Brewers holding their 'barley' breath

  • 2004-07-08
  • By Gary Peach
RIGA - When Vitalijs Gavrilovs, the beer maestro of Latvia's largest brewery, Aldaris, tendered his resignation in February, the industry suddenly became awash with rumor. The Aldaris CEO formally stepped down after nearly 20 years at the brewery "to use his experience elsewhere."

However, many speculated that he was forced out by Baltic Beverage Holding as part of the majority stakeholder's drive to imbue fresh management ideas in a rapidly transforming market. Still others believed Gavrilovs was sacked for Aldaris' slumping profits and shrinking market share.
Whatever the reason, the development was a symptom of Latvia's dynamic, yet tenuous beer industry, characterized by intense competition, declining sales and shifting tastes. The entire industry is bracing itself for changes, yet, with only two months having passed since EU accession, no one is willing to say what form those changes might take.
On the surface it would seem that Latvia's beer industry is ripest for a spat of mergers and acquisitions. The Lithuanian market underwent this process a couple years ago, and now its association contains nine brewers serving a market of 3.4 million. In Estonia, seven brewers have divided up the lucrative "beer tourism" market, but in Latvia there are 17 brewers (12 with bottling operations) in the association, seven of which have a less than 1 percent market share.
What's more, people are drinking less beer nowadays. Sales declined by 6.5 percent in the first five months of the year; and with weather as it is, local brewers are grim about this year's prospects.
By contrast, beer sales are up 6.3 percent in Lithuania over the first half of the year, while those in Estonia skyrocketed 18 percent in the first quarter, largely due to PET bottled and canned beer being bought en masse by Finnish tourists.
Imports are also exerting pressure on Latvian brewers. Though no official statistics exist, it is believed that imported beer accounts for 10 percent - 15 percent of brew on Latvian shelves. Russian and Ukrainian beer particularly arouse fear in local brewers, since, paradoxically enough, they are imported duty-free and are priced very competitively (whereas Baltic exports to Russia are taxed).
"Russia does what it wants," complains Ivars Grislis, director of the Brewers' Association of Latvia.
And lawmakers haven't helped either. In May the Saeima fomented panic when it passed a law prohibiting the sale of beer outside after 10 p.m., and earlier this year lawmakers levied taxes on so-called "beer lotteries" - e.g., collect all the bottle caps that spell out such-and-such word and win a free car - which proved particularly painful for the large breweries.
The cumulative effects of these trends and decisions have had an impact. Aldaris, for instance, has seen its market share erode from 44 percent in 2003 to 39 percent in the first five months of the year.
To make up the difference, the company is diversifying its product line and investing 400,000 lats (610,000 euros) into a nonalcoholic beverage, Zelta, which the company says is the first of its kind of the Baltics, since previously all alcohol-free beers were imported.
From an EU standpoint, the production of low-alcohol and nonalcoholic beer is advantageous because in the common market, excise taxes are levied for each percent of alcoholic content. Thus, consumers can expect to see more 1.9 percent and 2.9 percent beers appearing on the market, brewers say.
In fact, Latvia's small brewers, several of whom - Piebalga, Tervetas, Bauskas - adhere to classical brewing methods, are lobbying to have excise taxes differentiated on the basis of output. Many European countries, such as Germany, adhere to this practice as a way of propping up the small breweries that local communities pride themselves on.
For small Latvian brewers, a differentiated tax would be the strongest show of support from the government.
"Our politicians talk about supporting small and medium enterprises, but they do nothing," says Vladimirs Barskovs, director of the Bauskas brewery in southern Latvia, which has a 4.5 percent market share.
But brewers are optimistic. They remember a time a few years ago when imports accounted for up to 20 percent of total beer sales. Local consumers, however, have shown a preference for superior local beer, even if it costs a few santimi more. They have borne out what brewers have claimed all along: Latvian beer is better.
Also, there is room for growth in terms of overall consumption. In 2002, beer consumption per capita in Latvia was 57 liters per capita per year, compared to 70 liters in Estonia and 75 in Lithuania. (In the Czech Republic, that number reaches a whopping 116 liters.) Still, in terms of alcohol consumed per person, Latvians drink the most, which means many here still consume hard liquor.
And as far as cheap Eastern beer, Latvia's brewers are biding their time. "We're hoping for support from the EU," says Grislis, "because the cheap beer will eventually flood more EU countries, and then [Brussels] will be forced to act."