Baltika Brewery Joint Stock Company

3 6th Verkhny per.
Saint Petersburg
194292
Russia
Telephone: +7 (812) 329-91-00
Fax: +7 (812) 329-91-487
Web site: http://www.baltika.ru

Public Company
Incorporated: 1992
Employees: 8,700
Sales: $805.24 million (2003)
Stock Exchanges: RTS (Moscow)
Ticker Symbol: PKBA
NAIC: 312120 Breweries; 312111 Soft Drink Manufacturing; 424810 Beer and Ale Merchant Wholesalers

Baltika Brewery Joint Stock Company is the largest beer brewer in Russia, with about 20 percent of the domestic market. Aside from the main brewery in St. Petersburg, the company has breweries in four other cities that support the company's reach into the farthest regions of the country. The company's best-selling brand is the Baltika label, which is sold in ten varieties referred to by number, ranging from the nonalcoholic Baltika No. 0 to the extra-strong Baltika No. 9. Other brands include Arsenalnoye, a lower-priced beer, the premium beer Parnassus, and several localized labels with followings in regional markets. In addition, Baltika produces mineral water and citrus soft drinks. The company's majority shareholder is the Danish/English consortium Baltic Beverages Holding AB (BBH). After the fall of the Soviet Union, BBH's investment helped transform an aging state-owned brewery into the producer of a quality beer on par with other major European labels. Baltika's sales grew rapidly as Russians rediscovered beer, and the company's production is only just starting to level off after a decade in business.

A New Brand for the Post-Soviet Era

Baltika beer was first introduced to a market that was used to the unappealing brews of the Soviet era. Although beer had been a popular beverage under the tsars, the brewing industry suffered under the managed economy and anti-alcohol campaigns of the communist period. Very little barley was produced in the U.S.S.R., so the state-owned breweries of the Soviet era relied either on inexpensive low-quality imports or they used alternative ingredients such as rice. The resulting product was described by reporter Ben Aris as an "acidic, pale yellow liquid tasting vaguely of yeast." Almost all beer was sold under the label "Zhigulovskoye." Bottles came with little calendars on the label that told the buyer when the beer would start going bad, usually within a few weeks of being bottled. As a result, beer consumption was very low; vodka reigned supreme among alcoholic drinks.

The brewery that was eventually transformed into the Baltika company was one of six breweries in the Leningrad Production Association of Brewing and Non-Alcoholic Industry, also known as Lenpivo. The plan for the brewery was developed by the Institute "Design for Food Industry-2" in the 1970s because the other breweries in the production association had been operating for up to 200 years and were in need of major renovations. Construction began in 1978, but finishing the plant was a low priority during the 1980s because President Mikhail Gorbachev was running an anti-alcohol campaign. The plant was finally completed in 1990 and the state enterprise "Baltika Brewery" was established. The enterprise sent its first batch of beer to the market in November of that year. This product was still the Soviet-style beer and was sold under the brand names "Zhigulovskoye," "Rizhskoye," "Admiralteyskoye," and "Prazdnichnoye." About 27 million liters of beer were produced in the enterprise's first full year of operation.

Privatization of the brewery started in 1992 after the fall of the communist regime when the state enterprise was transformed into the Baltika Brewery Joint Stock Company. A key factor in Baltika's eventual prosperity was the early involvement of foreign investors. Personal relationships between brewery management and government officials helped Baltika make connections with potential investors. Specifically, the eventual general director of Baltika, Taimuraz Bolloyev, was close friends with Vladimir Putin, the future president of Russia, who at the time was deputy mayor of St. Petersburg and head of the foreign economic relations committee. Putin helped convince a Scandinavian consortium known as Baltic Beverages Holding AB (BBH) to invest in Baltika. At the time, BBH consisted of the Swedish company Pripps, the Norwegian brewer Ringes, and the Hartwall Group of Finland. BBH emerged with a 50.6 percent stake in Baltika after privatization. The remaining shares were held by corporations, private individuals, and holding companies tied to Baltika management.

The Russian plant managers, with the help of advisers from BBH, immediately began planning for the renovation of the brewery and the creation of a new brand name. The Baltika brand first appeared in June 1992. The earliest varieties were Baltika No. 1, a light golden beer; Baltika No. 3, also known as "Baltika Classic"; and Baltika No. 4, a dark beer referred to as "Baltika Original." Meanwhile, a reconstruction and development plan was drafted, which laid out an investment scheme scheduled to start in the spring of 1993 and be completed in 1998. As the plan began to be executed, brewery production grew from 60 million liters in 1993 to 113 million liters in 1995. In 1994 Baltika No. 4 "Exportnoye" was introduced in honor of the Goodwill Games in St. Petersburg; a dark porter variety, Baltika No. 6, also was available by this time.

In November 1996 the reconstruction and development plan was completed two years ahead of schedule. Renovations included the installation of new equipment at all stages of production, the installation of water purifiers, the replacement of iron pipelines with stainless steel, the computerization of production, and the utilization of beer filtering machines. Equipment had been imported from Germany, France, Denmark, and Sweden for a cost of around $44 million. The renovation made Baltika the largest brewery in Russia and the first to install equipment in line with contemporary European practices. Management's original goal had been to reach an output of 150 million liters by 1998, but in 1996 production already totaled 170 million liters.

Rapid Growth in the Late 1990s

Baltika had established a solid foundation by the mid-1990s, and the pace of the company's growth only increased in the second half of the decade. Baltika's share of the Russian beer market grew from 4.7 percent in 1995 to 20.1 percent in 2000. At the same time, overall beer consumption in Russia was exploding now that flavorful Russian-made beers were available. The younger generation in particular was more likely to prefer beer to vodka, although vodka retained its cultural dominance and continued to be consumed in very high quantities. In 1995 both beer and vodka were consumed at an annual rate of about 16 liters per person. Five years later, Russians were drinking 36 liters of beer per person per year. Beer was seen as a relatively harmless beverage and was unregulated. Rising beer sales cut into soft drink sales rather than vodka sales, since beer was itself classified as a soft drink under Russian law. At times during the currency fluctuations of the 1990s, a bottle of domestic beer cost less than a Pepsi or a Coke, so it was a popular choice for young people. Some Russians also considered beer to have healthful properties.

In the late 1990s Baltika continued developing in order to capture as much as possible of this expanding market. After the original reconstruction plan was completed, BBH invested another $40 million to $50 million in new equipment to add production capacity. During this period Baltika also transformed itself from a single large brewery to a holding company with multiple locations. In 1997 the company purchased a controlling share of the plant "Donskoye Pivo" in the southern city Rostov-on-the-Don and began implementing a plan to update the brewery. The following year the "Don" brand was created and tailored to consumer preferences in the southern region. Don beer was described as a light, refreshing, quality brew at inexpensive prices. Four varieties were eventually created. Also in 1997, Baltika began producing mineral water under the "Khrustalnaya" ("Crystal") label on an experimental basis in St. Petersburg only. The water was marketed as a product for everyday use under the slogan "Pure water for the protection of your family."

In 1998 Russia experienced an economic crisis in which the government defaulted on its debts and the value of the ruble plummeted. The crisis had mixed consequences for Baltika. On the one hand, imported beers now cost about four times as much as they did before the devaluation, which helped domestic sales, and production costs were low by international standards, which opened the door for export sales. On the other hand, Baltika had just signed a $100 million dollar-denominated contract to expand the plant with imported equipment; the company had to refinance and take out a loan in order to meet this obligation. Baltika also switched to domestic suppliers for bottles and labels to reduce costs. Some brewing ingredients, however, were difficult to find domestically at an acceptable quality, so the company began considering the construction of a malt factory.

Meanwhile, Baltika moved ahead with its development. The company's distribution network was disorganized, loosely overseen, and allegedly involved criminal elements. Consequently, in 1998 Baltika began investing heavily in the creation of a sales network in the larger cities of Russia's regions. Baltika No. 9 also was introduced that year. Known as "Krepkoye" ("Strong"), this was a light-tasting beer with an alcohol content of at least 8 percent. Total output in 1998 reached 488 million liters.

Company Perspectives:

We work to be the best Russian brewery in every aspect: in satisfying the customer—to make consumers feel they are buying the best beer; in influencing society—to convince society of benefits the Company's activities provide; in business—to ensure the growth of the Company's profits and capitalization and increase its shareholders' income; in satisfying personnel—to motivate each employee and make them feel that they are important to and appreciated by the Company.

In 1999 Baltika completed a warehouse at its St. Petersburg location. The new facility was highly automated and allowed for efficient loading onto rail or automotive transport. The company also developed a specialty beer under the Medovoye ("Honey") label in 1999, capitalizing on the traditional Russian fondness for honey. Medovoye beer was available in light and strong versions, both containing natural honey. In addition, Baltika started exporting about 2 percent of its production to Russian émigré communities, mostly in Britain, Germany, and Israel.

The year 2000 was a year of major growth and development for Baltika. Two new brands were introduced. The "Arsenalnoye" brand was developed as a popular affordably priced beer. It was available in light, dark, classic, strong, and traditional varieties and was promoted as "A Beer with a Masculine Character." A line of citrus soft drinks under the "Serebryanaya Ladoga" ("Silver Ladoga") label also was introduced. The drinks were available in lemonade, citron, and citrus mix varieties. Baltika added two new major facilities to its group as well. The plant Tulskoye Pivo in the city of Tula south of Moscow was acquired in October 2000. The plant had been established in 1974 and since 1997 had been under the control of Baltika's parent company BBH, who had carried out some modernizations. The new malt factory also was completed in October. It had been built in partnership with the French firm Groupe Soufflet and was known as the Malting Plant "Soufflet-St. Petersburg." Baltika held a 30 percent share in the plant. Now Baltika would have quality rye malt available without having to pay high prices for imports. Overall production in 2000 was up 60 percent and reached 1.06 billion liters. Revenues were up 67 percent from 1999, reaching $333 million, and net profit also rose to $79.3 million.

Slower Growth During a Maturing Market: 2001–04

In the early years of the new millennium Baltika continued expanding, although production growth slowed somewhat as the Russian beer industry matured. In early 2001 the company embarked on an ill-fated joint venture in Belarus. Baltika agreed to upgrade the Krinitsa brewery in return for a controlling interest in the plant. Baltika began installing new equipment there at the end of the year, but the Belorussian government was slow to transfer shares to Baltika and tried to reduce the agreed upon stake in the Krinitsa brewery. Baltika halted the upgrade activities and sued to get back the $10 million it had already invested. The money did not start coming back to Baltika until the summer of 2003, after the company pushed for the seizure of a resort in southern Russia that belonged to Belarus.

Other ventures were more successful. Baltika launched a new production line for canned beer in April 2001. The line would produce half-liter cans of No. 7 "Exportnoye" and No. 9 "Krepkoye." Cans were easier to distribute than bottles, but the company had to overcome a perception among Russians that canned beer was of a lower quality. Some of the canned production was earmarked for export; Baltika announced plans to bring exports up to 10 percent of production by exporting cans of No. 7 and No. 9 to countries including Britain, Germany, Greece, Israel, China, and Mongolia. In other developments, Baltika introduced a nonalcoholic beer in 2001 known as Baltika No. 0 and a wheat beer known as Baltika No. 8. The company also introduced a new premium brand aimed at high-income consumers under the name "Parnassus." The beer was marketed under the slogan "A Beer for Goal-Oriented People."

In 2002 Baltika restructured in preparation for the addition of new breweries to its group. The Donskoye and Tulskoye breweries were merged into the Baltika Brewery and became branches of the company with its headquarters in St. Petersburg. Sales offices in 31 cities in Russia and representative offices in neighboring former Soviet countries also were integrated. Decision-making was to be centralized in order to implement more uniform policies. A recently established distributor in Germany, Baltika Deutschland GmbH, remained an independent subsidiary. There were also changes at Baltika's parent company: due to sales and mergers, the British company Scottish & Newcastle plc and the Danish company Carlsberg A/S had 50–50 control of BBH. The company continued to leave day-to-day operations in the hands of Russian managers.

Baltika introduced Baltika "Gold" No. 5 in 2002, as well as Baltika No. 2, a line of "party mix" beers in flavors such as orange, lemon, cherry, and coffee. The company also signed an agreement to begin producing Carlsberg beer under license at the Rostov brewery in May 2002; the beer had previously been imported.

Key Dates:

1978:: Construction begins on the brewery that will eventually become Baltika's St. Petersburg headquarters.
1990:: The plant is finished and established as the state enterprise "Baltika Brewery."
1992:: Baltika Brewery is privatized with BBH as the largest shareholder; the Baltika brand is introduced.
1996:: An extensive renovation program is completed to bring the St. Petersburg brewery up to date.
1997:: Baltika acquires the Donskoye Pivo brewery.
2000:: A brewery in Tula is acquired, a malt factory is finished, and Baltika's annual production surpasses one billion liters.
2003:: Newly constructed breweries begin production in Samara and Khabarovsk.

In early 2003 construction was completed on two new breweries. Each was launched with the introduction of a new regional brand of beer. The plant in the city of Samara started production of Samara brand beer in classic and light varieties in January. A few months later the second plant opened in the city of Khabarovsk near the Chinese border, giving Baltika a strong presence in the Far East. Residents of Khabarovsk chose the brand name "DV" in a contest to name the region's new beer. Several other brands also were introduced in specific cities in 2003: "Leningradskoye," "Stavropolskoye," "Krasnodarskoye," "Krasnoyarskoye," "Sverdlovskoye," "Tyumenskoye," "Permskoye," and "Novosibirskoye." Each was named after its home city and was targeted at people with lower than average incomes. By the end of the year, however, production of all city brands except Leningradskoye was discontinued. Instead, in an attempt to appeal to Soviet nostalgia, in December Baltika introduced the "Zhigulovskoye" label, its own version of the low-priced familiar Soviet brand. In other efforts to broaden its product line, Baltika expanded production of bottled water nationwide. Water production in St. Petersburg was discontinued and moved to the Tula and Khabarovsk plants.

Baltika celebrated the new year in 2004 with the debut of Baltika No. 12, a dark winter-style beer. The company's annual production was now around 1.6 billion liters. Yet beer consumption in Russia was leveling off after growing at a rate of 20 percent over the past half decade and Baltika's market share was being challenged by the appearance of many popular regional brands. The company's production increased less than 1 percent in 2003 even though the overall beer market grew by 7 percent. The Sunday Times of London referred to beer as Russia's "liquid gold" in 2004. The boom years of the 1990s were over, however, and Baltika would have to remain vigilant and adaptable in order to retain its dominant position in the market.

Principal Subsidiaries

OOO Baltika Moskva; OOO Lizing Optimum; OOO Universalopttorg; Baltika Deutschland GmbH (Germany); ZAO Malt Factory Soufflet-Saint Petersburg (30%).

Principal Divisions

Baltika Saint Petersburg; Baltika Rostov; Baltika Tula; Baltika Samara; Baltika Khabarovsk.

Principal Competitors

Sun Interbrew Ltd.; Heineken N.V.; Ochakovo Beer and Soft Drinks Joint Stock Company; Krasny Vostok.

Baltika Brewery Joint Stock Company

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Baltika Brewery Joint Stock Company

3 6th Verkhny per.
Saint Petersburg
194292
Russia
Telephone: +7 (812) 329-91-00
Fax: +7 (812) 329-91-487
Web site: http://www.baltika.ru

A New Brand for the Post-Soviet Era

Rapid Growth in the Late 1990s

Company Perspectives:

Slower Growth During a Maturing Market: 2001–04

Key Dates:

1978:: Construction begins on the brewery that will eventually become Baltika's St. Petersburg headquarters.
1990:: The plant is finished and established as the state enterprise "Baltika Brewery."
1992:: Baltika Brewery is privatized with BBH as the largest shareholder; the Baltika brand is introduced.
1996:: An extensive renovation program is completed to bring the St. Petersburg brewery up to date.
1997:: Baltika acquires the Donskoye Pivo brewery.
2000:: A brewery in Tula is acquired, a malt factory is finished, and Baltika's annual production surpasses one billion liters.
2003:: Newly constructed breweries begin production in Samara and Khabarovsk.