Macroeconomic Environment in beer production

Product coverage Dark Beer = bere bruna Lager = bere blonda Low/Non- Alcohol Beer = bere fara alcool/ cu continut scazut de alcool Stout = sortiment de bere bruna englezeasca The macroeconomic environment interferes in beer production in many ways. The major factors, and how they affect beer production are presented below. Executive summary In present, beer in Romania suffers from several factors, of which the most important is the strong economic downturn, due to limited and even reducing incomes, increasing unemployment and consumers cautiousness regarding their expenditure. Also, the high growth in the last years was tempered somewhat in 2009, bearing in mind that Romania is a traditional producer of wine, and the consumption per capita at the end of 2008 placed Romania amongst the top 10 countries globally. This performance was outstanding, exceeding the most optimistic expectations, and greater efforts on the part of manufacturers and retailers can therefore lead only to marginally higher sales of beer.

Despite the excellent volume growth over the last years as a whole, beer continues to show marked seasonality in present. The majority of sales take place between April and September, while other months witness lower consumption than average. Given such a situation, volume sales fell in 2009, as the average temperature in the first half of the year was lower than usual, which led to a poor performance, especially for small domestic producers.

Stout (bere bruna englezeasca) was the best performing category in total volume terms during 2009. There is little or no awareness of stout in Romania, but a single brand, Guinness, which monopolises sales of stout, ensured significant growth, especially in on-

trade outlets, where imported beer has a significant presence. As a super premium brand, Guinness has a prohibitive price for most Romanians, and it maintains the perception of a sophisticated drink, appealing to high income consumers, and was therefore less affected by the economic downturn.

Unit prices of beer registered slight growth in 2009, explained by two opposite movements. Firstly, the price of imported raw hops and other ingredients increased due to the strong devaluation of the RON against the Euro, with consequences on the unit prices of domestically produced beer. In the larger categories of economy and standard lager (bere slaba), these price rises were entirely passed on to consumers, but this occurred to a lesser extent within premium lager, which was facing stiff competition from imported brands, and which already enjoyed higher margins. Secondly, the opposite movement consisted of consumers switching to cheaper brands due to their reduced purchasing power, which somewhat tempered average unit price growth.

Dark beer retained a marginal share in 2009, with Belgian beer Leffe accounting for the bulk of sales. On the other hand, dark beer, commonly having higher alcohol content, continued to be a niche product preferred by a few loyal consumers. Given the small volume sales and limited prospects, investment in advertising remained negligible. Manufacturers preferred to discontinue some of their dark beer brands, and showed no intention of launching any new ones. The most recent example was that of Heineken, which discontinued the brand Dracula, purchased together with Bere Mures SA in 2008.

Low/non-alcohol beer, with good availability and sustained by heavy advertising campaigns, also saw excellent growth. However, despite being advertised as being suitable for drivers and having no adverse effects on a persons reflexes, it also showed lower growth in 2009 than in the last years, due to the widespread perception that it could affect the alcohol test when driving. In fact, beer continues to be an important means of socialising, and seen from this perspective, it is less likely that either low alcohol beer or strong beer will witness pronounced growth.

The off-trade channel retained the majority of sales of beer in 2009, and its share also increased in 2009, following the economic downturn, when consumers of beer preferred to drink at home. The main trend within the off-trade channel was the rapid and extensive penetration of modern multinational retail chains in Romania, which made a strong contribution to the ongoing changes in buying habits and to the increased purchase of beer for home consumption. Large PET bottle packaging was perceived as appropriate

for family consumption, and also enabled large retailers to offer everyday low prices. By contrast, on-trade outlets remained loyal to glass bottles. Outdoor venues increased sales of draft beer during the summer, as a result of the switch in demand to cheaper beer.

The total amount of beer sold in PET bottles reached almost 50% of overall volume sales during 2009. This trend, common to most segments of the population in Romania, was embraced not only by domestic manufacturers of economy brands, but also by multinationals of standard and even premium brands such as Gsser. The launch of extra large 2.5l and 3l sizes also represented an important tactic used by both multinational companies and independent domestic manufacturers in order to reduce the seasonality of sales, since beer sold in PET bottles is less affected by the weather, and is consumed almost exclusively at home. Bearing in mind limited incomes, smaller PET bottles are available for standard and economy beer, such as Timisoreana 1l and Lwenbru 0.75l.Cans have also increased their share of volume sales, as a result of growing consumption in large cities during hot spells, when there is limited time available for refrigeration. Glass saw its volume share reduce to less than 40% of the total, retaining its popularity in on-trade outlets, but also amongst higher income consumers. As a consequence, Heineken launched 0.5l glass bottles for Neumarkt, a brand acquired from Bere Mures SA, and which was the best performer in terms of beer in PET bottles. Production, Imports and Exports

Local production includes all categories of beer, with the exception of stout and dark beer, and heavily dominates overall sales of beer in Romania. All the major manufacturers have either drawn up investment plans in order to increase capacity, or have already finalised their investments. This is certainly the case for United Romanian Breweries Bereprod SRL, which completed the expansion of its annual manufacturing capacity from 1.4 million hl to 2 million hl, with the prospect of operating at a capacity of 2.3 million hl by 2011. By the end of 2009, Ursus Breweries SA had reached a capacity of 6.3 million hl, while Heineken Romania SA achieved a capacity of 6 million hl. Romaqua Group SA, a domestic manufacturer of soft drinks, also finalised its investment in a plant in 2008 with 1 million hl capacity, but the success of its Albacher beer brand has created the basis for a further increase in capacity to 2 million hl. European Food SA already operates manufacturing capacity of 5 million hl. Apparent consumption of beer in Romania during 2008 stood at 2,129 million litres, which was roughly the same as the projected figure.

Imports and exports of beer both experienced very dynamic growth in 2008; reaching about three times the figures in 2007. 2008 also represented an important change in the structure of imports, with the traditional countries of origin for premium imported brands, such as Germany, the Netherlands, Belgium, the Czech Republic and Austria, being outpaced by imports of economy varieties from Bulgaria and Hungary. These two countries together accounted for 68% of import volumes during 2008, although sales were limited to the neighbouring southern and western districts of Romania respectively. Ireland was the only source of stout. Exports also nearly trebled during 2008, but remained limited compared with imports.

The strong position of multinational companies within Romania was an important determinant of the high level of domestic production and the continuing limited extent of imports overall. The opportunity open to multinationals operating in Romania to import their own premium brands manufactured elsewhere within the EU following the elimination of import taxes was not taken up, due to the substantial transportation costs involved, which would have had a significant impact on the final selling price. On the other hand, the low unit price of beer sold in large PET bottle packaging imported from Hungary and Bulgaria, which benefited from lower transportation costs, had a pronounced impact on the structure of imports during 2008. However, the strong position of those multinationals active locally was not seriously affected by the growth in imports, although a few regionally-based domestic producers struggled in the face of stronger competition from economy imported brands, especially as it was rumoured that these imports were not subject to excise duty. Table of contents ALCOHOLIC DRINKS IN ROMANIA : MARKET INSIGHT EXECUTIVE SUMMARY Economic decline leads to modest growth for alcoholic drinks Slight unit price growth is a result of the devaluation of the RON Multinationals and beer dictate the performance of alcoholic drinks Large retailers are the most dynamic, but independent small grocers dominate The economic downturn is expected to slow down forecast growth KEY TRENDS AND DEVELOPMENTS

The economic downturn has a negative impact on the purchasing power Large retailers retain consumers attention Brands have the capacity to stimulate consumption Rural areas hold significant growth potential for bottled alcoholic drinks