beer

Analysis of the Romanian beer market

As the storms are (hopefully) gone for the summer it’s time to relax on the terrace of a pub, having a cold one. But before I do that, I decided to take a closer look at the Romanian beer market.

Executive Summary

Comparative analysis of Romanian beer market vs. regional markets (consumption & tax)

Correlations between beer and wine consumption

Beer market concentration in Romania vs region

Conclusions and insights

Executive Summary

In order to see development in the Romanian beer market, here are the main findings this article will expand on:

Status-quo:

Possible development paths and measures:

Romanian beer market is the 7th biggest market in Europe overtaking Czech Republic since 2008, and has the potential to become the 5th by overtaking France and Italy.
The market is very concentrated with 4 main competitors and 15 brewing companies, ranking 21st in the region in terms of number of brewers.
Competitors are focused on the economic segment creating a lot of pressure on price, increased by high VAT. If focus is kept on low segments, and considering the aggressive entry on the market of retailers’ own brands (on the same segment), this will probably lead to record low margins.
The HoReCa culture in Romania is just developing and this presents a great opportunity for developing the upper segments and draught.
Wine is a direct competitor and it is a few years ahead of beer in terms of market buzz and creating a consumption culture.

Create a “beer culture”: usually, for this type of endeavor to be successful, the entire sector needs to embrace it. From a “go-to-market” perspective, this should not be a problem since all competitors are ready to follow the first-mover in order to diminish its advantage (see the Radler proliferation), but what is needed is much more than that. A corporation focused mainly on the return of investments can hardly muster the passion investment needed for a customer to start cherishing a glass of beer as something more than just a mediocre drink. Therefore I believe the major transformation of the market will happen in a “snow-ball” way, starting with influencers through niche products and proposition brought by microbrewers. This transformation however will considerably boost all sales and margins across industry and big corporations can greatly benefit from this.
One major advantage of the high level of concentration of Romanian beer market is the power of professional association and its ability to lobby in favor of:

Companies need to differentiate through flagship products for each segment and then cascade the “taste specialist” role to all portfolio and, in the process, educate customer as to how a beer can be refined and what premium means.
Focus more on HoReCa as this is the main distribution channel that can bring growth and there is a risk of losing it (not only as sales, but as a consumption habit across the country).
Continue introducing niche products (such as Bergenbier Nefiltrata, Holsten Weizen) and penetrate relevant segments – segment horizontally thus winning a more loyal customer base.

Reduced VAT on HoReCa – bump the “going-out” culture
Elimination of excise tax on microbreweries (below 200.000hl/y) – encourage niche production, let them compete with wine producers, and create a buzz around beer, allow customers to discover diversity and understand quality
Making the brewing industry a growth priority when it comes to the 2014 European programs – provide funding for niche production.

Comparative analysis of Romanian beer market vs. regional markets (consumption & tax)

Consumption grew steadily between 2004 and 2008. Biggest growth was registered in 06 when consumption grew by almost 15%. Drastic increase in VAT and decrease in purchase power in 2009 brought a drop of 14%, back to the 2006 level of consumption that remained steady until 2011.

In 2012 the consumption grew by 7%, reaching 18.2m hl. The hot summer and the European Football Championship contributed to this growth so, lacking the official data, I would assume that the same trend was seen across Europe.

Looking at the consumption per capita across countries, it is no surprise that the champions (by a landslide) are the traditional Czech Republic, Germany and Austria. North-Eastern Europe comes next with Ireland and Croatia finding their way in top 10, just above Romania.

On the right side of the graph are countries with either high taxation (such as Norway and Turkey) or with specific social issues (such as Turkey). However, the presence of Italy, Greece and France (countries with long summers and an “apéro” culture) so low in the rankings indicates a substitution between wine and beer.

Recently there was some debate regarding the increase of excise tax on beer in Romania, with both parties claiming that the level of taxation at this point is too low or too high (depending on which end of the excise tax payment you are). I do not think that the excise tax needs to be looked at independently from, but in conjunction with VAT.

Source: Brewers of Europe, Pintprice, NextTravelGuide, Wikipedia

Romania is just below the average taxation level and a small increase in excise tax is unlikely to make a big difference in consumption since, as seen in the graph above, except the countries with excessive taxation (Turkey, Norway) the small differences do not affect the consumption. In Romania the biggest pain (for all FMCG sector) is the VAT rather than the excise tax.

Correlations between beer and wine consumption

However, looking at the correlation between the wine consumption and beer consumption, it is clear the two products are direct competitors (see graph above). In Romania there is no excise tax on wine and lately there have been a lot of investments in high quality wineries and vineyards, all European funds allocated for the sector having been put to good use. On this foundation, the consumption of quality Romanian wine is growing, despite the high relative prices (compared to France or Italy for example). The community of wine producers has created a strong buzz around the new AOCs and the market has reacted. On the other hand, when it comes to beer, we barely have any independent brewers, all national brands being concentrated in 4 franchises of big international producers.

While at first glance the increase of excise tax might not seem to be an issue, when we look at it in corroboration with the direct competition (wine) it is clear that the revenues from excise tax might just decrease once the rate is increased.

Beer market concentration in Romania vs region

Given the size of the country, the level of consumption and the relative independent beer culture (from traditional markets, unlike Poland, Slovakia or Slovenia for example which are very close to Germany and Czech Republic) the number of brewers is just very small. If the purpose of the government is to increase the revenues, not only from excise tax, but from VAT, revenue tax and lowering the unemployment, the main strategy should be encouraging establishment and growth of micro and small brewers.

There is a clear direct correlation between the number of brewers and consumption. Of course, it is a “chicken or the egg” type of discussions, but what it is clear is that you can hardly speak of a beer culture with 6 mainstream and 5 premium beers in 3 different packages next to 50 something wines on shelves and no draught in pubs.

Conclusions and insights

Knowing the difference in level of investments needed to set up a winery versus a brewery, the number of new entrepreneurs in each industry should be the other way around. The brewery is so much cheaper and there are so fewer risks in quality than in wine that it is counter-intuitive that there are fewer investments in independent breweries than fingers on one hand, while in the past 5 years more than 15 new wine producers have popped up.

One of the reasons can be the way beer is seen and consumed.

In countries with strong tradition, the dominant container is draught, which is of course an on-premises type of consumption. In Romania, not only do off-premises containers dominate the market, but the level of PET consumption leads to the clear conclusion that beer is seen as a cheap, unsophisticated, lower-class beverage. At the same time, all wine producers have flagship brands available only in HoReCa segment and are mainly fighting for the 6Eur upwards segments.

Of course, this is where the market is today, pub owners do not provide enough quality assurance in draught, but to be successful a company needs to constantly innovate and see, or even create, future market trends and opportunities rather than follow the demographic today’s realities. Brewers are waiting for the Romanians to develop a “going-out” culture and educate their own preferences, but while they are busy changing recipes for PET, most newly opened pubs have no draught available and a wine menu twice as big as a beer menu.

Beginning this season, all brewers have been attacking one product segment: radler. At this point the average Romanian consumer does not even now the difference between an ale and a lager, let alone pils, weizen, stout, bitter, triple. For us Romanians the beer is blonde and clear. The local attempts for a weizen were not as successful as the radler initiative judging by the number of new products in each segment. However, a few years back, when the Tuborg Christmas Brew was released it did create a strong buzz and was the beer of choice during the cold season, and this is evidence that good products marketed properly can find a strong reliable market. Despite these attempts, the market moves more and more into a consumption pattern where the taste is almost irrelevant and segmentation is done mainly through price and company image.

In the next article I’ll look at the main four competitors on the Romanian market and their performance.