Saturday, October 4, 2008

Romania: A Market Matures

Oxford Business Group Latest Briefing

Romania's dominant beer brewers continue to benefit from the country's increasing purchasing power, but as growth in consumption of beer plateaus and production costs rise, market players are revising their tactics to secure their market shares in the long run.

Market leader Heineken Romania announced their consolidated results for the first half of the year on September 23. The company reported a 16% turnover increase year-on-year, while the volumes sold by the company went up by 5.6%. Ursus Breweries - a subsidiary of international brewer SABMiller - announced in early September a 22% growth in the volume of sales from April to June, compared to the same period last year. Fourth in the market, United Romanian Breweries Bereprod (URBB), part of the Danish Carlsberg Group, reported a 15% growth on volume sales compared to the first semester last year.

Despite growing sales volumes, the domestic beer market did not have an easy ride during the first six months of the year. Profit margins have been under pressure due to a combination of factors. Shachar Shaine, president of URBB and chairman of the Romanian Brewers Association, told OBG, "Last year's disappointing agricultural output has had its effect on the prices of raw material, which have increased between 30% (for malt and barley) to even five times the level of last year in the case of hops."

Shaine identified other pressures on profit margins as rising labour costs, energy, more expensive imports due to a strong euro in the first semester of the year and increased transportation costs, particularly in the Bucharest area.

The relatively modest volume increase marks the saturation of the beer market. According to data from the Romanian Brewers Association, national consumption levels increased strongly from an average of 52 litres per capita in 2002 to 90 litres in 2007. For this year, however, the association expects average consumption to achieve 95 litres per capita, which is significantly lower than the double digit growth seen over the past few years. Consumption levels now approach the European average.

A recent report by Euromonitor predicts that beer consumption in Romania will increase by 20% in 2012, reaching an average consumption level of 109.6 litres per capita, a figure comparable to other countries where beer and wine dominate the consumer's preference of alcoholic beverages, such as Hungary and Austria.

Local brands will remain of particular importance in driving growth to these consumption levels, according to a recent report cited in the local business daily.

"No international brand has made it into the exclusive club of those whose annual sales exceed 50 million euros, while domestic brands such as Timisoreana, Bergenbier, Golden Brau, Ursus

In a market valued at 1.2bn euros, the market leader and local brand Timisoreana, owned by SABMiller, is expected to derive sales worth 130-150m euros, according to the report. In terms of volume, Timisoreana sales surged by 43% in the last fiscal year, and by 51% in terms of value.

Ursus and Ciucas, two other local members of the SABMiller family, are close runners-up to Timisoreana. Ursus is the best-selling brand of the on-premise segment both in terms of volume and value, according to a 2007 survey conducted by MEMRB, a Greek market research agency. In overall retail outlets, Ursus held a 7% market share, followed by Ciucas, which accounted for 6% of the total domestic beer market.

Market maturity and rising cost levels are influencing beer producers' strategy. In an effort to maintain their position in the market, the acquisition of the few remaining smaller brands is of increasing interest to the country's main brewers. Heineken acquired local player Bere Mures at the end of last February, which has put the Dutch conglomerate's market share at an estimated total of 31%, according to local media.

Heineken Romania CEO Edwin Botterman commented to local media on the company's first semester's performance, saying that "with beer producers facing accelerated rises of variable costs and amid heightening competition due to slower growth on the beer market, we have become much more value-oriented."

According to Shaine, this value will be created through packaging and commercial campaigns to which he feels Romanian consumers are very responsive. "This is mainly due to the fact that consumers were largely deprived of marketing activities in the past. Promotional market approaches are therefore received with curiosity, and generally result in significant returns on brewers' expenditures," he said.

Anticipating tighter profit margins in the beer industry, URBB has expanded its offer with non-alcoholic beverages such as Orangina and Granini. Shaine stated that his company will continuously look for expansion in these markets in the longer run. He foresees that the main players will have to diversify their offer in order to offset decreasing profit levels in the conventional markets.

One particular area of interest that he highlights is mineral water. Shaine foresees a doubling in the consumption of mineral water over the following three years. The main reasons for this are the poor quality of the tap water in large cities and the abundance of high-quality mineral water springs throughout the country. In fact, as Shaine estimates, over 20% of Europe's mineral water sources can be found in Romania.

The future of the beer brewers in Romania is dependant on their anticipation of current market shifts. As demand peaks, producers are pushed to upgrade and diversify their offer in order to water their profits.
and Burger have all overshot this mark by as much as tens of millions of euros in some cases", the report stated.

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