Russia Food and Drink Report

Russia comfortably retains top spot in BMI's regional Food & Drink Business Environment Ratings table for Q409. Although severe concerns over the state of its regulatory environment have yet to be resolved and a GDP contraction of 7.8% is forecast in 2009 on the back of lower energy prices and a tumble in private investment flows, Russia remains a dynamic long-term market for existing multinational food and drink investors as discussed in BMI's recently published Russia Food & Drink Report for Q409.

Russia's beer industry has come under particular strain in 2009. A sharp recalibration in consumer spending has severely affected non-essential beverage volumes. Earlier in 2009, the market leading Carlsberg-owned Baltika (40% market share) reported a 5% y-o-y decline in first quarter volumes.

Meanwhile, Efes Breweries International (EBI), a subsidiary of Turkey-based beverage giant Andalou Efes, reported a 5.3% decline in H109 (through to June 30) volume sales in Russia. Rival brewers Heineken, SABMiller and AB InBev's Russia-based operations have all suffered this year. To compound matters, it was widely reported in Russia in July that the government was planning to increase taxes on alcoholic drinks, including a possible trebling of the beer tax. According to the Russia-based Vedomosti newspaper, the government is believed to be contemplating raising the beer tax on a samesized bottle to RUB3.51 (US$0.11).

Improbable as it may seem under the present circumstances, the industry's near-term malaise should not take away from the dynamic growth opportunities that still exist for brewers like Baltika across all price segments. With per capita beer consumption resting at around 60 litres per annum, the industry is still operating well below its potential. Through to 2013, BMI has forecast beer volume sales to increase by 27.8% and reach 14.2bn litres while value sales are expected to storm up by 56.8% and reach RUB856.3bn. BMI could revisit its forecast if the looming tax increase is passed off as official policy.

Spurred on by Russia's long-term market appeal, BMI notes that a number of the world's biggest multinational food and drink companies have significantly scaled up their capital expenditure budgets in 2009. Soft drink behemoths Coca-Cola and PepsiCo both plan to invest over US$1bn in the country over the next three to five years and will be buoyed by BMI's forecast that through to 2013, soft drinks value sales will increase by 36.2% and reach RUB197bn. Partly owing to Russian consumers' general disdain for carbonated drinks, both companies boast strong non-carbonates food and drink portfolios. Away from soft drinks, the diversified trio of Kraft Foods, Nestl?(C) and Unilever continue to be busy pursuing organic and non-organic growth opportunities.