Interbrew Expands in Beer-thirsty Russia

Interbrew, the Belgian group which this month is expected to become the world's largest brewer, yesterday took full control of Russia's second biggest beer group for €530m (£356m) in shares.

By buying out its joint venture partner - family controlled SUN Group - Interbrew, maker of Stella Artois and Beck's, consolidates its position in the rapidly expanding Russian market behind market leader Baltika, which is owned by BBH, a joint venture between Carlsberg and Scottish & Newcastle.

In return the Khemka family, which started SUN Brewing in Russia in 1992, will receive a 3.4% stake in an enlarged Interbrew following its €9.2bn cash and shares acquisition of Brazilian brewer AmBev. InterbrewAmBev will control 14% of the world beer market.

Nand Khemka, an Indian national who has run brewing operations in Russia for more than 40 years, will take a seat on the InterbrewAmBev supervisory board but will not be given voting powers.

Russia, the second fastest growing beer market, behind China, has seen sales more than double in six years. Drinkers have been switching from vodka to beer as incomes rise and western consumer trends are adopted.

Russian beer consumption averages 92 pints a year, only half as much as in Germany. But with sales volumes of 74m hectolitres last year - expected to rise to 80m this year - Russia could be overtaking Germany as Europe's largest market by 2006.

Baltika, which dominated a thriving beer market in the absence of competition throughout the 90s, has recently struggled to maintain market share in the face of a host of rivals - particularly SUN after it joined forces with Interbrew in 1999.

Other international brewers to have entered the Russian market include SABMiller and Turkish-controlled Efes Breweries International, which in May announced plans for a partial flotation in London.

Heineken has also been operating in Russia for two years, and this week acquired a further two breweries, in Sterlitamak and Nizhny Novgorod, to become the country's third-biggest beer producer.

Last month BBH revealed it had lost market share in Russia for three consecutive quar ters but it still accounts for 32% of the market. SUN Interbrew has grown from 12% at the start of 2003 to almost 16%.

Much of SUN Interbrew's gains have been attributed to a move into cheap plastic packaging and cans in place of bottled beer. Their popularity with Russian drinkers forced competitors to follow suit.

Interbrew will take control of 75% of SUN Interbrew's voting shares under the terms of the deal announced yesterday. That comes after Alfa Group, a Russian consortium, recently acquired more than 10% of voting shares in a move some observers saw as a potential challenge to Interbrew.

Carlsberg, S&N's partner in BBH, said yesterday a cool summer across much of Europe would hit its full-year sales figures, cancelling out gains made from promotional activity around Euro 2004.

"Bad weather in northern Europe continuing in July will adversely affect full-year operating profit. Therefore expectations on operating profit ... will not be revised upwards," the company said, adding that marketing costs would continue to be high for the rest of the year, particularly in Russia.

The remarks came after Carlsberg posted operating profit up 23% for the first six months of 2004 to DKK1.5bn (£135m), on net revenue ahead by 4% at DKK16.9bn.

Carlsberg chief executive Nils Smedegaard Andersen was last month quoted in the Danish press as saying he would defend BBH's market position "at any cost".

Hitting back at allegations that BBH brands were poorly promoted, he said marketing budgets had been doubled to about 7% of turnover. "It is more than the number two [SUN Interbrew] can ever dream of spending."