”, while the cheap Russian ruble will put pressure on the financial results of Belarusian exporters.

Meanwhile, the Belarusian authorities also appear somewhat at a loss to deal with the traditional problem of the domestic beer market: the population favours strong spirits over beer. According to data, Belarus has one of the lowest rates of annual beer consumption in Europe – about 50 litres per head, compared with the Czech Republic’s 143 litres. “Seven years ago we were distressed because Belarusians consumed too much strong spirits... Strong alcoholic spirits are still popular, while demand for beer is the same,” Lukashenko said last year.

Global brewers gain an edge over Belarusian state-run competitors

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