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. Financially, GGMW labored under a shareholder loan of over $10 million, which made it unprofitable even though operating profit was positive and growing fast.
The Salford Era: 2002-Onwards
Salford Spots an Opportunity In 2002, Salford Capital Partners6 identified the CIS7 bottled water market as an attractive investment opportunity. The market had double digit sustainable growth, no clear leaders and was highly fragmented. The Russian market was
4 Until 2001 the company’s revenues came from just one product, Borjomi Classic.
5 Earnings before interest, taxes, depreciation and amortization.
6 Salford Capital Partners was a private equity asset management and investment banking advisory company, located in Moscow and London (headquarters).
7 The Commonwealth of Independent States is an alliance comprising Russia and 11 former Soviet Republics including Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Uzbekistan and Ukraine. The CIS was created in December 1991 at the dissolution of former Soviet Union. Source: Interstate Statistical Committee of the CIS. - 5 - IMD-5-0682 I N T E R N A T I O N A L particularly attractive; Between 1998 and 2002, the consumption volume of bottled water grew at a CAGR8 of 23%.9 Salford estimated the EBIT10 margin in bottled water at a healthy 15%. In addition, with low national per capita consumption (PCC) of 10 liters in 2002 (refer to Exhibit 4), compared to 26 liters in Poland, there seemed to be plenty of room for growth. Salford believed that by acting quickly it would have a “first mover” advantage as the first to start consolidating a dynamic and highly fragmented industry. Furthermore, there was a clear exit potential through trade sales to international strategic investors. As the first step in an acquisition plan targeting Russia and Ukraine, Salford bought 92.5% of GGMW in October 2002. GGMW then relocated its headquarters (and top management) from the Georgian capital, Tbilisi, to Moscow at the end of the year. In April 2003, Salford made a further acquisition, this time buying 100% of IDS Group (International Distribution Systems), the market leader in Ukraine. IDS owned the most popular brand in that country, Mirgorodskaya, and operated the widest national FMCG (fast moving consumer goods) direct distribution network. By the end of 2003, Salford had built the largest bottled water operation in CIS. Throughout 2004, Salford made further acquisitions (refer to Exhibit 5 for a timeline). It bought Oscar11--the third largest water bottler in Ukraine--to expand further its market share in that country. Through GGMW, Salford also bought up small bottlers of Borjomi water to protect its source. By the end of 2004, it held 100% of the largest “small” bottler (ML Ltd12), 40% of the second largest (Big Ltd13), 50% of Likani 9514 and had eliminated all other Borjomi bottlers. It later increased its stake in GGMW to 96.3% by converting a $10 million loan to equity.
Salford’s Approach to Post-Merger Integration After the GGMW acquisition, Fleury accepted Salford’s offer to remain with the company. It was a pattern repeated in other acquisitions; in general, Salford
8 Compound annual growth rate.
9 According to estimates by Schroder Salomon Smith Barney, an investment bank.
10 Earnings before interest and taxes.
11 Created in 1995, Oscar controlled 6% of the market through sales of its Morshynskaya water.
12 Acquired in September 2004, ML was the last of the independent “small” bottlers and producer of Borjomi Gold--a product sold mainly in the HORECA segment. Gold was exactly the same water as Borjomi Classic, but sold in a different (green) bottle at a 25% premium to Classic.
13 Big Ltd bottled Borjomi water under the trademark BIG.
14 Likani 95 was the 4th largest “small” bottler with a valuable business franchise within the Russian HORECA segment. - 6 - IMD-5-0682 I N T E R N A T I O N A L preferred to retain talented people in its acquired companies, motivating them by the use of appropriate incentive contracts. After buying GGMW, one of the first things done was to sign new incentive contracts with Fleury and his top management team. Again in IDS, Salford signed contracts with the existing management as soon as the sale was completed. Salford faced a big challenge in integrating IDS and GGMW, both very different in nearly all areas: product, culture, decision making processes, systems and history. With Fleury, Ashurov15 first explored the possibility of creating one organization from the two, but later decided to build them as separate businesses.
Borjomi’s Second Transformation Fleury now took Borjomi back to the regions of Russia and the CIS countries where it had been famous for more than a century. There the water’s strong brand recognition enabled him to increase the price several times again--up to a total of 50%--over two years without losing sales. He was thus able to profitably deliver Borjomi to the furthest parts of the CIS. As Fleury explained:
To ensure that Borjomi would be widely available across the country, we worked with strong, local independent distributors. We chose only those we knew would focus on the product, and offered them attractive margins as incentives. In some places there were no suitable distributors, so we built up our own. Today, with 80 distributors, we cover the 25 biggest Russian cities--according to Nielsen that’s about 93% of the urban population.
Promotion and Marketing In its first year with Salford, GGMW made great progress in protecting its source by limiting the number of small producers to those that met its quality requirements, and buying up the largest. In addition, GGMW again attacked the issue of counterfeit with imaginative promotion. For example, one such promotion was a six-year below-the-line (BTL16) campaign using retired women (“babushkas”). Fleury had noticed that when the retired mother of an employee started her own check on counterfeit products, there was a big improvement in her local shops. Struck by those results, GGMW hired 50 babushkas to monitor 50 shops in Moscow. The women would enter the shops and raise a loud protest when they came across fake bottles of Borjomi. Their visits led to significant changes in traditional shops, where owners and managers respected older customers’ opinions. Though expensive, BTL marketing
15 Vladimir Ashurov was the partner in charge of Salford’s investments in the bottled water business.
16 Below-the line refers to non-media advertising or promotion when no commission has been paid to an advertising agency. It includes direct mail, point of sale displays and giveaways. Source: The Chartered Institute of Marketing, UK, Marketing Glossary. - 7 - IMD-5-0682 I N T E R N A T I O N A L was less so than television advertising. In the event, GGMW’s investment in BTL marketing paid off handsomely, resulting in the closure of 40 counterfeit factories.
Impressive Results As GGMW Grows Fivefold in Three Years Three years after the Salford acquisition, GGMW had seen its group-wide revenues grow from $25.7 to $122 million on the back of sales that had jumped from 53.8 million to 366.3 million liters.17 Ashurov and Fleury had succeeded in turning a local, almost family run business, into a company with proper corporate governance and controls. The company was able to strike a balance between the interests of shareholders and the stability/autonomy of the management, bring in new business processes and create a culture oriented to market leadership. In addition, with the help of Salford, GGMW acquired capabilities in post-merger integration, and developed marketing execution and distribution.
The Russian Bottled Water Market
The Russian Federation With an area of 17,075,200 square kilometers, Russia is the largest country in the world in terms of area and is about 1.8 times the size of the US. It lies in northern Asia, bordering the Arctic Ocean between Europe and the North Pacific Ocean (refer to Exhibit 6). The climate ranges from steppes in the south through humid continental in most of European Russia; sub-arctic in Siberia to tundra climate in the polar north; winters vary from cool along the Black Sea coast to frigid in Siberia; summers vary from warm in the steppes to cool along the Arctic coast. Russia was the largest republic in the FSU. December 1991 saw the break up of the FSU into 15 independent republics. By 2005, like the FSU, Russia remained a collection of diverse territories at different stages of development. Since 1991, the country had made great efforts to build a new political system and market economy to replace Communism. Russia’s reforms made good progress, particularly under President Putin who entered office in 2000. Bureaucracy remained a problem however, and the country was still troubled by a guerilla conflict in Chechnya which threatened the stability of the North Caucasus region. From 1995-1998, Russia borrowed heavily using domestic and foreign loans to cover large fiscal imbalances. In August 1998, credit relations collapsed and Russia defaulted on its sovereign debt. However, recovery was swift. Between 1999 and 2001, inflation fell from 85.7% to 17.7% and GDP grew by 21%. By 2005, GDP per capita was estimated at $10,700 ($ at PPP) (refer to Exhibit 6 for socio-economic data on Russia).
17 These figures are for the global GGMW group including sales of all brands in Russia, Ukraine, Georgia and other exports. - 8 - IMD-5-0682 I N T E R N A T I O N A L
Market Trends and Growth In Russia, the bottled water market was characterized by strong growth potential, fragmented competition18 and nearly 100 small and medium-sized producers with locally recognized brands. Pointing to the low level of per capita consumption (refer to Exhibit 4), GGMW’s marketing director Marianna Glotova said:
I believe there is still a lot of room for growth here. In Russia, per capita consumption is strongly related to income per capita, and those have been rising.
She was not wrong; from 2000-2005 PCC grew at a CAGR of 21%. By 2005, the share of throat of packaged water (out of the total beverage market) was growing as consumers switched from soft drinks to bottled water. It had grown from 29% in 2000 to an estimated 36% in 2005. Between 2004 and 2005, the market grew 25% by volume to 2.88 billion liters (refer to Exhibit 7). Market growth in Russia was being driven by an increase in consumption frequency. Category penetration in Russia was fairly steady, having risen to just 61.9% in 2005 from 60.5% the previous year (refer to Exhibit 8). The number of large packs sold (≥ 3 liters) was growing due to the development of a consumption culture, and a widening of the occasions in which bottled water was used. Bottled water was increasingly used to substitute tap water, and also being used for cooking. Yana, the Ukrainian consumer explained:
The drinking water quality is technically OK in most towns and cities, but in the South and some other regions people are experiencing problems due to the deteriorating quality of the treatment facilities. The trouble with the taste is that the water is chlorinated as a part of the treatment--the water comes mainly from rivers and requires much more thorough cleaning than the ground water commonly used as a water source in Europe--so the taste is not very pleasant. A lot of people complain about the smell and the aftertaste. So, many people see bottled water as better-tasting and healthier. And now, with the availability of relatively inexpensive bottled water I think more people and offices are choosing to use it mainly for drinking, but also for cooking.
The result was an increase in the volume market share of the large package segment--growing from 19% to 21.2% in 2005.
Segmentation The industry was traditionally segmented by carbonation (still/sparkling), use (therapeutic/drinking) and by price (from low to high) (refer to Exhibit 9). The fastest growing segments were the “sub-premium price” and “still water.” In 2005, still water held roughly 36% of the market and, at a CAGR of 28%, was growing faster than carbonated water which had grown at a CAGR of 16% (refer to Exhibit 9). This was notable given that, as Fleury explained:
18 In 2005, the top five players held about 37% market share by volume. - 9 - IMD-5-0682 I N T E R N A T I O N A L
Still water did not even exist in Russia before 1993!
With the multinationals being the first into the segment, they could afford heavy investment in advertising both to build their positions within the segment, and to grow the segment itself. Future growth in the still water segment was forecast at 22.75%, with average consumption doubling in the next three years. Within the therapeutic/drinking water segment, consumers made no distinction between spring (natural) water and purified water although the two differed significantly. Spring water was natural and often bottled at a specific (sometimes single) source. Purified, on the other hand, was multi-source water taken from deep artesian wells, which was then treated and sold.
Consumers In Russia, according to media research company TNS Gallup Media, the top three reasons for consumers’ choice of brand were health (16%), taste (13%) and naturalness (12%) (refer to Exhibit 10). Bottled water drinkers fell into five categories as shown in table 1 below: Table 1 Consumer Segment Attitude Cure seekers “Family time” Fashionable youth “Energy and relaxation with friends” Indifferent traditionalists “Just a water”, “What I normally drink” Healthy living waster enthusiasts “Healthy refreshment for the family” Aspiring strugglers “Affordable style” Source: Company information
(refer to Exhibit 11 for the demographics and buying behavior of these groups) Both the “cure seekers” and the “aspiring strugglers” were growing at the expense of “indifferent traditionalists”, while the “healthy living water enthusiasts” (HLWE) showed the fastest growing PCC (refer to Exhibit 12). Women were the primary decision makers, with over 80% of purchases made by women.
Competition Competition within the market was fragmented, with about 100 small and mid- sized local bottlers. Six national brands had national awareness and a country- wide distribution network. They could be divided into local, historical brands and new, international brands owned by big multinationals. Between them, the six held 40% of the market in 2005 with the balance held by local bottlers (refer to Exhibit 13). - 10 - IMD-5-0682 I N T E R N A T I O N A L
Local Competition The historical brands were Borjomi, Essentuki and Narzan. Borjomi was the premier local natural mineral water in the market, and enjoyed the highest brand awareness; ahead of the other two, who were its closest competitors. However, in the therapy segment, Essentuki enjoyed a small lead over Borjomi in terms of brand loyalty with an index of 11.7 to Borjomi’s 11.4 (refer to Exhibit 14). All these brands suffered as a result of weak local legislation, which jeopardized their ability to get proper title to the names and water sources of their brands. Like Borjomi, Essentuki was bottled by dozens of small and medium producers using water from the same mineral water sources; Narzan was the sole exception. By 2005, these former Soviet-era market leaders had dropped to 5th (Borjomi) and 9th (Narzan) place in terms of volume market share (refer to Exhibit 13). Also, the nature of the three waters prevented their following a multi-source strategy, placing them at a logistical cost disadvantage compared to other competitors. International Competition The new brands were BonAqua, Acqua Minerale and Saint Springs, which were owned by Coca-Cola, PepsiCo and Nestlé respectively. Bon Aqua and Acqua Minerale were both purified waters, whose brands had been built from scratch at great expense by their multinational parent companies. On the other hand, Nestlé bought an existing brand with a good heritage, but failed to exploit it.19 Acqua Minerale was the overall leader, with a 13.8% volume market share. Between 1999 and 2002, Acqua Minerale and BonAqua grew due to aggressive advertising that enabled them to gain brand recognition close to that of Russian brands like Borjomi, Essentuki and Narzan. The effect of the advertising was enhanced by the relative weakness of smaller local competitors who, at the time, did not have any unique selling proposition for their products: most of those waters were produced multi-source and based on heavy treatment of artesian or tap water. Within the market, Bon Aqua had been increasing its market share steadily and closing in on the number one, Aqua Minerale. Towards the end of 2005, Bon Aqua had an 11.7% volume market share compared to Aqua Minerale 13.7%. Borjomi Classic was in 5th place (by volume), but thanks to high prices and a stable market share, it maintained its number 3 position (by value) in the market, ahead of Narzan and Essentuki (refer to Exhibit 15). By the following year, Borjomi had overtaken market leader, Aqua Minerale (PepsiCo) for the first time in a decade. According to the latest AC Nielsen survey, by March 2006 Borjomi held 13.5% of the total Russian market, by value.
19 According to industry sources, St. Springs was a very traditional brand that benefited from association with the church--the original source was said to have been blessed by the Pope. Thereafter the papal signature was put on all bottles from the source. In spite of the religious associations, Nestlé focused on young people, removing the “church” label that had been a part of its attraction. Unfortunately this lost the brand its previous loyal customers, but did not attract the young consumer. In 2005, St. Springs had a volume market share of just 2.9%. - 11 - IMD-5-0682 I N T E R N A T I O N A L
Although not yet present in 2005, Groupe Danone had already announced its intention to also enter the Russian market. The Vedomosti daily quoted the company's chief executive, Franck Riboud as saying20:
If at some point there appears a chance to enter the water and beverage market in Russia, we definitely will.
Market Regional Structure and Characteristics Moscow and St. Petersburg, Russia’s two major cities, accounted for 26% of national water sales volume. Together with the Privolzhskiy region and Siberia, they were the most important areas in terms of numbers of consumers or high consumption per capita. Both Moscow and St. Petersburg had high PCCs, well above the national average of 20 liters. Moscow water drinkers annually consumed 55 liters per capita; while in St. Petersburg consumers drank 35 liters (refer to Exhibit 16). The capital’s market structure was very different to that seen in the regions. Borjomi had a leading position in terms of volume and value; it was the second largest brand in terms of value. Together, the two cities accounted for 66% of Borjomi’s 2005 sales in Russia, and 44% of overall company sales i.e. including Georgia and exports. In the rest of Russia--apart from the Far East region with a PCC of 23 liters--PCC was below the national average. Local producers held over three quarters of the market. In nearly all the main regional cities, the market leader was a local producer. Consumers were also more price-sensitive. With its distribution weaker than in either Moscow or St. Petersburg, Borjomi had a less commanding position to that held in the cities21. Regions drank more still water (refer to Exhibit 16), and so were becoming increasingly important in that segment where their share had grown from 25.5% to 26.2% in 2005. There were some similarities however, and consumers in both the regions and the two main cities, had a broadly similar demographic profile (refer to Exhibit 16). Market forecasts predicted that the most rapid growth would, in future, occur away from the cities where Borjomi was strong; especially in view of the difference in consumption levels. Furthermore, it was anticipated that the market leaders would combine organic regional expansion with buying up local leaders, thus reducing the market share of small producers to about 50%. This move was also expected to lead to integration of distribution networks and further segmentation of brands.
20 “Danone Interested in Russia's Water, Drink Mkt –Vedomosti” Dow Jones International News, 13 April 2005.
21 In Moscow and St. Petersburg, Borjomi had strong distributors who were also specialists in the category (bottled water). However, in the regions, the priority was to find strong financial partners and such distributors tended to cover a broader range of items, having thousands of products on their price lists. Borjomi therefore represented a very small percentage of their sales. - 12 - IMD-5-0682 I N T E R N A T I O N A L
Pricing According to the international market research organization, Nielsen, there were five price segments in the Russian market as shown in table 2 below: Table 2 Segment Elite Premium Sub-Premium Medium Mass Price > 80.01 Rbl < 80 Rbl < 50 Rbl < 20 Rbl < 10 Rbl Rbl: roubles per liter22
In general, domestic premium brands were priced above global purified water brands (refer to Exhibit 17). Borjomi and Narzan’s prices were far above average segment prices; Narzan’s had been growing since mid-2005.
Promotion Backed by the deep pockets of their multinational parents, Acqua Minerale and Bon Aqua maintained a year-round presence with TV heavyweights. With a much more limited budget, smaller players like Borjomi and Narzan instead followed a “breakthrough” strategy of having a 3-month presence during the water summer season. From this, Borjomi got 14.8% share of voice (SOV) to Narzan’s 9.3%; Acqua Minerale and Bon Aqua took 40.7% and 34.7% respectively. In total, companies spent $81 million23 on advertising in 2005, up from $33 million in 2000. Of this, Borjomi spent about $5 million on a mix of ATL and BTL and it was estimated that Bon Aqua and Acqua Minerale spent twice as much as that (refer to Exhibit 18).
Bottling Generally, in Russia, the bottling facilities established in almost every regional city during Soviet rule still existed--hence, quality management, brand names and distribution were much more valuable and scarce than production assets.
Distribution and Logistics The international players, BonAqua and Acqua Minerale, had best-in-category distribution networks that had been initially built in the mid-1990s for major cola and other flavored carbonated soft drinks (CSD) portfolio brands. Modern trade channels were growing in Russia, with about 25% of consumers buying their bottled water from supermarkets and hypermarkets--but this was predominantly in
22 US$1 = 28.29 Russian Rouble; 1 Russian Rouble = US$0.035 (2005 average)
23 Company information. - 13 - IMD-5-0682 I N T E R N A T I O N A L
Moscow and St. Petersburg. In the regions, the traditional food stores were the most important channels and accounted for 45% of national sales. Point of sale marketing (POSM) and merchandising in the modern trade, traditional stores and kiosks was becoming more and more important (refer to Exhibit 19). Transportation, which included loading and warehousing, represented approximately 55-60% of total logistics expenses.
Borjomi in Russia: 2006 By 2006, GGMW was a leader in the Ukrainian and Georgian mineral water markets and dominated the premium category in Russia. It was one of the three largest producers in all CIS countries. IDS had been fully integrated into GGMW, which had become the holding company for all Salford’s water operations in CIS (refer to Exhibit 20 for company income statement and breakdown of sales).
Group Organizational Structure Rapid growth in GGMW’s Ukrainian operations led to the creation of a Corporate Center to provide for the efficient management of functions that were either absent in GGMW, or directly performed by Fleury and the CFO e.g. marketing. The corporate center included commercial officers from GGMW, IDS and Salford, a newly hired corporate development director, a public relations director and a chief legal counsel. It directly supervised country functional managers in Russia, Georgia and export markets and oversaw Ukrainian operations through the Board of Directors of IDS (refer to Exhibit 21). In addition, a Strategy Committee was put in place to ensure efficient decision making at the shareholder and top management level. The committee provided a forum to discuss critical matters to be formally addressed at board level, provided advice to top management and had limited executive powers regarding specific Georgian issues. Ashurov and Fleury sat on this committee.
Bottling The Company’s production facilities were located in Georgia and formed an integrated state-of-the-art production unit consisting of the wells, pipeline system and bottling factories with modern equipment, well organized production processes and quality control management systems. The water was extracted from three underground deposits (Borjomi Classic), with the pipeline network then delivering the water from the sources to the factories. In 2002, GGMW had a total annual capacity of 100 million bottles of mineral water. A complete reconstruction of the factories in 2003, and again in early 2006, brought the capacity to 300 million bottles per year. However, because of seasonal factors, activity peaks linked to commercial measures and technical constraints, the utilization rate was only about 80%. - 14 - IMD-5-0682 I N T E R N A T I O N A L
Brands and Marketing Mariana Glotova was the group marketing director, operating at both holding and subsidiary level. She acted as overall Borjomi brand manager, supervised the Georgian and IDS marketing operations and was leader of marketing operations in Russia. In addition, she also monitored and advised on other Ukrainian brands owned by GGMW such as Morshynskaya (the market leader in Ukraine). Borjomi’s marketing strategy focused on leveraging its strong traditional brand, and careful segmentation. In 2005, GGMW had four products in its Russian portfolio24 (refer to Exhibit 22 for a breakdown of Borjomi’s product portfolio). Borjomi Classic and Borjomi Gold came from the same underground source in the Borjomi valley. Classic and Gold were the original traditional highly-mineralized sparkling water, and were well-established premium-priced brands with high awareness and brand recognition. Borjomi Springs was a still spring water, from above-ground mountain springs also in the Borjomi Valley. Borjomi Light--a mixture of Classic and Springs--was a low-mineralized water for daily consumption (refer to Exhibits 23, 24 and 25 for Borjomi’s marketing mix). Borjomi Classic Much of GGMW’s advertising expenditure--$10.4 million, representing 16% of sales in 2005--went to support its flagship product, Borjomi Classic25. From April to June 2005, Fleury ran an above-the-line (ATL26) campaign consisting of two television commercials of 15 and 30 seconds each, resulting in a share of voice of 14.8%. It also ran print campaigns as well as providing OOH (out-of-home) and BTL support. Although it had excellent brand awareness at 95%, only 80% of those who recognized the brand went on to try it out at a first trial. Further, of those only 46% would purchase the water, and 20% went on to become regular buyers. The challenge for Classic was to encourage those trying it for the first time to include it as one of their purchased brands, and then to switch them from random purchasers to regular buyers. In other words, the company had to increase usage frequency and loyalty among its current customers. Nonetheless, Borjomi Classic was up on most indicators by the end of 2005. Compared to the previous year, it had seen sales growth of 35% and market share growth of 7.7% (by volume) and 5.7% (by value). Brand awareness was up 14%, brand loyalty by 8% and brand consumption by 18%.
24 GGMW also sold some of its Ukrainian products in Russia too e.g. Mirgorodska water.
25 GGMW did no consumer advertising for Borjomi Springs and Borjomi Light, however it ran some trade marketing activities for the two brands. Roughly 80% of its marketing spend was in support of Borjomi Classic.
26 Above-the line refers to advertising for which a payment is made and for which commission is paid to the advertising agency. Source: The Chartered Institute of Marketing, UK, Marketing Glossary. - 15 - IMD-5-0682 I N T E R N A T I O N A L
Borjomi Springs To Fleury, Borjomi Springs represented a growth opportunity. Still water, growing at a CAGR of 28%, was the fastest growing segment in the Russian bottled water market. The product quality was good; focus groups held in 1999 had approved the taste. Furthermore, it was an unserved category and one in which the market leaders could not compete since their products were non-natural. By positioning Springs as a natural product, he hoped to be able to command a premium over purified waters like Bon Aqua and Acqua Minerale. Fleury dreamed of building an entirely new category of mountain spring waters; Borjomi Springs would personify that category and become the category leader. He was also confident that the Borjomi brand could be leveraged to promote the spring water. In his view:
I know that Badoit in France, which is also highly mineralized, did it. Spa did it too in Belgium. So why can’t we?
Because it was Russia, and as Glotova pointed out:
Russia is different, and Borjomi stands for much, much more than a just a mineral water.
She also reminded the two men of the earlier problems with counterfeits. There was support for both views from the consumer. On the one hand, the main reason given for the first purchase of Borjomi Springs was “…a wish to try the new product from the famous brand.” On the other hand, a survey of 1,300 people in July 2005 showed that 45% of Borjomi consumers, and 37% of Borjomi Springs consumers, had seen counterfeit Borjomi products before. These consumers considered that, on average, at least 3 out of every 10 bottles of Borjomi, would be fake. Research by GGMW showed some other problems too with distribution, packaging and labels. Fleury had discovered that Springs was not available in stores. Also, even where available, it was not presented in stores in the traditional way i.e. in the refrigerator and that the brand was not noticeable on the shelf. Regarding the label, the most disadvantageous elements were the colors and the font of the word Springs. The best elements were the deer on the bottle and the Borjomi font on the label (refer to Exhibit 22). Market research also showed that the most promising segment for Borjomi Springs was the HLWE27. This group had the highest PCC, preferred high quality products for their health and considered a premium price as a warranty of quality:
27 Healthy living waster enthusiasts. - 16 - IMD-5-0682 I N T E R N A T I O N A L
Table 3 HLWE Characteristics Borjomi Springs Characteristics Prefer natural waters => 9 Is a natural spring water Want to take care of their health and family => 9 Is good for the whole family Family oriented => 9 Is good for the whole family Image of quality is important => 9 Borjomi warranties quality Prefer well-known brands => 9 It is associated with a well-known brand Not price-sensitive => 9 It is premium Don’t trust new fashionable western brands => 9 It is “ours”, not western
Borjomi Light Although the sales volume of Borjomi Light had risen, its growth still lagged that of the carbonated water market (see Table 4) and was less than that of Classic. Table 4 Russia, without Export 2003 2004 2005 Borjomi Light year-on-year Growth, % -4% 29% Borjomi Classic year-on-year Growth, % 14% 33% Carbonated segment year-on-year Growth, % 7% 21%
There were also issues of perception. A July 2005 study revealed that some consumers viewed Light as “fake” or an “imitation” product that badly exploited the Borjomi name. Indeed, some had expressed their views quite forcibly:
There is only one Borjomi taste. If there is another mineral content, then it is not Borjomi
Moscow, woman, aged 35-55
You must not parasite on such a famous brand with such traditions as Borjomi.
Ekaterinburg, man, aged 35-55
You took the name but the water is not Borjomi!
Ekaterinburg, man, aged 35-55
Distribution, Salesforce and Logistics GGMW’s distribution operated under four business units: Moscow, St. Petersburg, Rest of Russia (RoR) and export (primarily to the Baltic States). The company used a network of 80 distributors as shown in table 5 below: - 17 - IMD-5-0682 I N T E R N A T I O N A L
Table 5 Moscow St. Petersburg Rest of Russia • 7 distributors • 1 distributor • 72 independent companies. • Distributors concentrate on • Also concentrates on water • GGMW focuses on finding bottled water, beverages & products. stable financial partners, juices • 200 items on price list. hence distributors are the • GGMW share of total sales largest who cover a wide is 20-80% (in one case a range of goods and have distributors sells 1.4 thousands of items on their million bottles per month. price lists.
In distribution, GGMW focused on 25 cities,28 for which it had special teams of sales representatives and merchandisers. There were 34 sales representatives and 67 merchandisers for Moscow; 12 representatives and over 20 merchandisers for St. Petersburg. Between them, these teams controlled 25,000 outlets directly. They provided in-store support, helped distributors with order-taking and stock monitoring and also helped with store merchandising. For their part, the distributors focused on logistics, some order-taking and payment collection. They had a direct financial contract with GGMW and 30-40 day payment terms. Where the company had no teams, the distributors carried out all activities, although GGMW sometimes carried out sales audits in those cities. In winter, transportation costs--for the 1644km journey from Tbilisi to Moscow-- rose from $65/ton in summer to $100/ton. Given the cost of logistics, the limit of profitability for the company was the natural border of the Ural Mountains (see Exhibit 6)--over half the cities not directly served lay east of the Urals.
The Path to Growth - Glotova’s Concerns In 2005, GGMW received two offers--to sell or partner--for Borjomi from two multinationals. It was a welcome vindication of the remarkable achievements made from 2002-2005. Fleury and Ashurov had realized their earlier vision; growing the company’s revenues from $25 to $67 million (Borjomi sales alone), and transforming the company in the process. But despite the excellent offers, neither man believed it was the right time to sell out. They believed that there was still significant room for growth, and that they could push revenues further. Specifically, that they could grow global sales of Borjomi (Russia, Georgia and exports) from $67 to $207 million within the next three to four years. They expected to achieve $155 million of that 2008 growth from sales in Russia alone--but how?
28 These were Moscow, St. Petersburg, Arkhangelsk, Vladivostok, Khabarovsk, Nizny Novgorod, Voronez, Tula, Yaroslavl, Volgograd, Krasnodar, Rostov, Samara, Saratov, Kazan, Sochi, Stavropol, Yekaterinburg, Ufa, Chelyabinsk, Perm, Novosibirsk, Irkutsk, Omsk and Krasnoyarsk. - 18 - IMD-5-0682 I N T E R N A T I O N A L
To Fleury, it was clear that Borjomi had to exploit the unserved niche in the still water segment, in addition to increasing sales of its Borjomi Classic product. His management agreed with that. But should, and could, the company really use Borjomi Springs to do so? The dangers were clear; if they got it wrong, they would not only fail to meet their target, they might also jeopardize their single greatest asset, the Borjomi brand. It would be Fleury’s call--he had built up this business over the past nine years. Would he take the risk of losing everything now?
- 19 - I N T E R N A T I O N A L
Exhibit 1 Map of the Republic of Georgia
The Borjomi Valley
• Borjomi
Source: CIA
2006 estimates Population: 4.7 million GDP Growth: 7 % (2005) Population per sq. km: n.a. GDP (current US$): $6.4 billion (2004) Population growth: - 0.34% Life expectancy: 76.1 Age structure 0-14 years: 17.3% Population below national 54% 15-64 years: 66.2% poverty line (2002): ≥ 65 years: 16.5% Georgian 83.8%, Azeri 6.5%, Armenian 5.7%, Russian 1.5%, other 2.5% Ethnic groups (2002 census) Georgian 71% (official), Russian 9%, Armenian 7%, Azeri 6%, other 7% Languages Note: Abkhaz is the official language in Abkhazia.
Source: CIA
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Exhibit 2 Georgian Glass and Mineral Water: Management Team
Mamouka Khazaradze - President and founding shareholder Khazaradze graduated from the Technical University of Georgia and Harvard Business School. Prior to founding GGMW, he was vice-president of the Creative International Organization “Sakartvelo” from 1988-89. Since the early 1990s, he has held top positions as president of TBC-Group (1991-2005) and chairman of the supervisory board of TBC-bank (1992-2005). He was appointed president of GGMW in 1995.
Vladimir Ashurov - Chairman Ashurov was the Managing Director of Salford’s Moscow office where he focused on advisory services for mergers and acquisitions, and private equity. In CIS, he ran the group’s activities including investment strategy, deal origination and execution, portfolio monitoring and advisory services for both new and existing clients. Prior to joining Salford Capital Partners in 2001, Ashurov had over a decade’s experience of working with, or founding (alone or with partners) several private companies in new areas of the Russian economy including IT, financial services, equity and commodity trading, commercial banks and real estate development.
Jacques Fleury - Chief Executive Officer Fleury was a Frenchman with extensive experience in managing corporations and projects in emerging markets. Before joining GGMW in 1997, he was managing director of Zanzi Vivai Iran (1975-81) and Zanzi Vivai Morocco (1981-83). From 1984-91 he worked as an international project manager with Thomson-CSF- Sodeteg in Guinea, Senegal, Liberia and Egypt. From 1991-1996, he acted as a chairman and managing director in various Greek agro-food companies under management contracts with Thomson-CSF-Credit Lyonnais.
Ruud J. van Heel - Chief Financial Officer Prior to joining GGMW in 1997, Mr. van Heel, a Dutch national, worked for eight years in Deloitte & Touche Auditors in the Netherlands as an Audit Senior, and in Russia as an Audit Manager. He was the financial director of a large Dutch industrial bakery in Bakkerij Aad Klootwijk between 1991-93 and a multinational real estate company Palladium BV from 1995-97. Within GGMW, van Heel was responsible for accounting, reporting, treasury and general organization the company’s head office and sales offices abroad.
Source: Company information
- 21 - I N T E R N A T I O N A L
Exhibit 3 Georgian Glass and Mineral Water Holding Structure: 1995-2001
Georgian Glass & Mineral Water Co. NV
73% 66% 75% 97% 100%
Borjomi Mineral Khashuri Glass Tare Bottling Factory #1 Bottling Factory #2 Waters of Borjomi GG&MW Branch Water
Production – glass Production – Borjomi in Production – Borjomi Water extraction and Sales & Marketing - Sales & Marketing - bottles glass bottles in PET bottles transportation Russia & Export Markets Georgia & Export Markets
Constructed in Soviet Constructed in Soviet Owns all wells in Borjomi Operates GGMW’s times – GGMW invested times – GGMW Valley and exclusively Russian distribution heavily to renovate and invested heavily to operates pipeline network and sales in install new equipment renovate and install carrying water to bottling Baltic states new equipment plants
Source: Company information
- 22 - I N T E R N A T I O N A L
Exhibit 4 Per Capita Consumption of Bottled Water (liters)
Source: Euromonitor, 2005
- 23 - I N T E R N A T I O N A L
Exhibit 5 Borjomi: Timeline and Key Events
Khazaradze (GGMW) Fleury arrives at August 1998 Launch of Borjomi October 2002 GGMW receives offers buys Borjomi Borjomi Russian debt crisis Springs & B Light Salford buys Borjomi to buy Borjomi
1995 19971998 1999 2001 2002 2004 2005
Years of decline; production falls from 450 to 5 million April 2003 Nov 2004 bottles (1994), then UKRAINE to 1 million in 1995. Acquisition of Acquisition of IDS Oscar
GGMW consolidates control over Borjomi: buys majority stakes in, integrates and modernizes production plants. Also opens regional sales offices in Moscow & Tbilisi.
Borjomi turnaround
Revenues grow at CAGR 43% EBITDA up 9x from $700K to $6.5 million
Borjomi regains Fleury & Ashurov grow Borjomi from $25 to prime position. $125 million in sales.
¾3% of Russian market (value) ¾4th place market Borjomi reduces number of small bottlers by share imposing quality standards & by acquisition ¾75% brand (BIG, ML, Likani 95). awareness ¾100% price premium over Acquisitions in RUSSIA July 2004 Dec 2004 rivals MLBIG Lk - 24 - I N T E R N A T I O N A L
Exhibit 6 Russia: Economic and Social Data Map of Russia Showing 25 Cities and Republic of Georgia (in red) - 25 - I N T E R N A T I O N A L
Exhibit 6 (contd.) Russia: Economic and Social Data Road distances in Russia Kilometers to the left/down, miles to the right/up.
Sankt- Archan- Kalinin- Mur- Volgo- Donetsk Kazan Moskva Perm Samara Peterbur Ufa Vyborg RUSSIA gel'sk grad mansk grad g RUS RUS RUS RUS RUS RUS RUS RUS RUS RUS RUS RUS Archangel'sk RUS — 1358 1299 898 767 1016 1165 1146 702 1233 1361 792 Donetsk RUS 2185 — 1143 1082 597 1804 1457 743 1032 1036 241 1128 Kaliningrad RUS 2090 1840 — 1271 777 1432 1647 1442 597 1609 1296 693 M Kazan RUS 1445 1742 2045 — 498 1501 373 350 941 336 712 1038 I Moskva RUS 1235 960 1250 802 — 1215 873 659 443 836 600 541 L Murmansk RUS 1635 2903 2305 2415 1955 — 1874 1712 836 1836 1827 814 E Perm RUS 1875 2345 2650 601 1405 3015 — 588 1314 423 1091 1411 S Samara RUS 1845 1195 2320 564 1060 2755 947 — 1109 293 502 1206 Sankt-Peterburg RUS 1130 1660 960 1515 713 1345 2115 1785 — 1277 1053 96 Ufa RUS 1985 1667 2590 540 1345 2954 680 471 2055 — 795 1373 Volgograd RUS 2190 388 2085 1145 965 2940 1755 808 1695 1280 — 1150 Vyborg RUS 1275 1815 1115 1670 870 1310 2270 1940 155 2210 1850 — K I L O ME T E R S Taken from http://www.abo.fi/~oholm/distance/russia.shtml accessed April 19, 2006.
2000 2001 2002 2003 GDP per head ($ at PPP) 6,626 7,169 7,664 8,350 GDP (% real change pa) 10.05 5.09 4.66 7.33 Consumer prices (% change pa; av) 20.81 21.6 15.96 13.63 Labour costs per hour (USD) 0.44 0.63 0.78 1 Recorded unemployment (%) 10.49 9.03 8 8.47
2004 data Population: 144 million GDP Growth: 7.10% (2004) Population per sq. km: 8.4 GDP (current US$): 572,960 million (2004) Population growth: -0.37% Life expectancy: 67.1 Age structure 0-14 years: 14.6% Population below national 17.80% 15-64 years: 71.3% poverty line (2002): ≥ 65 years: 14.2% Russian 79.8%, Tatar 3.8%, Ukrainian 2%, Bashkir 1.2%, Chuvash 1.1%, other or Ethnic groups unspecified 12.1% (2002 census) Languages Russian, many minority languages
Source: World Bank, CIA, EIU
- 26 - I N T E R N A T I O N A L
Exhibit 7 Russian Bottled Water Market: Growth
- 27 - I N T E R N A T I O N A L
Exhibit 8 Russian Bottled Water Market: Consumption Frequency & Penetration
Exhibit 9 Russian Bottled Water Market: Segmentation - 28 - I N T E R N A T I O N A L Exhibit 9 (contd.) Russian Bottled Water Market: Segmentation
Exhibit 10 Russian Bottled Water Market: Factors of Brand Choice
Other, 12% Utility for health, 16% Place of bottled, 6%
Gassing, 6% Taste, 13%
Mineral ingredients, 6%
Availability in retail, 8% Naturalness, 12%
Brand, producer, 11% Price, 11% - 29 - I N T E R N A T I O N A L
Exhibit 11 Russian Bottled Water Market: Consumer Segment Profiles
Buys bottled water Drinks bottled water
8% 5% 5% 9% 7% 15% 13% 12% 20% 23% 29% 36% 36% 34% 34% 34% 39% Every day 40% Every day 38% Several times a week Several times a week 40% Once a week 25% Once a week 2-3 times a month 2-3 times a month 26% 17% Once a month 27% 30% 28% Once a month 19% Less than once a month Less than once a month 17% 22% 20% 18% 16% 20% 17% 17% 16% 17% 17% 15% 17% 11% 13% 13% 10% 9% 11% 10% 7% 4% 6% 2% 3% 6% 2% 4% 1% 2% 3% 2% 3% Cure seekers Fashionable Indifferent Healthy living Aspiring Cure seekers Fashionable Indifferent Healthy living Aspiring youth traditionalists water strugglers youth traditionalists water strugglers enthusiasts enthusiasts - 30 - I N T E R N A T I O N A L
Exhibit 11 (contd.) Russian Bottled Water Market: Consumer Segment Profiles
2% 1% 2% 1% 2% 2% 5% 5% 5% 7% 2% 2% 2% 1% 5% 7% 2% 5% 4% 5% 5% 10% 7% 11% 7% 43% 11% 20% 55% 52% 53% 11% 62% No answer 19% 12% >22500 19,501 - 22,500 23% 20% Female 17,000 - 19,500 Male 14,000 - 17,000 29% 11,501 - 14,000 8,500 - 11,500 57% <8500 59% 61% 45% 48% 47% 48% 38% 45% 34%
Cure seekers Fashionable youth Indifferent Healthy living Aspiring strugglers traditionalists water enthusiasts Cure seekers Fashionable Indifferent Healthy living Aspiring youth traditionalists water enthusiasts strugglers
3% 1% 1% 7% 6% 8% 5% 10% 14% 9% 13% 13% 2% 14% 12% 14% 11% 11% 5% 4% 3% 13% 9% 17% 15% 9% 8% 12% 13% 15% 14% 56-60 14% 51-55 No answer 19% 21% 46-50 15% Not married 17% 41-45 13% Widowed 36-40 Divorced 12% 13% 30-35 20% Married 81% 13% 73% 76% 75% 25-29 21% 68% 18% 12% 14% 22%
11% 23% 17% 17% 14% 6%
Cure seekers Fashionable youth Indifferent Healthy living Aspiring strugglers Cure seekers Fashionable youth Indifferent Healthy living Aspiring traditionalists water enthusiasts traditionalists water enthusiasts strugglers - 31 - I N T E R N A T I O N A L
Exhibit 12 Russian Bottled Water Market: Consumer Segment Dynamics Russia Russia Changes (cities with over 1mn population) (cities with over 1mn population) 2002 vs 2005 2002 2005 100% 100% Aspiring Aspiring strugglers 90% 20% 23% 90% strugglers 26% 26% 80% 80% Healthy living Healthy living water 70% 20% 70% 23% water 17% enthusiasts 22% 60% enthusiasts 60% Indifferent Indifferent traditionalists 50% 22% 50% 15% 16% traditionalists 13% 40% 40% Fashionable Fashionable 18% 30% youth 30% 19% youth 23% 20%
20% 20%
Cure seekers 24% Cure seekers 10% 10% 21% 16% 18%
0% 0% Population Volume Population Volume - 32 - I N T E R N A T I O N A L
Exhibit 13 Russian Bottled Water Market: Volume Market Shares & Competitors’ Positioning - 33 - I N T E R N A T I O N A L Exhibit 14 Russian Bottled Water Market Overview: Consumer Indexes 2005-3 All Diff 2005-Q2 Diff 2005-Q3 Diff 2004-3 vs. % of consumers 2004-3 All 2004-4 All 2005-1 All 2005-2 All vs. 2005-Q3, % vs. 2004-Q3, % 2005-3, % Borjomi aware, % 53 59.4 60.1 60.9 60.2 -0.7 7.2 14% consum, % 21.5 24.7 23.7 26.4 25.3 -1.1 3.8 18% loyal, % 10.6 11.9 11.4 13.1 11.4 -1.7 0.8 8% Essentuki aware, % 54.3 53.5 56.9 55.5 56.2 0.7 1.9 3% consum, % 22.4 22.3 24 24 23 -1 0.6 3% loyal, % 11.3 12.1 13.4 13.3 11.7 -1.6 0.4 4% Narzan aware, % 46.9 50 50.8 50.4 49 -1.4 2.1 4% consum, % 19 19.2 18.7 19.7 18.5 -1.2 -0.5 -3% loyal, % 9.2 9.3 9.2 9.7 8.2 -1.5 -1 -11% Novoterskaya aware, % 20 19.8 21.7 21.1 22.5 1.4 2.5 13% consum, % 10.2 10.4 10.9 10.8 11.8 1 1.6 16% loyal, % 6.5 5.4 6.3 6.5 7 0.5 0.5 8% Aqua Minerale aware, % 64.7 61.1 62 62.5 64.8 2.3 0.1 0% consum, % 39.1 35.5 34.1 36.1 39.4 3.3 0.3 1% loyal, % 23.7 20.3 19.7 21.6 23.6 2 -0.1 0% BonAqua aware, % 52.4 49.6 50.8 50.5 53.8 3.3 1.4 3% consum, % 27.8 24.9 23.8 25.2 29.4 4.2 1.6 6% loyal, % 14.2 12.2 11.5 12 15.4 3.4 1.2 8% Saint Spring aware, % 44.3 41.8 42.6 40.4 40.6 0.2 -3.7 -8% consum, % 17.8 15 15.3 15.9 15.6 -0.3 -2.2 -12% loyal, % 8.6 7 7.3 7.8 7.4 -0.4 -1.2 -14% Arkhyz aware, % 26.7 27.4 27.4 26.6 28 1.4 1.3 5% consum, % 8.6 9.3 9 8.3 9.4 1.1 0.8 9% loyal, % 3.6 4.5 4 3.9 4.4 0.5 0.8 22% Borjomi Springs aware, % 27.5 16.2 15.5 15 15.2 0.2 -12.3 -45% consum, % 8.3 3.5 2.8 3.1 2.9 -0.2 -5.4 -65% loyal, % 3.3 1.4 1.4 1.3 1.3 0 -2 -61% Borjomi Light aware, % 16.4 18.8 17.2 17.4 0.2 17.4 consum, % 4.6 4.2 4 4 0 4 loyal, % 1.7 1.7 1.7 2.1 0.4 2.1
- 34 - I N T E R N A T I O N A L Exhibit 15 Market Overview: Competition
Brand Awareness Brand Loyalty Brand Consumption - 35 - I N T E R N A T I O N A L
Exhibit 16 Russian Bottled Water Market: Regional Analysis Regions (importance, %): 100% =2,877 million liters (2005)
9% 9% 10% 8% 8% 8%
14% 14% 13% 14% 15% 15%
15% 14% 16% 16% 16% 16% 56-60 51-55 46-50 17% 17% 17% 16% 18% 41-45 16% 36-40 30-35 14% 14% 14% 13% 12% 14% 25-29
17% 18% 17% 18% 16% 16%
15% 15% 14% 16% 16% 15%
Russia Moscow St. Petersburg Ekaterinburg Samara Rostov
53% 53% 55% 51% 52% 52%
Female Male
47% 47% 45% 49% 48% 48%
Russia Moscow St. Petersburg Ekaterinburg Samara Rostov - 36 - I N T E R N A T I O N A L
Exhibit 16 (contd.) Russian Bottled Water Market: Regional Analysis - 37 - I N T E R N A T I O N A L
Exhibit 17 Russian Bottled Water Market: Price Segmentation
- 38 - I N T E R N A T I O N A L
Exhibit 17 (contd.) Russian Bottled Water Market: Prices per Liter
- 39 - I N T E R N A T I O N A L
Exhibit 18 Russian Bottled Water Market: Ad Spending
Exhibit 19 Russian Bottled Water Market: Distribution
- 40 - I N T E R N A T I O N A L
Exhibit 20 GGMW: Profit and Sales GG&MW PROFIT & LOSS ACCOUNT ($000s) 2002 2003 2004 20052
Revenues1 25,672 33,643 45,025 66,800
COGS (9,086) (11,293) (14,602) (21,708)
Gross Margin 16,586 22,350 30,423 45,092
Administrative Expenses (4,793) (6,198) (10,840) (12,702) Selling Expenses (5,604) (9,224) (13,076) (19,957)
EBITDA 6,189 6,929 6,507 12,433
Depreciation & Amortization (1,664) (1,261) (1,490) (1,992)
PROFIT BEFORE INTEREST AND TAX 4,524 5,668 5,018 10,440
Interest Paid (874) (1,949) (1,557) (102) Interest Received 10
PROFIT BEFORE TAX 3,650 3,719 3,460 10,349
Corporate Profit Tax (45) (981) (1,709) (2,767) Extraordinary Items (3,467) (142) (828) 3,540 Currency Exchange Result (165) (88) 783 (365) Minority Interest (32) (38) (125) (212)
NET PROFIT (59) 2,471 1,582 10,545
Notes: 1. This figure includes GGMW’s group’s sales (for the Borjomi brand only) in Russia, Georgia and for exports. 2. In 2005, Russia represented 75% of Borjomi’s total sales i.e. $50 million.
GG&MW – Actual and Target Sales ($000s) 2005 2006 2008*
(actual) (forecast) (target)
GGMW global group (including all brands & countries) 122 185 320
GGMW (Borjomi only; Russia, Georgia & export) 67 106 207
GGMW (Borjomi in Russia only) 50 82 155
*This target does not include growth coming from acquisitions.
- 41 - I N T E R N A T I O N A L
Exhibit 20 (contd) GGMW: Profit and Sales – Geographic Breakdown of Sales
GGMW Sales in Russia (Bottles) – 2005
Regions 34%
Moscow 50%
St.Peters. 16%
GGMW Sales in Russia (Liters) – 2005
Regions 33%
Moscow 50%
St.Peters. 17% - 42 - I N T E R N A T I O N A L
Exhibit 21 GGMW: Organizational Structure
GGMW Board of Directors
Chairman V. Ashurov
GGMW Corporate Center CEO J. Fleury Strategy, operational control, holding-wide policies and practices, brand management
Group CFO R. Van Heel
Corp. Develop. Procurement HR Director Chief Legal Council Chief Marketing Director Technical Director M Glotova Director Manager
Local Markets Extraction, bottling, distribution and Ukraine Russia Georgia marketing
IDS Board of Directors Managing Director Russia Managing Director Georgia
IDS CEO
Source: Company information - 43 - I N T E R N A T I O N A L
Exhibit 22 GGMW: 2005 Product Portfolio
Borjomi Sales in Russia: FY2005 (65 million liters)
Borjomi Springs Still water – low mineral content, comes from same Borjomi Light springs as Borjomi but is Sparkling water – low mineral filtered, lightly mineralized and content, has a light, pleasant purified. taste and is positioned as healthy lifestyle choice. 5% 6% Borjomi Classic Sparkling water – 5% highly mineralized, comes from underground deposits and only receives carbonation during processing
Other Mirgorodska etc.
84% (includes Borjomi Gold)
Source: Company information
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Exhibit 23 Borjomi Brand Positioning in 2005
What: Brand Offer Who: Target audience
BORJOMI CLASSIC Borjomi is a trusted brand of super premium, Brand for mature, intelligent and discriminating healthy, real mineral water with unique people that value heritage and tradition; choose composition of minerals that give it a distinctive substance over pure image, preferring proven taste of true mineral water. Borjomi is an quality of well-known brands they trust. They essential element in achieving positive results in strive to leave a healthier lifestyle that’s the goal of healthier life. supported through the choice of products they use. It’s important for them to feel that they are doing something good for themselves, their health BORJOMI LIGHT Borjomi Light is a premium, natural and Brand for family people who strive to take good refreshing water that’s a source of health and care of their health and health of those they love. energy for the whole family. It is brought to you They are proactive, advocate preventive by the trusted brand of Borjomi you already measures to avoid future health problems and know. choose trusted brands of products for their families. BORJOMI SPRINGS Borjomi Springs is a prestigious, stylish Brand for young, energetic and successful premium brand of water that’s great for people that live a modern lifestyle. socializing and relaxing with friends. It is brought to you by the trusted brand of Borjomi you already know.
Source: company information - 45 - I N T E R N A T I O N A L
Exhibit 24 Borjomi Marketing Mix in 2005 Borjomi Classic Borjomi Springs Borjomi Light Borjomi Gold
Healthy (natural) carbonated Luxury, natural still water With gas exclusively Sold in HORECA POSITIONING water No gas, pure still water from Technically: 70% Springs, Same as Borjomi Classic Very old brand the mountains 30% Classic Woman in evening dress “Created by Nature”
Premium 50% of price of Classic Same as Borjomi Premium over Classic PRICE (per liter)
Water from the glacier, from Water from the intermediate No communication COMMUNICATION the high mountains level
Same Same Same HORECA only CHANNELS
4 SKUs 2SKUs 2SKUs 4SKUs PRODUCT LINE
Glass ( 0.5L, 0.33L) All plastic (1.5L, 0.5L) All plastic (1.0L, 0.5L) Green glass bottle with gold PACKAGING Plastic (1L, 0.5L) label (0.2L, 0.33L, 0.7L)
28-48 year olds, Doing something good for Unclear Harvesting PRIMARY TARGET traditionalists myself 25-35 year men & women urban, modern Source: company information - 46 - I N T E R N A T I O N A L
Exhibit 25 Borjomi 2005 Price List: Russia
SKU Moscow St. Petersburg Regions RSP, Roubles RSP, Roubles RSP, Roubles Borjomi Classic Glass 0.33 24p 25.40 26.80 25.40 Glass 0.5 20p 27.50 28.90 27.50 PET 0.5 20p 18.70 19.60 18.70 PET 1.0 12p 31.00 32.60 31.00 Borjomi Gold Glass 0.2 35p 26.60 28.00 26.60 Glass 0.33 24p 30.20 31.80 30.20 Glass 0.7 12p 58.60 61.60 58.60 Borjomi Springs PET 0.5 20p 11.90 11.90 11.90 PET 1.5 6p 21.50 21.50 21.50 Borjomi Light PET 0.5 n.a. n.a. n.a. PET 1.5 19.83 - 29.19 19.83 - 29.19 19.83 - 29.19 Source: Company information