Saturday, November 17, 2007

Romania: A Toast to Beer

Oxford Business Group Latest Briefing

This week the top three beer producers in Romania reached sales of over 1.1bn euros, with the sector as a whole registering growth of over 30% . Considering the obstacles the industry faced in 2007, these numbers are striking.

Drought, labour shortages, changes in export and import markets, currency fluctuations and a flood of foreign competitors put the industry to the test this year. While many analysts expected growth as disposable incomes rose and there were large increases in per capita beer consumption, few expected the sector to increase margins, profitability and production capacity.

The outlook at the beginning of the year seemed ominous for local beer manufacturers. While many were celebrating the country's entry into the EU on January 1, 2007, local food and beverage producers feared new EU regulations and lifted trade barriers might harm their respective industries.

They had good reason to worry. Prior to accession, Customs duties - which added 25% to the price of imported beer - had been an effective barrier to EU producers eyeing Romania's large population and fast-growing economy. Almost immediately following accession, producers from Bulgaria flooded the Romanian market with low-cost beer, wine and soft drinks.

In some cases, the imported beers were 25% cheaper than comparable Romanian beers - a price discrepancy that led many local producers to claim Bulgarian brewers were using Romania as a dumping ground. While mainstream local producers have been able to defend their positions with strong distribution chains and marketing campaigns, small brewers have not. They have seen a 12% decline in sales across the board this year, due largely to their inability to compete on prices.

At the same time Romanian producers were experiencing intense foreign competition at home, they were also facing the closure of an important export market: the Republic of Moldova. Tuborg, Carlsberg, Neumarkt and other brands produced in Romania were forced to cease exports to Moldova due to a new set of Customs regulations implemented after accession. The regulations, which stipulate that a tax of 25 euros per hectolitre be levied on all imported beer, priced many Romanian beers of out Moldova's market.

After the market changes that accompanied accession, drought was the next obstacle to hit the industry. The drought is blamed for a 1% price increase in consumer goods and the lacklustre performance of Romanian exports this year and an increase in the cost of ingredients such as hops and yeast. According to Dieter Schulze, president of Ursus Breweries, malt prices increased by 40% to 400 euros per tonne in the first half of 2007.

"For the time being, we have absorbed the costs for some beer brands and increased the prices of others by a level slightly below the inflation rate. We will only be able to make a decision regarding a potential price increase after the harvest," said Schulze.

By forcing the industry to import more ingredients, the drought has exposed local producers to the ups and downs of the international currency markets. Schulze reported that last year 80% of raw materials were acquired from the domestic market. "This year, the percentages will change, with imports witnessing an increase," he said.

Still, the industry started the year strongly. Heineken Romania, the domestic unit of the Dutch brewer, reported a gross turnover of 120m euros in the first half of 2007, a 36% year-on-year increase. Tuborg, Ursus, Timisoreana and other major brands reported growth between 15% and 30%.

The reason for these successes has largely been attributed to Romanians' growing disposable income and increased beer consumption. Beer sales are expected to reach 81 litres per capita in 2007, up from 64 litres in 2006, despite an overall 4% to 5% price increase. Premium and super-premium beer sales have risen by 10% to 20%. Romania's particularly hot summer also played an important role, increasing sales by as much as 40% in seaside resorts and urban centres.

While strong demand has had a marked effect on the industry, the gains of 2007 could not have been sustained if not for diligent and heavy investment in increased production and efficiency.

United Romanian Breweries Bereprod (URBB), the bottler of Tuborg and Carlsberg, is expected to invest between 60m and 90m euros in the coming years to double production capacity to 4m hectolitres per year.

Strong competition and the positive role of multinationals on the local market have fostered such prudent management. Out of the top five global brewers, all are present in Romania except one: the American producer Anheuser-Busch. No player has over 25% in market share and most producers, even the smaller ones, operate multiple brands. Without a clear market leader, all the market players have had an incentive to invest heavily in future capacity and cost-cutting methods.

New innovations in marketing and packaging have helped as well. The move into PET packaging with 1 to 3 litre plastic bottles often sold for 1 to 2 euros, has increased volumes, sales and profitability. For some producers, PET bottles now account for 40% to 45% of sales.

The combination of a strongly competitive environment and good management can reap rewards for the industry as a whole. There is a potential that the retail and manufacturing sectors could see a sustained period of strong organic growth.

The odds were stacked against the beer industry in 2007 yet it managed to grow over 30% this year on the back of rising domestic consumption. This is good news for domestic manufactures and retailers alike.

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