The Russian drinks industry is facing some interesting long- and short-term dilemmas. News earlier this month that Russian oil magnate and multi-millionaire Mikhail Khodorkovsky had been arrested sent shivers through the international investment community. Despite assurances to the contrary, fears that Putin’s administration is looking to crack down on private business have been stoked, just-drinks reported in a statement.

And while the long-term implications are indeed worrying, the drinks industry’s focus returned sharply to the here and now on November 10, with the announcement that BBH was revising its growth forecasts down for the full year, from 7-9% to 5%.

The Russian beer market is not as attractive an opportunity as it was 18 months ago. In addition to the unfavourable climatic conditions (which BBH blames for the sales slowdown), profit margins are relatively low, as prices are rising slower than the rate of inflation.

That said, this is still a beer market growing rapidly. A recent report by the investment analyst Standard & Poor’s pointed out that “the Russian brewing industry has demonstrated a remarkable operating profitability of nearly 40-50% because of fast growing demand and low production and distribution costs.”

However it also said that this profitability is now declining and market growth pace is slowing, while costs are rising disproportionately fast. Cost management and improvements in sales mix could restore margins somewhat, it said, but Standard & Poor’s warned that Russian brewers would have to increase their borrowings to make the investment needed to take advantage of volume and pricing growth, because internally generated and equity infusions were no longer enough to meet these requirements.

14 November, 2003