IDS, official distributors of Myhorodska and Borjomi, team with GG&MW to head into untapped Russian market
The country’s largest mineral water producers, Industrial Distribution Systems (IDS) and Oskar MorshynMineral Water Plant, announced a merger deal on Dec. 2 that will allow the two to compete on an equal footing with international holdings.
Analysts said the merger is aimed at creating the first Ukrainian mineral water holding, GG&MW/IDS, and will prevent international companies from snapping up all domestic producers.
Multinational water bottlers have been studying the Ukrainian market for some time now, and experts predict that they may attempt to buy shares in Ukrainian companies.
IDS is an official distributor for brands such as Myrhorodska, Stary Myrhorod, Alyaska, Sorochynska and Borjomi. The company claims to be the largest mineral water company in Ukraine, with a market share of about 14 percent. The Oskar Morshyn Mineral Water Plant in Lviv oblast, which sells under the Morshynska trademark, controls about seven percent.
“Right now around 21 percent of the mineral water market is in our hands, and the holding’s goal is to increase our market share to 30 percent in the next two years,” said Morshyn’s general director, Mykola Kmyt. Kmyt will also run the holding’s operations in Ukraine.
The Georgian Glass & Mineral Water Co. (GG&MW) will have control over the new holding.
In early 2003, the Financial Times reported that Salford, an independent private equity and investment bank based in the British Virgin Islands and with close links to Russian businessman Boris Berezovsky, had bought up to 50 percent of Georgia’s Borjomi producer GG&MW in a deal worth $50 million.
Meanwhile, IDS’s main shareholder is Britain’s New World Value Fund, which arranged a debt and equity swap with Borjomi’s western and Georgian executives to buy out its previous backers, the International Finance Corporation, the European Bank for Reconstruction and Development, and Baring Vostok Partners, the FT reported.
Kmyt wouldn’t provide details of the GG&MW/IDS merger, but according to Ukraine’s Antimonopoly Committee, IDS shareholders have received permission to acquire more than 50 percent of Morshyn and its distributor Nova.
The mineral water market in Ukraine is currently dominated by seven companies: the Ukrainian Mineral Water Corporation, with production facilities in Odessa and Zakarpattya oblast; IDS, in Poltava oblast; and Morshyn, Obolon, Coca-Cola Beverages, Rosinka and Orlan Beverages, all based in Kyiv.
Twenty mineral water bottlers, including the seven locally-based bottlers, control 80 percent of the market.
IDS president Viktor Zaychenko, who will be the managing director for GG&MW/IDS in Moscow, said IDS and Morshyn are both leaders in management and production, and IDS is known as the largest mineral water producer in Ukraine.
“Oskar Morshyn is a leader in the western regions and is currently the most dynamic company on the market. The merger of the nation’s fastest-growing companies should produce a new giant and an absolute leader in the market,” he said.
The mineral water market in Ukraine and Russia is very promising. Annual consumption of mineral water in Ukraine is 18 liters per capita, compared with 12 liters per capita in Russia. According to a RosBusinessConsulting survey, annual per capita consumption in Italy, Germany and Poland, is 116, 93 and 50 liters, respectively.
“These figures show that there is extremely high potential for growth in [Russian and Ukrainian] markets,” Zaychenko said.
In the next five years, the company plans to invest an additional $24 million to modernize and increase the capacity of the IDS bottling plant in Poltava and the Morshyn plant in Lviv oblast.
“Our brands occupy two percent of Russia’s mineral water market, and we are targeting 100 percent growth,” Zaychenko said.
Currently, IDS sells 126 million liters a year, while Morshyn produces 64 million liters annually.
In Russia, aggressive marketing from Coca Cola’s BonAqua and PepsiCo’s Aqua Minerale brands make expansion a challenge for established names like Narzan and its Georgian counterpart, Borjomi.
As a result, foreign companies continue to dominate Russia’s mineral water market. In 2003 most Russians who purchased bottled water purchased Aqua Minerale.
Having consolidated its control over Ukrainian market leaders, GG&MW will begin expanding exports of Ukrainian brands to the Russian market. Analysts suggest that GG&MW’s Borjomi mineral water is declining in popularity on the Russian market because of its relatively high price.
Kmyt said by introducing well-known Ukrainian brands at cheaper prices, GG&MW will be able to better promote Borjomi products in Russia.
In 2003, 763 million liters of mineral water was produced in Ukraine, about 7.5 percent more than in 2002, according to the State Statistics Committee. About two percent of that water was exported.
Besides direct sales, Kmyt said that there is a potential niche in Ukraine’s water-delivery market, where his company has a strong base with more than 2,000 clients.
Given the increasing perception that the quality of drinking water is important, the country’s water-delivery market is expanding rapidly. Sixty percent of water-delivery companies have foreign investors.
Overall, Kmyt said, his holding’s water-delivery operations next year are expected to grow almost 300 percent over this year.
The holding expects to supply up to 12,000 clients next year and may create up to 1,000 new jobs thanks to the current expansion.
“Basically it’s very simple: Whoever spends more on advertising and marketing their brands has a greater chance to target en masse to consumers,” Kmyt said.
“In Ukraine, we have spent a lot on advertising our brands and informing people that consuming bad-quality water has serious health consequences. Now we will inform people in Russia,” he added.Zaychenko and Kmyt are ready to launch a takeover if the opportunity arises in its Ukrainian core market, but they’re not in talks for any more acquisitions at the moment.
