Foamy Crisis: Legislative innovations and the military conflict in Ukraine have hurt the beer market badly

Beer manufacturing in Ukraine is decreasing year after year. The trend that emerged in 2011 is still ongoing. This year, according to experts of the Ukrpivo Association, such decrease in beer manufacturing will break the record — brewers have produced 138 million deciliters of the malt beverage during the first eight months of 2015. This is 21% less compared to the same period last year. This industry had been actively developing until the crisis of 2009. With the rate of 15–20% per year, it was the fastest growing industry in Europe. Ukrainians consumed more than 320 million dekaliters of beer per year. Now this rate is one third of the figure.

However, beer is still loved in Ukraine. GoEuro assessed the consumption of this beverage in 75 cities around the world. Kyiv takes 11th place with a volume of 103 liters per person per year, and the second one for cheapness (0.33 Euros per bottle in a bar and a supermarket). Krakow is the first in the list.

Losing volumes, beer manufacturing becomes more expensive. Since 2012, it has almost doubled and reached about UAH 11.5 billion in 2014. Beer prices go up not only because of rising raw materials and energy costs, but also because of the increased tax burden imposed on producers. Over the past two years, the government raised the excise duty on the foamy drink twice: a 10% import duty and a 5% retail tax. And that is not all. Since January 1, 2016, another increase in the rates of excise duty on beer is expected. The imposition of import duty has put companies in a dilemma: to raise prices according to the dollar rate or suffer losses in order to keep their market shares. According to Nielsen’s retail audit survey, beer prices increased by 39% on the average during the first half of 2015. To curb rising prices, brewers have partially revised the procurement system in favor of domestic suppliers. But the full switch to Ukrainian raw materials is impossible. For example, hop extract is not produced in Ukraine. «We have to import unit package and component parts as well», says Oksana Pirozhok, Head of Corporate Communications Department at Obolon JSC. «At the end of 2014, only Carlsberg made profit. Other companies suffered losses», points out an independent analyst of alcoholic beverage markets Igor Tovkach.

The four major players (SUN InBev Ukraine, Obolon, Carlsberg Group (Slavutich) and Efes Ukraine) control over 90% of the Ukrainian beer market. One of the «big four» representatives, Efes Ukraine has encountered serious problems — the company’s only brewery is located in the occupied Donetsk. «Now we are trying to receive a license», says Director of Corporate Affairs at Efes Ukraine, Valentin Boynitskiy. «Our company works in the Ukrainian legal environment, but the issue of enterprises left in the occupied territory is not settled completely. Over the past year, the company’s market share decreased twice because of problems with production facilities and the lack of its products on the shelves. So its market share was immediately seized by three giants. In order to keep loyal consumers, Efes Ukraine started importing brands it produces in other countries to Ukraine. For example, «Polar Bear Light» (brewed at a plant in Chisinau), «Polar Bear Live», and «Mug of Fresh Beer». The company does not rule out the possibility of renting manufacturing shops at other plants. Efes has estimated losses — the company lost nearly $1 billion last year. «I do not think Efes will leave Ukraine», says Tovkach. «The company experienced rapid growth before and strengthened its brands. For the global Carlsberg, Ukraine along with Russia is an important market, which consumes about 40% of its total production».

SUN InBev has lost $400 million. But the subsidiary of the world’s largest brewer Anheuser-Busch InBev faces a somewhat different situation than Efes. The breakaway of the Belgian giant from the rest of competitors will be even more significant if the company is taken over by the British SABMiller, number two in the global beer market — the deal is under negotiation. «For such a company, minuscule sales in Ukraine are not a business at all. As it happened in Russia, it will withdraw from our market in order not to get involved in local issues», says Tovkach.

Brewers’ revenues have decreased largely due to the reduction in exports. Ukrainian beer used to be exported to the countries of the Customs Union, mainly to Russia. For example, Obolon used to export 10% of its output to the Russian Federation. Over the past year, beer export volume fell by 53% due to the armed conflict — the Russian Federation has closed its market.

The hardest hit for brewers was the law, according to which beer has been classed to alcoholic beverages since July 1, 2015. «We no longer sell beer, because the license fee (UAH 8,000 per year) for a single retail outlet has become too high», says the owner of several trade pavilions in Kyiv. Moreover, not every kiosk selling beer is ready to install the cash register. The number of outlets that sell beer has decreased by 5% since July. The trend is gaining momentum — their number will decrease by 10% to the end of the year.

Since 2012, craft breweries have been opening in Ukraine. Kharkiv businessman Aleksey Kovalenko, the owner of the Vladimir-Volyn poultry farm (number three in the Ukrainian market of poultry meat production) wanted to set up a restaurant and craft brewery, like those he had seen in Germany and the Czech Republic during early 2000s. In 2001, together with Gumenny brothers Aleksandr and Igor, the owners of UBC Group engaged in the supply of raw materials and equipment for the beer industry, they set up three pubs on the outskirts of Kharkiv.

Four years later, the famous Stargorod brasserie with its own brewery was opened. The brasserie quickly became popular. In 2012, Kovalenko decided to return to the restaurant business. He built a small brewery called Probka («The Cork») near Kharkiv, and opened a restaurant and network of 23 Pivobank beer stores in the city.

Three years later, the businessman was forced to close Probka because of tax innovations. «We have suspended our activities since July 1 like most of the 200 craft breweries in Ukraine», says the co-owner of Probka brewery Aleksandra Rud’. «We produce about 80,000 liters of beer per year, but we have been equated with such giants of alcohol production as Nemiroff or Carlsberg.” According to her, UAH 500,000 for a wholesale license is an unattainable luxury for small breweries.

Today the bottom price segment brands are the most popular among consumers. «To save money, Ukrainian consumers are switching to cheaper beer,” says Eugene Shevchenko, CEO of Carlsberg Ukraine. «In general, brands of the middle and lower price segments account for about three-quarters of the market».

«There is stability only in the premium and super premium segments. But together they occupy only about 5% of the market,” comments Tovkach. Sales of beer in plastic bottles grow, because the final price of the product is less compared to glass bottles or cans. «Last year the share of PET was about 53%,” says Boynitskiy.

Consumers have a wide choice of beers on the Ukrainian market. On average, the largest Ukrainian companies have about two dozen brands in their portfolios. Lager is still the most popular beer. «Ukrainians prefer light bottom fermenting lager beer. In 2014 it held over 80% of the market», says Boynitskiy. There is a rather high demand for strong beer — 10%, as well as white and wheat beers — about 4–5%. Non-alcoholic is the least popular beer in Ukraine — its share is not more than 3%.

Brewers expect further industry decline. «At year-end, beer production may be reduced by 15–20%. This decline is primarily caused by the fact that traditional retail is not ready to pay for the license», says Shevchenko of Carlsberg. Recession awaits the industry next year as well: the economic crisis, decreasing incomes, loss of territory, lower affordability of beer because of inflation and the new retail tax will hinder sales growth.

Written by: Anastasiya Kruglova