Significance of kvass at the market of non-alcoholic beverages

Who makes the market
Seasonality
Segmentation of the market
    According to the type of packaging
    Price
Forecast

The past year 2007 was more than successful for the manufacturers of bear/non-alcoholic beverages. The unusually hot weather that set in Ukraine already at the beginning of May has caused a rash increase in the demand for soft drinks. Nevertheless, even in such an apparently favorable condition the market of sweet carbonated beverages has showed more than moderate growth rate. According to the results of the last year the market growth has reached only ... at the same time the production of beverages has increased by ... million dal. For comparison the market of bottled water has grown almost by ... % up to ... million dal last year and the beer market – by ... % up to ... million dal.
The tendency to reduction of consumption of sweet carbonated beverages has appeared quite long ago. Since 2002 «the share in the gulp» of sweet carbonated beverages has been gradually reducing in favor of bottled water and juice (for the last 6 years – by ... p.p.). The main reason for the current situation lies in the aspiration of consumers who due the growth of their well-being are paying more and more attention to their health to consume natural and wholesome drinks.

None the less the manufacturers of sweet carbonated beverages do not grow desperate. Trying to keep step with the tendency to the natural and wholesome they move the focus of their attention from the flavor-based beverages to the manufacturing of products with some additional advantages – e.g. beverages containing juice, functional beverages, etc. What is more, the specialized production is actively growing. For the last year or two the manufacturers are taking a careful look at cold teas and energy drinks. The demand for these drinks is steadily growing and in the nearest future they may occupy a significant place at the market of sweet carbonated beverages.
And still kvass is now considered to be the most prospective product at the market as in view of the stunted growth rate of sweet non-alcoholic beverages it is showing steady growth for more than a year in a row. According to the State statistics committee kvass manufacturing in Ukraine has grown by ... % and reached ... million dal just over the last year. As for the market share, according to various assessments it has made ... million dal by volume and ... million UAH – by value. The share of kvass and kvass-flavored drinks at the market of non-alcoholic drinks has grown by ... p.p. and reached ... % at the end of the year 2007.

Annual consumption of kvass and kvass-flavored drinks calculated per 1 Ukrainian has grown up to ... liters in 2007 despite the fact that just a year ago this rate was half a liter less and was assessed as ... liters per ... country citizen in average. In our opinion kvass consumption will continue its growth within the next few years. Compared to flavor-based beverages kvass is presented to the consumers as a natural and wholesome drink that is moreover well-known from the times of our childhood. According to the analysts» forecasts the consumption of kvass and kvass-flavored drinks is going to further grow up to ... liters per 1 citizen of Ukraine in 2008.

Who makes the market?

Before we present the market analysis in view of determining the shares of its main participants we should give some explanations. At Ukrainian market there are now represented both the beverages of natural fermenting that can be rightly referred to as «kvass» and the beverages based on synthetic flavorings that are not kvass by nature but are also distributed as kvass. The State consumer standard committee of Ukraine still has not developed the corresponding legislative regulations for determining kvass of natural fermenting and kvass-flavored drinks in spite of active lobbying on behalf of the leading manufacturers of the naturally fermented kvass. The absence of this regulation essentially affects the market. According to Illia Gnetnev, the Manager of non-alcoholic beverages segment development for Baltic Beverages Holding*, many of the Ukrainian consumers do not see the difference between the kvass of natural fermenting and kvass-flavored beverages and so the lack of distinction of this kind at the legislative level too is confusing for the consumers and it hinders the general development of this segment. «The first experience of trying a kvass-flavored beverage labeled as «kvass» may be disappointing to a consumer and so he may turn his back on this category. Both kinds of the product have their right to be presented at the market and still the consumer should have the right to choose,» - says Illia. At the same time Maxim Vasiliev, the Marketing director for «The First Private Brewery» company, considers that « this kind of differentiation is already realized by the consumers (especially by the more advanced community of the big cities) and now it should be just legally secured.» Non the less we consider it unnecessary to make any differentiation between the kvass of natural fermenting and kvass-flavored beverages in this particular review as most of the consumers so far do not actually see the difference between the two categories

*Reference
In April 2008 Danish company «Carlsberg» came to be the single owner of the brewing «BBN Ukraine» holding company.

At the moment the kvass market of Ukraine is controlled by the ... companies. Together they hold ... % of the market (the share of all the rest of the manufacturers amounts to a little more than ... %). Nevertheless it is too early now to speak of the consolidation of the market. The interest for kvass that is displayed by manufacturers of the likely categories of drinks (e.g. beer and non-alcoholic beverages) is steadily growing and consequently the number of the participants of this market is growing too. For example, right at the beginning of the kvass season – end May 2008 – there emerged a new prospective participant of the market. The company group «Baltic Beverages Holding» has presented its own trademark of naturally fermented kvass «Taras». Though according to the main operators of the market who assess the actions of BBH more like an attempt of trying of the market, this introduction of the beer giant to the market will not affect allocation of the leading positions in the immediate future. At the same time this company holding sets for itself a rather ambitious target – to occupy ... % of the kvass market, primarily through expanding the segment.

According to our assessment in 2007 the leading position at the market was shared by the 2 companies – CJSC «BAN», Zaporozhye, and «Aquarius Systems Management». Together they controlled almost ... % of the kvass market.

CJSC «BAN» is well-known by the kvass of natural fermenting under «Yarilo trademark». This brand is the most long-lasting at the market and CJSC «BAN» some time ago became the first company that started bottling of naturally-fermented kvass in polyethylene bottles. According to our assessment in 2007 the company controlled ... % of the market having produced ... million dal of kvass. In comparison with the year 2006 CJSC «BAN» has a little lost its position. According to the information obtained from an open reporting source the company has finished the year 2007 with financial losses. And the production volume decreased by more than ... %. The production shrinkage was mostly induced by the changes in the distribution system of the enterprise. Until the beginning of 2007 the products of this Zaporozhye enterprise were sold by «Ridna marka» corporation that acted as the single distributor of «Yarilo» trademark». Though due to presenting at the market of its own brand of naturally fermented kvass «Drevlyansky» «Ridna marka» refused to further promote the product of CJSC «BAN». For some time kvass «Yarilo» has disappeared from the shelves of network and retail stores in big cities but gradually CJSC «BAN» has developed the distribution system of its main brand. It is worth mentioning that even though in all kinds if media there emerged from time to time the information that the enterprise is looking for a buyer this was not confirmed by the management of the company.

According to our assessment the company «Aquarius Systems Management» (that incorporates three manufacturers of kvass-flavored beverages «Monastyrsky kvass», Ltd., «Alians-1», Ltd. and «Darl», Ltd.) also controlled ... % of the market last year. Although according to some sources the share of the company has reached ... % of the market in 2007 in our opinion this kind of data is not quite true.
At the moment «ASM» company is presented at the market with the following trademarks: «Monastyrsky kvass» («Classical», Okroshka-style», «Cranberry»), «Verkin kvass» trademark that is produced at «Monastyrsky kvass», Ltd., «Danylo» trademark («Pokhmelny», «Classical», «Okroshka-style») by «Darl», Ltd. and «Pan Ivan» trademark» («Bochkovy», «Zhytny») by «Alians-1», Ltd. In 2007 «ASM» company was incorporated by «Ukrainian Beer Group».

*Hereinafter the following types of retail trading facilities are involved in the survey:
• Large food and combined stores
-- Hyper-Supermarkets (with the trading area of more than 300 m2).
-- Other large stores: department stores, minimarkets, provision shops, food and combined stores (with the trading area 100-300 m2).
• Middle-sized food and combined stores (with the trading area of 40 - 100 m2)
• Small-sized food and combined stores (with the trading area up to 40 m2)
• Stalls
• Pavilions
• Open market-places
The survey does NOT cover the following trading facilities:
Gross and small-scaled wholesale trade (including Cash&Carry), seasonal facilities, HoReCa, trading practiced in the state institutions, hospitals, army, etc.

The third place in the TOP-5 of the market leaders is occupied by Lvov company «The First Private Brewery» that is represented at the market with the kvass of natural fermenting under «Lvivsky kvass» trademark («Khlebny and «Bochkovy»). In 2007 the company has manufactured and sold ... million dal of kvass. According to the company»s Marketing director Maksim Vasilyev in 2008 they are planning to increase the production volume by ... % up to ... million dal.

In spring 2008 «The First Private Brewery» launched an advertising campaign for supporting of its leading kvass brand where a particular emphasis was made on the natural essence of this beverage. The advertising appeared in subways of large cities that are viewed by «The First Private Brewery» as the main trading regions. According to Maxim Vasilyev this is going to facilitate both the increase in sales volume and recognition of the brand. We would also like to draw your attention to the fact that until 2008 the kvass manufacturers not quite eagerly invested in marketing support of the category. The tendency can be explained both by the relatively small shares of the market (and of the sales volumes, respectively) and by the low profitability of the category – kvass is mostly positioned in the lower and middle price segment.

The fourth and the fifth places with equal shares of ... % of the market are also occupied by 2 companies at the same time – JSC «Rosinka» and «Ridna marka» corporation.
In 2007 JSC «Rosinka», Kiev, has manufactured almost 1 million dal. of kvass. It is worth mentioning that «Rosinka» is the only participant of the market that produces both the kvass of natural fermenting and kvass-flavored drinks. The kvass-flavored beverage under «Drevnekievsky» trademark («Drevnekievsky», «Drevnekievsky healthy», «Drevnekievsky honey») is packaged in polyethylene bottles while the «natural» kvass under «Ukrainsky» trademark is distributed by the company only from the barrels. The keeping time of the letter is not more than ... days.
Kvass and kvass-flavored beverages production is just one of the business areas of «Rosinka» company. Beside the kvass products this company also manufactures non-alcoholic and low-alcohol drinks, mineral water, juice-containing beverages and syrups.

«Ridna marka» corporation also controlled ... % of the market last year. In the middle of the year 2007 the company presented at the market the kvass of its own manufacturing under «Drevlyansky» trademark» even though for three years before that it was promoting the kvass under «Yarilo» trademark. According to Natalia Belikova, the Marketing director for «Ridna marka», in 2007 (right after the presentation of «Drevlyansky» trademark) their maximum volume of kvass manufacturing was ... million dal a month. But already by May 2008 the production capacity was doubled. «By the end of the year 2008 we are planning to expand our production capacities up to ... million dal of kvass a year» - added Natalia. .
In May 2008 «Ridna marka» corporation has made a kind of a breakthrough – on Ukrainian TV there appeared advertisement of the kvass under «Drevlyansky» trademark. It is noteworthy that it has already been long time that kvass was not being advertised on TV. (CJSC «BAN» was the author of the first advertising video with «Yarilo» trademark that was actively supported at the time of its introduction to the market in 2004). As it was already mentioned before the kvass category have had quite a weak advertisement support lately, subsequently the described activities of the two leaders of the market will improve not only the position of the mentioned participants but the position of this category in general. Moreover both of these companies «Ridna Marka» and «The First Private Brewery» are promoting kvass of natural fermenting as the product essentially different from kvass-flavored beverages.

Seasonality

Perhaps no other product at the market of sweet beverages is subject to seasonality to such extend as kvass does. During the favorable months the sales and, accordingly, manufacturing of kvass grow several times more. It»s already become a tradition that kvass season starts from the end of April – beginning of May. On the streets of the cities there start to show kvass barrels and containers that are used for selling the beverage only in summer*. The peak of production and sales takes place in June-July. For example in 2007 just on these two months there was manufactured almost one half of the annual kvass production volume that is ... million dal. In total from May to August there was produced ... million dal of the beverage or... % of the annual production volume.

*Reference
HoReCa facilities are an exception as they sell draught kvass from containers all year long.

Due to the unusually hot summer of the year 2007 the demand for kvass, especially the barreled one and its sales were very high. Kvass and kvass-flavored drinks manufacturers were having great expectations for the year 2008 too as they were extending their manufacturing capacities. Nevertheless it looks like their hopes are not going to be justified. The season of the year 2008 stands no comparison with the previous year and we can already state that it will hardly be possible to reach the growth rate of the year 2007. And still it is worth mentioning that the unusually hot weather that dominated in August without doubt improved the situation which in its turn once again highlights the importance of the weather factor for selling kvass and kvass-flavored beverages.

Due too its high seasonality kvass is considered to be quite an «inconvenient» product in terms of its sales. According to the Manger of non-alcoholic beverages segment development for «Baltic Beverages Holding» Ilya Gnetnev «in retail sales, especially with the key retail facilities there is a need to rashly expand the shelf size in summer and curtail it in the low season.» The bulk of the sales of bottled kvass at the moment is after the contemporary retail facilities (i.e. supermarkets, hypermarkets, large food stores). According to Nielsen about ... % of kvass beverages are sold through this kind of trading facilities.

Segmentation of the market

According to the type of packaging

Kvass positioning as the people»s popular and a rather cheap kind of drink has determined the choice of tare for its packaging. At present the manufacturers basically use three kinds of tare: barrels, containers and polyethylene bottles. It is noteworthy that the barrels are used for selling of natural draught beer (that can be kept for no longer than 3 days) whereas containers and polyethylene bottles are used either for selling pasteurized kvass of natural fermenting or for selling kvass-flavored beverages.

Selling of draught kvass from the barrels usually takes place in summer season as it presupposes outdoor sales. At the same time the draught kvass in containers can be bought both outdoors and in HoReCa facilities (where it is sold practically all year long, which considerably helps to compensate the seasonal factor). As for the bottled kind of kvass it is distributed in Ukraine solely in polyethylene tare. *.

*Reference
For reference, in Russia where the kvass market is much ahead in its development compared to Ukrainian one aluminum tin is also used for kvass packaging which certainly adds premium sense to this beverage.

According to Nielsen for the period of June/July»07 – April/May»08 the sales of kvass and kvass-flavored beverages in a family-size packaging (... and ... liters) were considerably prevailing in Ukraine. Their total share at the market amounted to ... %, with all that the ... -liter tare alone is accounting for more than ... % of the sales volume. But unlike ... -liter polyethylene tare that for the mentioned period has showed a negative growth rate (-... p.p.) the sales of kvass and kvass-flavored beverages in ... -liter polyethylene tare increased by ... p.p. and made ... % of the market.
We can also conclude that there forms a tendency to curtailing of sales of kvass-flavored beverages in ... -liter polyethylene tare*. In June/July»07 – April/May»08 they decreased by ... p.p. compared to the analogous period of 2006/2007. In this situation we could probably make a conclusion on the decrease of the sales of kvass-flavored beverages in favor of kvass of natural fermenting and to some extend it is true though the main reason for curtailing of the share of ... -liter bottle at the market lies in re-orientation of the kvass-flavor beverage manufacturers towards other kinds of packaging, in particular polyethylene ... -liter tare.

*Refernce
We speak here purely of kvass-flavored beverages as kvass of natural fermenting is not bottled in this kind of tare.

The polyethylene ... -liter tare shows a very good growth dynamics. For the mentioned period its share at the market has grown by ... p.p. and reached ... % of the market. Kvass consumption «on your way» is growing which shows that a buyer more and more often prefers kvass to other sweet carbonated beverages for momentary quenching of thirst.
Among other changes in the structure of the sales of bottled kvass we should highlight the ... p.p. decrease in the market share of the kvass in 1-liter tare up to ... % of the market.

Price

Kvass has always been viewed by the consumer as a relatively cheap kind of drink that can be used to quench your thirst at any moment. The manufacturers decided to support the already formed reputation of the kvass and so there are no premium-class kvass products in Ukraine beside that it is going to be quite difficult to reason the premium status of kvass (though we can not exclude the possibility that a product of this kind will appear with time). And so far kvass and kvass-flavored beverages are mostly sold in the lower and middle price segments. We should mention that in the first segment there are sold kvass-flavored beverages as their manufacturing do not demand any long-lasting technological process and considerable costs while the kvass of natural fermenting is chiefly sold in the middle price segment.
Speaking about the price of kvass we should state that in 2008 it has raised by ... % in average. This was caused by the raise in the price of its ingredients, growing of the manufacturers» constant expenses and by the general macro-economic factors (such as raise of inflation in our country). At the same time the raise in the retail price of the product is affected by another factor – absence of the clear-cut regulation for the price formation which is especially characteristic of the key retail facilities. The briefer for JSC «Rosinka» Svetlana Martus commented on the current situation in the following way: «The prices in retail sale are not fixed by us and every undertaker feels free to set the price on his own, although we have addressed the Price Committee nobody takes care of that» .

Forecast

Kvass is by right considered to be one of the most prospective products at the market of non-alcoholic beverages. Kvass consumption is steadily gradually growing, the variety and the quality of the products is developing. Production volume of this product is growing too. In 2008 the market expansion is going to reach about ... -... %. It is also reassuring that in the analysts» opinion this growth rate will persist for at least the nearest ... years.
Despite that fact that now there is already a number of operators at the market they are still unable to answer the ever-growing demand of the consumers. At the same time the manufacturers are careful to restrain from the rash development of their production capacities due to the extremely high seasonality in selling of kvass and kvass-flavored beverages.

The basic trading facilities still include key and are contemporary retail stores though the involvement of HoReCa is steadily intensifying. The sales volume is not too great here at the moment but with the further development of the consumption culture it is going to grow too which in its turn will help to compensate the high seasonality factor.
The active advertisement support of the trademarks by the biggest participants has become an obvious tendency at the market. Moreover the main emphasis is made on the natural essence of the product at the time when there exist no legal distinction between the kvass of natural fermenting and kvass-flavored beverages (which is by the way for many years demanded by the leading manufacturers of the «natural» kvass). The actions of this kind could direct the development of this market towards the growth in production and consumption of particularly the kvass of natural fermenting (or at least facilitate the consumer’s awareness of the difference between the two categories of beverages thus giving him/her the right to a conscious choice).

The year 2008 saw the long-predicted introduction into the market of the first beer giant. That was «Slavutich» company (a member of Carlsberg Group) with its «Taras» trademark. In our opinion however that was just the beginning. In the nearest future we can expect to see the similar actions on behalf of CJSC «Obolon» that is for a long time showing its interest for this segment and what is more it has a great potential for the leadership here too as well as on behalf of the non-alcoholic drinks industry giant «Coca-cola». The latter has already presented its kvass under «Kruzhka and bochka» trademark to the attention of Russian consumers though the company’s plans as to its entering this kind of market of Ukraine are still unknown.