OREANDA-NEWS. February 28 2011. 2010 was a unique year for the Russian brewing industry. At 1 January 2010, the excise duty on beer with 0.5-8.6% ABV was raised by 200%. Baltika minimized the volume impact from the substantial excise duty increase through our pricing strategy of gradual price increases throughout the year, recovery of the market dynamics in the second half of 2010.

Consumer confidence and consumer spending that declined during the economic crisis, started to recover to previous levels and supported by high customer loyalty and a hot summer market dynamics were impacted positively in the 3rd and 4th quarters. The company estimates that the market declined by 4% in 2010, with an improving trend in the second half of 2010. In the 4th quarter, the beer market declined by 1% compared to Q4 2009.

Baltika's beer in-market sales (distributors’ sales to trade outlets) declined by 4% compared with 2009. In Q4 Baltika beer in-market-sales increased by 2%.

For 2010 Baltika's Russian beer volumes (shipments) declined by 13% as distributors did build stocks in the 4th quarter of 2009 ahead of the excise duty increases.

According to data compiled by the agency AC Nielsen (urban Russia), Baltika’s 2010 market share was flat at 39.7% (39.8% in 2009). In the 4th quarter of 2010 Baltika market share grew by 0.4% compared to 4th quarter of 2009.

The duty increase led to unprecedented consumer price increases. Baltika’s products were leading on price versus most of the competitors in the market which had an impact on market share development, mainly in the modern trade.

Financial results

The company’s financial performance displayed negative dynamics as a result of a decline in sales.

Nevertheless, despite the decline, investment in products promotion increased and the company successfully maintained high profitability, demonstrating an ability to manage fixed costs whilst operating within a highly volatile market due to ongoing efforts to improve efficiency and high level of control of expenses in all areas of the company’s activities and in all areas.

For example, in the reporting period, administrative costs were reduced by 4%. As in other departments, this improvement was achieved by increases in efficiency, economies of scale, synergy and an increase in outsourcing. Cost of sales decreased by 20% compared to 2009.

The results were positively impacted by the favourable raw material prices in the first half of 2010, as prices for the essential ingredients — brewing barley and malt — declined to a 4-year low during the year. Adverse weather conditions during harvest in the summer of 2010 resulted in a poor yield of brewing barley and subsequent price increases for barley and malt at the end of 2010. The higher raw material prices material impacted profits in the late part of 2010, but will to a larger extent impact 2011.

Brand Portfolio

In 2010, Baltika continued significant investing into innovation. The company launched several new products in the main category, such as Baltika Draft, Baltika Cooler (in a premium 1.5 liter format), Zatecky Gus Cerny and Old Bobby.

Besides its range of beers, the company entered a number of new categories, with its drinking water (Life Spring), cider (Somersby), lemonade (Crazy) and extensively developed its kvas (Khlebny Krai). It also added a new sort of kvas: Khlebny Krai 7 Grains.

In 2010, the flagship Baltika brand held its leading position: according to data from A C Nielsen (urban Russia), its share amounted 14.5%. The brand showed good results in the premium segment due to the growth of the share of Baltika №7 Export and successful innovation Baltika Draft. The share of the new sort in December 2010 reached 2%.

International Sales

Baltika continued developing its sales abroad. In 2010, the company entered the large Latin American beer markets in Mexico and Brazil, enlarged its presence in Africa and strengthened its position in Europe. In December, a natural non-alcoholic malt beverage, specially produced for markets where alcohol consumption is strictly regulated, was introduced in the Middle East. Baltika is now sold in over 70 countries, and, as previously, Baltika is still the leading beer exporter in Russia.

Baltika has continued its integration into the Carlsberg Group: licensed beer manufacturing of Baltika №7 Export is underway at the Slavutich breweries in Ukraine; towards the end of the year, Baltika №7 share of the premium market segment was already 6.8% (source: AC Nielsen) and the total Baltika brand market share in the segment amounted 25%. In addition the Baltika brand is rolled-out in other parts of the Carlsberg Group for instance in Estonia, Latvia and Lithuania.

In 2010, company sales abroad increased by 19% compared to 2009, exceeded 3.3 million hectolitres and accounted to 9% of total volumes. International sales of Baltika brand amounted over 60% of the company’s total sales abroad.

Anton Artemiev, President of Baltika Breweries: "Mostly due to unprecedented tax increases on beer, 2010 was one of the most challenging periods for the industry. Owing to intensive work carried out across the company to increase efficiency in all areas combined with our weighted pricing strategy we managed to minimize the negative impact. We have been able to maintain a leading position in the market in terms of market share and profitability and will continue to drive for improving results and through investments behind brands and modern market tools to strengthen our market position".

In 2010, the company continued to develop projects and programs directed at increasing efficiency in operations, in particular, developing its own agricultural project, measures to reduce energy consumption, developing cross-production, optimizing use of own transport, storage logistics, introducing the corporate initiative "Lean Production", developing direct delivery, and others.

Most of investments were directed towards development of new products, commercial infrastructure and management systems.