BELARUS NEWS AND ANALYSIS

DATE:

18/11/2008

Heineken: Brewer taps into local tastes

By Geoff Smith

Bobruisk was not always welcoming to foreigners. In 1812, the central Belarusian town's fortress defied a 12,000-strong detachment of Napoleon's Grande Armee for four months on his retreat from Moscow.

Things are different now. The town's Syabar brewery has, since December, been owned by Heineken, the world's fourth-largest brewer by volume, which bought it from a consortium of Russian-American private equity investors and the International Finance Corporation, the World Bank's private-sector arm, for an undisclosed price.

A whirlwind programme of modernisation and expansion has ensued. The measures helped raise Syabar's annual production capacity by nearly 50 per cent to 1.3m hectolitres this year. A further increase to 2m hectolitres next year is planned.

In May, Heineken also bought a 51 per cent stake in a 525,000 hl/year brewery in Rechitsa for ?6m ($8m). It now accounts for 24 per cent of Belarusian beer output.

The speed of development at Bobruisk reflects the familiarity of the routine for Heineken, which has spent heavily on expanding in other parts of central and eastern Europe, including Russia and Ukraine, the markets that Belarus most resembles. What represents a vital process of catch-up for local industry is, for the investor, now just the filling-in of a blank spot on the map.

"Our position and strategy in Belarus is very similar to the one we have in the rest of the region," says Nico Nusmeir, head of Heineken's CEE operations.

Recent events contrast sharply with the past. Only five years ago, the brewing sector witnessed one of the more egregious disputes involving a foreign investor of the Lukashenko era.

The government first agreed to sell a controlling stake in Krinitsa, the country's largest brewery, to Baltic Beverages Holding in return for $50m of investments. It then retroactively decided it would transfer only 30 per cent. BBH - then a joint venture of Scottish & Newcastle and Carlsberg - walked away from the deal and tried to put Krinitsa into bankruptcy proceedings to recover the $10.5m it had already invested, but a Minsk court refused to hear the suit.

Mr Nusmeir is far too polite to dwell on that particular case. "We weren't looking at Belarus at that time," he says. Even BBH is letting bygones be bygones - it returned in December 2006 to buy 30 per cent of Minsk-based brewery Olivaria and can now exercise effective control jointly with the European Bank for Reconstruction and Development, which owns another 20 per cent. Krinitsa, with 40 per cent of the domestic market, is reported to be back on the government's list for possible privatisation.

Competition concerns may limit Heineken's ambitions, but Mr Nusmeir says that, as long as there are no legal obstacles, further acquisitions are still possible.

In the meantime, the priority is ramping up production and improving quality to meet fast-growing demand. Total beer sales were up 20.7 per cent year-on-year in the first nine months of 2008, according to the National Statistics Committee. But Belarusian consumption still lags that of neighbouring countries. Mr Nusmeir estimates per capita consumption will be about 50 litres this year, compared with 70 and 90 litres, respectively, in Russia and Poland. For Heineken, part of the aim is to grow at the expense of imports, which accounted for nearly 25 per cent of the market last year.

So far, Heineken has concentrated on tapping the mainstream - local brands sold in resealable polyethylene bottles. But with volume growth the strategy will become more sophisticated, offering a broader range of products and making more use of glass and canned packaging.

Already, it has taken measures to improve barley quality, distributing its preferred variety of seeds to local farms. That, in turn, has required it to help under-capitalised farmers.

"We don't try to play the role of a bank, but ... we have certainly been able to provide [access to] seeds and fertiliser," Mr Nusmeir says. "We have received a lot of appreciation from other stakeholders with this programme."

Source:

http://www.ft.com/cms/s/0/4a8facb4-b431-11dd-8e35-0000779fd18c.html

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