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. Last Updated: 07/27/2016

Small Brewer in Changing Times

MTChief brewing technician Elida Vishnyakova pointing out Yarpivo's beer tanks.
YAROSLAVL -- Elida Vishnyakova knows her beer.

Walking between enormous tanks at the Yarpivo brewery in Yaroslavl, where she has worked for the past 32 years, Vishnyakova recalled how hundreds of people toiled to produce the ubiquitous frothy Soviet brews.

Now machines handle most of the manufacturing processes at Yarpivo, which churned out about 50 million decaliters of beer last year. In 1974, when Yarpivo began production under the name of the Yaroslavsky factory, a more modest 7.2 million decaliters left the factory gates.

As Yarpivo's chief brewing technician, the diminutive Vishnyakova is now one of only a handful of brewing workers to be seen here.

"Back then, it was the best of the best among Soviet breweries," she recalled of the factory as she strode between the tanks where the brewing process begins.

Czech brewers helped design the brewery and get it off the ground, but the best the Soviet Union had to offer still meant that workers in rubber boots had to climb inside the tanks to wash them by hand, she recalled.

This and other rudimentary processes survived well into the 1990s, Vishnyakova said, until Yarpivo became part of Baltic Beverages Holding, Russia's largest brewer. Yarpivo is one of three breweries that BBH plans to consolidate under its wing Tuesday.

"You have the term 'competition,' and we have the term 'scarcity,'" Vishnyakova recalled telling some visitors from the United States in 1990. Back then, most brewers, including Yarpivo, produced the Zhigulyovskoye brand.

Since the beer market opened to competition, all the large independent brewers, except Moscow-based Ochakovo, have been snapped up by foreign giants, as brewers raced to benefit from soaring beer consumption.

BBH, jointly controlled by Britain's Scottish & Newcastle and Denmark's Carlsberg, has the biggest market share, followed by Belgium's Sun Interbrew and Dutch Heineken, according to Business Analytica research firm.

In 2005, the market was worth $9.6 billion.

Major players are now looking to cut costs to remain competitive as growth slows, said Yelena Borodenko, consumer goods analyst at Alfa Bank.

"There is not much left to buy. ... Companies are scrambling to lower their logistics and marketing costs to stay ahead of the competition," Borodenko said.

Beer consumption by volume grew by 12 percent in 2004, but growth slowed to 3 percent last year and is expected to be just 2 percent this year, according to Business Analytica.

Yet with an annual per capita consumption of 60 liters, Russia's is still one of the world's most attractive beer markets.

Within the next five years, the Russian market may move up to third place behind the world's largest beer markets, China and the United States, and overtake Germany, said Marat Ibragimov, an analyst at UralSib.

Lower patterns in the regions outside of Moscow and St. Petersburg allow room for growth, he said.

At the Yarpivo brewery, general director Adam Tlekhuray acknowledged that the factory was "competing with very strong global companies." To retain a strong market position, he said, Yarpivo hoped to cut transportation costs by switching part of its production to brands previously produced in St. Petersburg -- the Baltika and Arsenalnoye brands, currently brewed by Baltika, as well as Vena brewery's Nevskoye brand.

BBH is a major shareholder in the Baltika and Vena breweries.

"Our brands will also be produced at other factories," Tlekhuray said, adding that brewing beer closer to densely populated areas would ease logistics headaches.

Transporting beer is expected to get costlier due to booming oil prices and tariff hikes by the country's natural monopoly Russian Railways, said Alexander Kotikov, transportation analyst at Troika Dialog.

How high transportation costs may go is difficult to estimate because tariffs vary widely from region to region, Kotikov said, adding that the retail market boom would also push transportation costs higher.

"We have a vast country," he said. "The more trade we have, the more transportation demand will grow."

Russia's $246.2 billion retail sector is expected to reach $304.1 billion by the end of this year, according to Troika's estimates.

Yarpivo's Tlekhuray said that the brewery's branding and transportation changes were contingent on BBH's consolidation plans, whose fate could be decided at a Baltika shareholders meeting on Tuesday.

Baltika has not yet won shareholder approval for its plan to consolidate three smaller BBH breweries -- Yarpivo, Pikra, and Vena -- under its wing.

Analysts were optimistic that the planned consolidation would go through. Last summer, Baltika's minority shareholders voted down a proposal to buy out Siberian brewer Pikra, saying it was overpriced.

This time around, Baltika has hired the Deloitte & Touche CIS consultancy to provide an independent valuation of the four breweries and avoid pricing disputes.

"Baltika has very active minority shareholders," who must approve the consolidation along with the other three breweries' shareholders, Alfa Bank's Borodenko said.

Even if the plan to merge the four breweries is voted down again next week, the holding would still consolidate sooner or later because it was a sound business move, she said.

"Along with transportation savings, consolidation will cut advertising and raw materials costs," UralSib's Ibragimov said.

Centralizing BBH brands management under one roof will halt competition among similar brands within the holding and decrease advertising costs, which are expected to rise about 30 percent this year, he said.

Ibragimov said that the consolidation would also give Baltika access to deeper discounts on raw materials.

If the consolidation goes through, BBH breweries would come under the Baltika umbrella by December 2006, Tlekhuray said.

"This is the consolidation year," he said.