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. Last Updated: 07/27/2016

Tatar Transforms Brewery Into Gold Mine

MTKhairullin hopes to make Krasny Vostok one of the world's 10 largest breweries.
KAZAN, Central Russia -- "Every business needs one owner," said Airat Khairullin, head of the Krasny Vostok brewery.

"I am risking my money on the market and my business and myself. ... I have to calculate everything, and because of that, I have to be better than everybody else."

Khairullin, 31, took over Kazan-based Krasny Vostok in 1996, when it was producing just 2 million decaliters a year. The brewery saw sales soar 68 percent to surpass 24 billion rubles ($770 million) last year, when the entire beer market grew just 18 percent.

But Khairullin is not satisfied. He wants the brewery -- which produced 40 million decaliters last year -- to eventually become one of the 10 largest in the world.

"This year, we will produce about 55 million decaliters," he said in an interview at the company's headquarters on the outskirts of the capital of Tatarstan.

After Krasny Vostok opens its $60 million brewery in Novosibirsk in the first quarter of 2003, the company's capacity will rise to 150 million decaliters per year, Khairullin said. "By capacity, we will be one of the top two [brewers] in Russia."

Krasny Vostok's brands include Krasny Vostok and newcomer Solodov, among others.

Solodov, a high-end beer, was rolled out last year, and the ad campaign cost $5 million, according to Profile magazine. The campaign included a series of billboards before the beer was launched in Moscow that mysteriously proclaimed: "Solodov, I Want You."

The billboards kicked up a controversy for their sexual overtones -- because there was no indication that Solodov was a beer and not a person. But despite the ruckus, Solodov earned a brand of the year award.

Krasny Vostok is the engine behind the Kazan-based Edelweiss holding, which is worth $10.67 million, according to Profile.

The holding, which has 10,320 employees, includes a chain of 124 stores, also called Edelweiss, along with the Edelweiss-M dairy factory, the Kristina soft drinks factory and the Regina chocolate factory.

Airat Khairullin and his brother Ilshat set up Edelweiss in the early 1990s, beginning with the retail chain. Ilshat, who remains at Edelweiss, is a less public figure than Airat and was unavailable for comment.

The brothers began with no start-up capital, selling beer from the Krasny Vostok factory on the street, Airat Khairullin said. The brothers were able to double the amount of beer they were selling in a matter of days, reinvesting the proceeds to buy even more beer.

They then built a chain of kiosks, expanding to other fast-moving consumer goods and keeping prices low so that customers could afford them. The brothers were then invited by the city council to revive run-down Soviet-era shops in Kazan.

"I wanted to be the best retailer in Kazan and in the republic [of Tatarstan]," said Khairullin, adding that he made his first million dollars at the age of 21.

"I try to do better than others. To do that, whether in production or in retail, you have to have the best technology, the best equipment, the best specialists," he said.

The brothers began purchasing soft drinks in Moscow to sell at their stores in Tatarstan -- and even had them delivered by road at one point -- but this system was expensive and pushed up retail prices, Khairullin said.

The brothers took a trip to Poland, where the soft drinks were made, in the hope of cutting out the Moscow middleman. Instead, they decided to build the Kristina factory in 1994.

"We invested about $748,000, and at that time, it seemed to be huge, huge money, but the factory paid for itself in its first few weeks," Khairullin said.

Trucks began arriving from as far away as Vladivostok in the Far East, as well as Novosibirsk and Krasnoyarsk in Siberia, to buy soft drinks from Kristina.

"We sold five truckloads a day," Khairullin said. "Some of our shops were selling at almost wholesale prices. People were buying not only from our retail outlets for retail prices, but were buying by the truckload."

Kristina was the first factory in the country to produce carbonated soft drinks in 1.5-liter plastic bottles.

Edelweiss also began producing candy and yogurt. "We just needed the technology and the equipment," Khairullin said.

In 1996, Khairullin was invited to take over 100-year-old Krasny Vostok, which at the time was the country's 56th-ranked brewery.

Some $300 million has been invested in the plant, Interfax quoted Khairullin as saying earlier this year. Krasny Vostok signed a deal with KHS, a German bottling equipment company, in August for a ninth bottling line, which is capable of filling 30,000 bottles of beer per hour.

Krasny Vostok paid 1 billion rubles in taxes last year, making it Tatarstan's fifth-largest taxpayer, Profile reported. Khairullin, who is also a deputy in the Tatarstan parliament, said that large taxpayers have the right to expect recognition of their business needs from the local government.

Khairullin controls production of the raw materials for Krasny Vostok, which is vertically integrated. "I have three of the biggest grain elevators in the Kursk region, which are located at an equal distance from each other along the southern part of the region," he said.

"We like the south of the Kursk region, the north of the Belgorod region and the west of the Voronezh region -- that's where the best barley is grown."

Natasha Zagvozdina, analyst at Renaissance Capital, said Kazan is a strategic location for beer production.

"It is right in the middle of the Urals region, where beer consumption is high, and has good access to the southern region and to the center of Russia," she said.

Krasny Vostok has 578 agreements with state and collective farms and funds seed and fertilizer programs, Khairullin said, adding that payouts are deducted from the cash payments for the harvest. "There is no speculation here, everything is calculated ahead of time."

The company also has some 300 insulated railroad cars to transport the beer, the Tatarstan.ru web site reported earlier this year.

Khairullin declined to reveal the ownership structure of Krasny Vostok, a joint-stock company. But Interfax reported in June that he controls 93 percent of the charter capital of Krasny Vostok. United Financial Group said in May that the company is 70 percent privately owned and 30 percent belongs to the Kazan city government.

One Krasny Vostok arm, Solodovpivo, is controlled offshore by the Swiss bank Sadeca Societe Financiere, according to the AK&M news agency. The obscure bank raised its stake in Solodovpivo by 11.77 percent to 71.57 percent earlier this year, the news agency reported.

Foreign brewers have approached Krasny Vostok about producing beer at the Kristina plant, Khairullin said, but the company has turned down the offers.

Khairullin also has no intention to float shares on the market with an initial public offering, preferring to control the company himself.

"An individual can play a big role in the development of a business," said Vyacheslav Mamontov, president of the Russian Brewers Union. "Khairullin had no experience in brewing, but he has brought his energy and initiative to Krasny Vostok and expanded its potential considerably.

"He is catching up on the larger companies that are not as active as he is," Mamontov said. "It's a positive development in Russian business."

Krasny Vostok, with a market share of 7 percent, is Russia's No. 4 brewer behind Baltika, Sun Interbrew and Ochakovo, according to Alexei Krivoshapko, an analyst at UFG.

Krivoshapko said, however, that the gap between Krasny Vostok and the larger companies is quite big and growth on the market is slowing. "You cannot outperform the market in the long term. The market is broadly matured now," he said.

"If you really want to become No. 2 in this market, you need to invest quite a large amount of money in capacity and expand your geographical location," Krivoshapko said.

"New capacity should be located in central Russia because that's where the market is. If you just start shipping your products from Kazan to Moscow, you can be No. 2, but you will be losing money because of high transport costs."

Krasny Vostok is on sale at only 50.2 percent of retail outlets in the country's largest cities, according to market research company Business Analytica. Baltika, controlled by the Scandinavian BBH holding, is on sale at 94.8 percent of such outlets.

Krasny Vostok's top market is Kazan, where the company controlled 81.9 percent of the market by volume of beer sold in the first half of the year, according to Business Analytica.

In spite of big volumes, Krasny Vostok is still a regional company, said Maria Vanifatova, general director of the Business Analytica Retail Index. "The growth of their distribution in other regions will influence the growth of the market share with a high probability," she said.

Vanifatova added that Krasny Vostok's brands are not as strong as other beers sold throughout the country. "I wouldn't think with their brand that they will be able to sell as much as they can produce," she said.