Heineken made a multi million bet on the beer market of Russia

28.09.2009 — Analysis

In recent years Heineken Russia has completed a series of big investment projects to modernize and upgrade its breweries. Several hi-tech industrial footprints have been set up in the North-Western Region, the Central Regions and the East of Russia. On September 23, 2009 the company has officially announced the completion of the reconstruction and production expansion of the Patra Brewery in the Urals. In an interview to RusBusinessNews Dimitar Aleksiev, CEO Heineken Russia, spoke about further development of the company in the Russian beer market.

- Mr Aleksiev, is modernization of the Patra Brewery in Ekaterinburg one of the long-term investment projects of Heineken in Russian assets or one-time funds injection to sustain production?

- When we purchased the Patra Brewery back in 2005, the brewery was not in its best technical "condition" (the brewery was launched at the end of the 1980's, it has been repeatedly swapping owners and management - editor's note). For that moment the capacity of the brewery was around 800,000 hectolitres per year. We realized that the demand in the Ural market was very high and that the market was highly potential. That was why the company started to develop an investment project to expand and modernize the whole processing chain of beer production.

In these four and a half years we have invested in the Patra Brewery about 80 mln. Euro. For this money, we have reconstructed malting, brewing house, fermentation, filtration and packaging. We have also improved yeast treatment, water treatment plant and warehouse facilities. New boilers, fermentation tanks, water treatment systems - all this was brought over from Germany.

The most intensive modernization stage was at the end of 2007 - beginning of 2008. As a result, from January to August 2009 we have produced by 25 per cent more beer than during the same period of the previous year. Nowadays, the brewery is capable to produce up to 3.2 mln. hectoliters per year. The capacity of the bottling line is 50,000 units per hour. Two PET lines - 24,000 and 12,000 bottles per hour.

How much does the Patra Brewery produce today?

It is obvious that the launch of new equipment is a matter of many days. Hence, the production volumes will be increased gradually.

- Up until now this Ural brewery has specialized in the production of traditional regional beer brands: Patra, Strelets and Zhigulevskoye. The brewery has not brewed the licensed brands of the company. With the increased capacities do you plan to expand the range of products of this brewery?

- One of the priorities for the development of our company is to strengthen and further reinforce the positions of the strategic and regional brands. Patra, Strelets and Zhigulevskoye are among these regional brands. Now they take up a large portion in the production and sales of the brewery. In 2007-2008 in Ekaterinburg, we started to produce national brands: Bochkarev, Tri Medvedya and Okhota. Quite recently, we have launched here regional brands of other Heineken Russia breweries: Sedoy Ural and Shikhan. By now any Heineken Russia brands can be brewed in the Patra Brewery.

But before we transfer this or that brand from one brewery to another or launch the production of a certain brand in a new region, we calculate the economic expediency of such a decision. This is mainly transport and logistics expenditure as well as the demand for this type of product within the territory. It is because of these parameters that we have not planned to launch the production of the licensed beer brands in Ekaterinburg yet. However, in the long-term we do not exclude it - today the technique of the brewery allows us to brew international brands.

- With the expansion of production of this Ural brewery can we expect its products to become cheaper for the consumers of the region?

- The company's price policy is formed for the long-term, taking into account the specifics of the sales territory, production capacities and demand. And this is rarely subject to short-term changes. Therefore, you should not expect beer to become cheaper with the launch of new capacities in the brewery.

- At the same time with the expansion in the Urals, Heineken has stopped beer and kvass production at the Stepan Razin Brewery in St. Petersburg. What is the strategy and tactics of developing the company in Russia in general, what issues are you planning to address to increase your financial returns from the assets?

- Our primary task is to reinforce regional industrial footprint and promote unique regional brands in the local markets. We expand the production within prospective regions with high consumer demand. Our breweries in central Russia, in the North-Western Region, in the Urals, in Siberia, in the Far East allow us to substantially save on transportation and promptly respond to the change of customer preference.

Another task is to maximally optimize costs in all activities of Heineken Russia. We operate in line with the Total Cost Management program. We increase labour productivity in breweries through investment into equipment and people. We purchase high quality raw materials at a favourable price and save considerable funds on transportation - thanks to buying barley within Russia from agrobusinesses in the regions of presence. The use of big volumes of packaging materials allow us to conclude profitable contracts and reduce packaging costs.

Moreover, we are now working on our production efficiency in general. And this is in particular what you mention: ceasing production of beer and kvass in one of the breweries in St. Petersburg - as one of the measures to exploit production across all Heineken breweries in Russia.

In the Northern Capital of Russia we so far have owned 2 breweries: Heineken Brewery (from February 2002) and Stepan Razin Brewery (from July 2005). To reinforce competitive position as a strong leading player in the Russian beer market, we have taken the decision to turn Stepan Razin Brewery into a major distribution and logistics center in St. Peterburg. This centre will work with wholesale clients of our company from St. Peterburg and the North-Western Region, Moscow and the Moscow Oblast. As far as kvass is concerned, indeed, we have recently signed an agreement to transfer this brand to another producer.

- Are you planning to set up a similar logistics centre in the Urals?

- There is no need yet. Warehouse territories of the Patra Brewery are sufficient to service contractors from the Ural and West-Siberian Regions: the Sverdlovsk, Chelyabinsk and Tyumen Oblasts as well as the Perm Krai. Today the warehouses of raw materials and finished goods as well as direct sales territories take up around 20,000 square metres. The total territory of the Ural brewery is 16 hectares.

- Does Heineken have open investment projects in Russia?

- We have already completed a series of big investment projects and, no doubt, will keep on investing into the quality of our products (The company has 10 breweries: 2 - in St. Petersburg and 1 in Sterlitamak, Novosibirsk, Ekaterinburg, Irkutsk, Kaliningrad, Khabarovsk, Nizhni Novgorod and Novotroitsk - editor's note). Now our task is to develop and most effectively use our industrial footprint. This requires time. To speed things up we need to be clear as to where the market goes and follow its needs. We will go on investing in growth of our brands and skill improvement of our employees.

Prepared by Evgenia Eremina