Competitors and competition

Characteristics

Current situation

Future trend

Market concentration (number of firms, concentration ratios, HHI)

The industry is oligopolistic. The consolidation process on the Russian beer market has already finished. 85% of all beer market in divided by 5 largest companies. The rest 15% are occupied by regional breweries and small producers. Five-firm concentration ratio is about 85% which is considered to be high (the number falls into interval from 80% to 100%).

• Baltika – 39.1%

• InBev – 17.7%

• Heiniken – 12.1%

• Efes Breweries International – 9.7%

• SabMiller – 7%

HHI calculations:

HHI=39,1%^2+17,7%^2+12,1%^2+9,7%^2+7%^2= 15,29%+3,1%+1,46%+0,94%+0,49%=21,28%

A HHI index between 0.15 to 0.25 (or 1,500 to 2,500) indicates moderate concentration.

There is a low probability of new entrants. Only multinationals that are currently not present in Russia could enter the market. That is why the situation is very unlikely to change in the nearest future. The oligopolistic market will remain.

Market growth

The rapid growth phase of Russian beer market has already finished. Market saturation was observed in 2010.

Experts in beer market predict slow growth after 2011 year and the potential for market development is be available firstly in regions. For example, the beer market of Siberia is poorly developed and not saturated yet, unlike the central region market. Therefore the transnational companies are planning expansion to Siberian region.

Cost differences (among firms)

The main cost differentiation among the competing firms is the availability of beer production on the Russian territory.

Transportation costs account for the total costs as well as customs duties and other expenses connected with import process. Thus, smaller companies with market share show significant costs connected with logistics.

All leading companies on the beer market have production facilities in Russia. The largest breweries are Baltika, Heiniken and InBev.

Labor costs differ among regions where companies’ plants are situated.

Cost structure of firms are more or less the same and considers costs of materials, amortization of production facilities, labor, logistics, marketing, etc.

Some companies are extending their production, thus they invest in facilities.

In general. cost structure of firms remains more or less constant.

Product differentiation

Almost all breweries have more or less the same product range. It usually incudes different types of beer, low-alcoholic drinks, energy drinks, cider, kvass.

The tendency to differentiate from competitors. Thus, new products and new flavors are being developed.

Price differences

Companies operate in different price segments:

• Cheap

• Medium price

• Premium

• Licensed

• Imported

Almost all of the leading companies have products in full price range.

Today Russians are starting to consume more and more beer in bars, cafes, restaurants. The trend is that people start to buy more expensive beer due to the increase in welfare of Russia. That shift to a upper segment price level could be also observed in retails.

Excess capacity

A situation in which actual beer production is less than what is achievable or optimal for a firm. This often means that the demand in the beer market for the product is below what the firm could potentially supply to the market.

Due to the fact that demand in beer market is highly seasonable, the excess capacity depends on the demand. In summer, beer producers operate in near-full capacity whereas the level of production decreases in autumn and winter.

The situation is very likely to stay the same in the nearest future. Only if one of big players on the market extends its production by building extra plant, the excess capacity of that particular firm is likely to decrease.

Are prices and terms of trade transaction observable?

Trade transaction costs are not observable to the end consumer. They are almost the same for all beer companies and include such costs as:

• Search and information costs;

• Bargaining costs - the costs required to come to an acceptable agreement with the other party to the transaction (such as suppliers and retailers);

• Policing and enforcement costs - the costs of making sure the other party sticks to the terms of the contract

The situation is very likely to stay the same.

Can firm adjust prices quickly?

No, fixed costs of production and transportation of beer companies products are very significant in the cost structure. Such costs could not be eliminated or decreased quickly. Hence, the price of the end product is not quickly adjustable.

The situation is very likely to stay the same.

Type of competition (price, quantity, simultaneous, sequential)

Oligopolistic competition - very similar products, few sellers, small firms follow lead of big firms, fairly inelastic demand.

The combination of price and quality competition could be observed.

The tendency to quality competition instead of price one.

Leadership pricing?

No, there is not any strict leader in the market, which determines the price of goods.

The situation is very likely to stay the same.

Tacit collusion (actual and potential)

Circumstance where two or more beer companies agree upon a certain strategy without putting it in writing or spelling out the strategy explicitly.

Actually, although the market is oligopolistic, the tacit collusion is not observed.

Potentially, it could occur on the Russian market, but we cannot judge for sure.

The situation is very likely to stay the same.

Antitrust litigations

No antitrust litigations on the beer market.

It could be potentially implemented in case of unfair competition.