Vladimir Shahrur Name of the Market Beer Market in Russia

Characteristics

Current situation

Future trend

Main fixed costs

Payroll Expenses

Paying full-time employees is a fixed cost. Payments to those on the payroll will continue regardless of how much unit volume of a brewery's beverage is sold to market

Utilities

Utilities, such as electricity for lighting and the running of machinery needed to produce a product, are a fixed cost

Space and Maintenance

A brewery needs a place to operate. This office and manufacturing space must also be maintained to remain at peak operating efficiency. If equipment that's integral to the production at a brewery needs replacing or fixing, it must be done to remain in business.

Marketing company

The fixed cost for an average brewery with a capacity of 400,000 hl is about $4-$5 million per year. This depends mostly on the yearly budget for advertising & marketing (usually 50% of the fixed cost).

Depreciation

According to generally accepted accounting principles, depreciation is an expense that needs to be reflected on a brewery's financial books and is tracked to measure an asset's financial benefits over the course of its useful life. An example for a brewery may be its fleet of delivery trucks. While originally paid for by the brewery, the depreciation incurred through use and age must be tracked and accounted for as a fixed cost.

There is no significant trend changes coming. The only point is increasing yearly budgets on advertisement & marketing company.

Main variable costs

Indridients

Beer is an extract from roasted malt in water. Hops are added to provide bitterness; yeast helps fermentation to form 4-5% alcohol.

Packages

Beer is filled in bottles, cans or barrels (kegs)

The variable cost of pilsner beer ranges from $600-$900 per ton, depending on the type of packaging used. Despite their importance to taste, ingredients only account for about 5-10% of the variable cost, processing cost (utilities, waste water) for 3-6%, and packaging (bottle, can, keg, carton, crate) for the remaining 85-90%.

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Economy of scale (scope)

In brewing the size of the brew house, the ability to have your own bottling line, efficiency in distribution, number of taps, brand recognition, and many other aspects make brewing an industry that is subject to significant economies of scale

the industry is characterized by a lot of volatility.

The large brewer like Heineken tends to enforce their own strategies to the beer industry and due the economies of scale they will produce higher quality and unique products which can make their own place in the market, hence keep themselves growing to achieve their target.

Are there minimum efficient scale (MES)?

What is the efficient growth mode?

Minimum efficient scale is critical to strategic decision-making with economies of scale because it identifies the level of scale required to enjoy optimal cost savings. In the grown market, MES varies from 20 to 25 billion barrels

Typically, brewers needed to incur higher fixed costs for the brewing of bottom fermented beers compared to top-fermented beers as lagers require artificial cooling during the fermentation and throughout the longer maturation time. Moreover, in reaction to the introduction of lager beers, top-fermentation breweries invested in new equipment to increase the

quality of their brews. Both these factors increased the minimum efficient scale of production in the beer sector and caused the smaller breweries to exit the market as they were not be able to

recover their fixed costs.

Sensitivity of costs to capacity utilization

Costs are sensitive, the main issue is to decide how much we need to produce

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Behavior of marginal cost

If average variable costs in brewing are constant, these numbers are marginal costs, but if average variable costs vary with output, they either over or underestimate marginal cost.

The pioneers who took the first step, by either indigenously investing in new technology or, alternatively, purchasing it outside the industry, were able to lower their marginal costs of delivering beer to consumers.

A cut in supply or increase in demand leads to a situation, when companies decide to increase prices to maintain marginal revenue as marginal costs increased.

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Exit barriers

Exit barriers include:

• Redundancy payments

• Loss of marketing expenditure

• Low resale value of machinery and factories 11

• Declining market due to competition from wine industry so may receive fewer & lower offers for purchase

Brewery could wait for consumption of fixed assets to reduce exit costs. The possibility of selling well known brands could help reduce the exit costs

associated with marketing. Finally, exit barriers in the industry are high with specialized equipment

designed around the production of one product – beer or another malt beverage

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