Ivars Grislis takes a long, slow drink of the draught Kimmel, and his face instantly beams in satisfaction. Casually he begins to examine the libation, spinning the glass in his hands. He is, one can tell, a professional beer drinker.
"We're not afraid of the European Union," says Grislis, who is head of the Brewers' Association of Latvia. "We have the advantage of living on the edge of the union. If competitors want to come here, they must be prepared for a long, long drive."
What does alarm Baltic brewers, according to Grislis, is Russia. The country has very cheap beer and could easily adopt strong-arm tactics in relation to local Baltic brewers it decided to seize a market share.
"If they put their mind to it, they could dump and destroy," says Grislis. "They're that big."
Should the battle ever take place, it might not develop the way Russian brewers wanted. For Baltic beer, despite being a tad more expensive, is simply too good to be defeated.
Though each of the three markets is small, there is a surprising range of diversity and quality of beer on Baltic store shelves. Major investments over the past few years have improved product quality, and market savvy has created a genuine Baltic beer culture that would seem invulnerable to outside invasion.
Still, many small producers share this fear of an invasion from the East.
"We are vulnerable to Russia, Ukraine and Belarus," says Vladimir Paskov, general manager of Bauskas Alus, which holds a 3.3 percent niche on the Latvian market. Production costs of beer from these countries are much lower, he explained, and Latvian laws currently do not protect local producers from cheap imports.
Nor do legislators intend to protect us in the near future, Paskov adds.
Curiously, with nearly half of its population non-Latvian, Latvia's consumers are notoriously nonpatriotic, explains Grislis, an opinion with which Paskov agrees. Both men said that cheap Slavic beer could wreak havoc on small local brewers.
However, the same doesn't particularly hold true for the other two Baltic countries. Lithuanians, for instance, possession a strong passion for their own brew, and it simply unfathomable that Kaunas pubs would one day be filled with locals enjoying Russian brands.
"Beer is a local product with local identity and brand loyalty to national brands," says Ovidijus Jankauskas, general director of Kalnapilis-Vilniaus Tauras, the country's second largest brewer.
Even in Estonia, which has a large non-Estonian population, local producers feel confident. "Estonians prefer Estonian made beer, and the local producers have a great advantage here," said Kristy Villems, marketing manager at Saku Brewery.
Nevertheless, imports to Estonia are on the rise, according to data provided by A.LeCoq brewery, and they are rising largely due to cheap Obolon – a popular Ukrainian brand.
Russian-based Baltika, which is controlled by Baltic Beverages Holding – the same concern that holds stakes in brewing behemoths Saku, Aldaris and Svyturys-Utenos – has recently unfurled a major advertisement campaign in Estonia in order to gain a foothold on the market.
According to Baltika export manager Artyom Shafransky, the ad blitz is being run straight from Russia.
Now that production lines have been modernized and the industry has navigated the consolidation phase, the broader issue of Baltic beer is one of market saturation. After the fantastic growth in consumption the past three years, insiders wonder how long growth can continue.
The average European consumes 77 liters of beer, and already one Baltic country – Lithuania – has reached that milestone.
"It seems that now that we have gotten to 78 liters per capita, we are approaching the limit to the amount of beer Lithuanians can drink," said Jankauskas, who refers to beer as the traditional Lithuanian drink.
Lo and behold, over head-spinning growth of 17.6 percent in 2002, domestic beer sales over the first five months of 2003 contracted by 7.6 percent to 89 million liters, according to the Lithuanian Brewers' Association.
According to Saku's Villems, "The Estonian beer market is fairly saturated, but still we will see steady growth in the next few years" of around 2 – 5 percent.
Tarmo Noop, CEO of A.LeCoq, Estonia's second largest brewery, predicted in May that Estonian beer sales would shrink by 5 percent this year.
"We predict a decline for this year," said Noop at the time. "First, because the weather hasn't been favorable, and second, a substantial increase has occurred on the vodka market."
Per capita consumption, said Noop, will level off at 66.4 liters this year.
In Latvia, which has the lowest per capita beer consumption in the Baltics, as well as the lowest average wages, the potential for upside is still considerable. Latvian brewers sold 12 percent more beer in the first half of 2003 that they did during the same period last year, and industry output in the second quarter grew for the first time in four years. Given the incredible 35 percent increase in per capita consumption in 2002, Latvia's beer industry could still see a couple unexpected developments.
By and large, however, market positions haven't changed dramatically over the past two years. Svyturys-Utenos, Aldaris and Saku have maintained commanding leads – nearly half of domestic sales – in their respective countries, and considering their steep financial resources and marketing sophistication, it is unlikely they will yield market domination.
Aldaris, for example, saw its market share sink from 47 percent to 40 percent last year, but after an aggressive advertisement campaign this year it has gained back a 46 percent share of the Latvian beer market in the first half of the year.
In Estonia, Saku isn't taking anything for granted. "In the beginning and middle of the 90s the main competition was imported beer, but since the end of the 90s the main competitors have been local producers. The competition has been intense and required us very precise market research and marketing activities," said Villems.
The real market dynamics are likely to occur for smaller market segments. In Latvia, for example, three brewers – La?plešis, Cesu and Livu – are engaged in a barrel-to-barrel struggle for second place.
The rest, for their part, will have to fight to keep their corner of the Baltic beer market.
"Smaller companies don't have resources to be flexible with prices," said Grislis. Barring the much-feared invasion from the East, "nothing will change for them," he said. "They have their own niche."
Tactics and strategy
As market positions solidified over the years each brewery's has been forced to define its niche and come up with creative ways to maintain it.
One of the most interesting Baltic breweries is Latvia's Agrofirma Tervetes, which, as the name suggests, sits on a farm. Brewers working there pride themselves on their homegrown barely and malt that together produce a truly delectable beer.
Bauskas adheres to classical brewing methods that require 60 – 90 days for maturation– as opposed to 10 – 15 days for most European beers. Located just outside Riga, Bauskas keeps its veteran 77-year-old brewer on staff in order to guarantee top quality.
Cesu announced in June that it would invest 3 million euros in construction of a new facility that will allow the brewer to double output capacity, and the ambitious Livu Alus wants to build its own malt house.
Squeezed by Saku and A.LeCoq, Parnu Brewery has been able to win the hearts and palates of Estonia's resort capital and keep its humble 4 percent market share. But after buying out minority owners this spring, the brewer's new shareholder has plans to improve beer quality and overall output.
Two mid-size Latvian breweries, Lacplesis and Cesu, have managed to overcome their low production capacities by having several of their brand names made abroad. This has allowed them to better adapt to the seasonal fluctuations that define the beer market.
International branding, in fact, has caught on in recent years. Svyturys has begun producing Carlsberg in Klaipeda, and Aldaris is brewing Baltika, Russia's most popular beer, in Riga.
To ensure that the trading channels have two-way traffic, these same producers are trying to reach out to foreign markets. Svyturys has been exporting to North America and the United Kingdom, and Saku is exporting to EU countries. Kalnapilis, meanwhile, is hoping to gain entrance to the massive Russian market through the Kaliningrad exclave. Which calls to mind an old business management rule of thumb: the best defense is a good offense. And just maybe Kalnapilis' strategy is one more Baltic brewers living in the shadow of the East should consider adopting.
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