IMD-5-0682 I N T E R N A T I O N A L 24.04.2006 BORJOMI: REBUILDING A BRAND ICON IN RUSSIA Research Associate Mope We have to create this category and own it! Ogunsulire prepared this case under the supervision of Jacques Fleury hit the table for emphasis, but his two colleagues Professor Dominique Turpin remained skeptical. Marianna Glotova, group marketing director as a basis for class discussion for Georgian Glass and Mineral Water (GGMW), barely waited rather than to illustrate either for her CEO to finish before breaking in: effective or ineffective handling of a business situation. People will see it as tampering with their Borjomi! They will not like it; remember the example of “new Coke.” But Fleury disagreed. On the contrary, Russians will listen to us because we are Borjomi! Vladimir Ashurov, a partner in Salford Capital Partners, owners of GGMW, looked from one to the other in silence. The heated debate had been raging for over two hours, but no-one had noticed the time passing. As a Russian, Ashurov understood Glotova’s visceral reaction to any potential dilution of the Borjomi brand. One of Russia’s oldest mineral water brands, Borjomi was also one of its best-known and loved. Though a finance specialist, Ashurov was as passionate as Glotova about marketing the Borjomi brand. However, he was also a venture capitalist and could clearly see the opportunity Fleury identified. The challenge before Borjomi was huge. Having grown rapidly in the past three years, the company now wanted to triple its revenues in Russia further from $50 in 2005 to about $155 million in the next three years. The fastest growing market segment was in still (spring) water, and this was where Fleury wanted to go; in addition to growing the sales of Borjomi Classic, its highly-mineralized and carbonated flagship product. The question before them now was whether to focus on Classic alone, or to also keep, and promote, its other two products; Borjomi Springs, a natural spring water tasting like the world- renowned Evian, and the slightly-mineralized Borjomi Light? Copyright © 2006 by IMD - International Institute for Management Development, Lausanne, Switzerland. Not to be used or reproduced without written permission directly from IMD. - 2 - IMD-5-0682 I N T E R N A T I O N A L Borjomi Spring Water The Borjomi Valley is located two hours drive west of Tbilisi, the capital of Georgia (refer to Exhibit 1 for a map of the country). Established in 1890, Borjomi’s mineral water was drawn from natural underground springs in the valley. In its heyday, the water was one of Georgia’s leading exports; about 400 million bottles were sold in the former Soviet Union (FSU) each year. Yana, a young Ukrainian consumer recalled: Borjomi was to water what Xerox is to copiers. We grew up with about two brands in the shops; Borjomi was one. Some other local brand would be the other. Following the break-up of the FSU, it became impossible to export Borjomi water to its main market of Russia, due to civil war in Georgia. From the late-1980s to 1994, Borjomi went through a period of decline in which equipment deteriorated, production went down sharply and counterfeiting increased. By 1994, less than five million bottles were sold by the then-government owned company, and a year later production had dropped further to one million bottles. But the brand remained well-known throughout the former Soviet Union where it was widely believed to have almost magical healing powers, curing a range of ills from upset stomachs to the most severe hangovers.1 The water was highly mineralized, which gave it a distinctive taste different to mineral waters found in the West. But many of Borjomi’s customers believed that taste indicated its therapeutic value. Another consumer commented: Borjomi was well known for its curative properties. For example, when you went to a sanatorium, perhaps by the sea-side, or you went to a recreation place, you drank Borjomi. It was regarded as semi-medicinal. Georgia was a popular recreation place, and of course, you would drink Borjomi! In The Beginning - The Founding of GGMW in 1995 In 1995, Mamouka Khazaradze, a 30-year old Tbilisi-born entrepreneur, formed Georgian Glass and Mineral Water (GGMW) with Western and Georgian private equity investors. When the Georgian government completed a limited privatization of the mineral water company that year, GGMW won the exclusive rights to the Borjomi brand. Although the factories remained state-owned, the management rights were sold in a several-year concession. Two years later, GGMW hired Jacques Fleury as CEO under pressure from its backers. The financiers had insisted GGMW hire a professional management team before they would invest the additional money needed to improve the bottling operation. 1 Harvard Business School case “Georgian Glass and Mineral Water”, N9-899-082. - 3 - IMD-5-0682 I N T E R N A T I O N A L Fleury, a French national, was attracted by the challenge of reviving a strong brand--with high brand recognition and solid consumer loyalty--in the face of several unconventional and daunting challenges. When he arrived, quality was low and the brand’s exclusivity had been eroded by counterfeiters; some of whom had actually been temporarily authorized to bottle the water.2 By 1997, nearly 95% of the water sold under the Borjomi brand in Russia was fake. The theft and corruption formerly prevalent under Soviet rule also remained a problem. Soon after buying Borjomi, GGMW found itself faced with dubious claims made by the company’s old creditors. Finally, there was the harsh Russian winter. Russia was GGMW’s single largest market. However, winter conditions raised per bottle transportation costs3 from $0.08 to $0.20 between November and March. The Borjomi Turnaround: 1997-2001 Nonetheless, Fleury and his management team (refer to Exhibit 2) restored Borjomi successfully. The company survived the economic crisis in 1998 and went on to become a major market player with a developed distribution network, renovated production facilities and well-educated and professional staff. Between 1995 and 2001, GGMW consolidated its control over the business by buying majority holdings in all production units and opening regional sales offices in Moscow and Tbilisi (refer to Exhibit 3 for GGMW’s holding structure from 1995- 2001). It then integrated the production facilities and installed modern equipment and production/quality control systems, which conformed to EU regulations. With quality under control, Fleury re-positioned Borjomi as a premium brand as part of his marketing strategy. He also attacked the issue of counterfeit with a memorable advertising campaign, the “Five Signs of Borjomi.” Launched at the end of 1997, this promotion on just two subway lines, urged Moscow and St Petersburg commuters to “Find five differences.” A marketing investment of just $120,000 boosted sales ten times. Consumers were grateful to GGMW for being one of the few companies to recognize, and acknowledge, that there were many counterfeit products around at the time. In a post-campaign phone survey of 1,000 St. Petersburg consumers, 90% were able to recall three of the five differences. Indeed, focus groups seven to eight years later still remembered the campaign. Fleury also doubled the retail price, thus avoiding serious price competition while retaining a leading market share with limited advertising expenditure. Although at that time the big multinationals, like Coca-Cola and PepsiCo, were spending massively to promote their new bottled water brands, their products were in a different segment--the purified water segment. By 2001, Borjomi was again pre- eminent among local natural mineral waters and held approximately 10% market 2 Although the Georgian government had initially awarded exclusivity to GGMW, it then also authorized fifteen other companies to bottle the Borjomi water for one year, believing it could thereby utilize unused capacity. 3 In winter, the bottles had to be shipped from Georgia to Russia in expensive insulated railroad equipment. - 4 - IMD-5-0682 I N T E R N A T I O N A L share by value (3% by volume) of the total Russian market. Its brand awareness stood at 75%, the highest among all mineral waters in the market. Borjomi commanded a 100% retail price premium over Russian competitors like Narzan or Essentuki. To exploit its high brand recognition, GGMW introduced two new products: Borjomi Light and Borjomi Springs in 2001. Unlike Borjomi Classic, the original highly mineralized sparkling mineral water, Light was a mildly mineralized sparkling water for daily consumption, while Springs was a still mineral water. But promotion for the new brands was almost non-existent, and sales of the two products remained marginal. Indeed, the company made only one advertisement for all three brands--each distinguished only by attitude. A Successful Turnaround but Some Problems Remain In 2002, the financial results were impressive. In the four years since Fleury had managed the company, GGMW’s revenues4 had grown at a compound annual growth rate (CAGR) of 43% (from 1999-2002), jumping from $8.7 million to $25.7 million. EBITDA5 increased correspondingly from $700K to $6.2 million. But GGMW continued to battle with several issues. For instance, under political pressure successfully arranged by small local producers, it was forced to issue licenses to them from time to time. These licenses permitted the smaller producers to use the Borjomi name, so that confusion remained among consumers. It also led to continued problems with the perception of quality since many of these producers lacked GGMW’s commitment to quality.