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Focus on Russia: Move over Moldova

Now that the previously favoured suppliers of Moldova and Georgia have been dropped, wine companies are queuing around the Eastern bloc to gain a foothold in Russia. Penny Boothman reports

Ballet, borscht and booze. Russia is probably most famous for these three things, along with world-class tennis players, the Kalashnikov rifle, caviar and being really, really cold. The trouble is that so little is known about the Russian drinks market that it’s very easy to resort to stereotypes of fur-clad Cossacks downing vodka for breakfast, lunch and dinner. But Russia has now been under democratic government for 15 years and ballooning international oil prices have seen the economy looking increasingly rosy in recent times. Consequently, the average disposable income is rising fast, and we all know what that means for the drinks industry.

But back to the stereotype just for a moment: it has to be said that Russia is not a country known for drinking in moderation. In fact, 35,929 people died from alcohol poisoning in 2005 (AFP), which actually represents an impressive drop from the 2004 figure of 42,715. Russia’s relationship with the demon drink has been somewhat troubled since well before Gorbachev’s anti-alcohol campaign in 1985, and 20 years on there is still a significant black, grey, or otherwise shady market for illegal moonshine.

However, times are changing and a trend towards adopting a more Western European lifestyle, coupled with government encouragement towards lower alcohol beverages, means that drinking habits are shifting away from spirits and towards beer and wine. The Russians have always had a taste for luxury goods, so the potential for premium growth is significant.

“[The Russian beverage market is] set for enormous growth, particularly at the premium end while the gas and oil boom lasts,” confirms International Wine & Spirit Record (IWSR) chairman Val Smith. “The biggest influence on the drinks market is still the insatiable Russian appetite for alcohol and drinking with friends – with the cash to support this.” Smith believes that beer and vodka are still in the best positions to profit from this growth. Indeed, as reported in the drinks business April issue, total beer sales by volume in Russia have soared by 41% since 1999. The beverage market in the Russian Federation remains massively beer-dominated, with the country consuming 1.02 million nine-litre case equivalents of beer and 330,000

cases of spirits, against just 80,000 cases of wine in 2005 (IWSR).

Russian beer
Beer has been big news in Russia for some years, with brewing giants Anheuser-Busch, Heineken and Scottish & Newcastle doing battle for pole position. Scottish & Newcastle’s recent purchase of the European distribution title to the Foster’s brand includes the Russian territory and looks set to consolidate S&N’s position in this market. Beer is, in fact, well ahead of the pack as the drink of choice for Russians, and has been stealing market share from both wine and spirits (see Canadean table). Beer’s overall share of the market may have grown only marginally from 78.9% to 80.3% from 2004 to 2005, but the slight drops of 4.5% to 4.2% in wine and 11.8% to 11% in spirits market shares tell the real story.

But beer is not the only winner in this changing drinking culture. Prior to the 1998 economic crisis and consequent devaluation of the rouble, Russia imported almost US$400 million-worth of wine a year, but this plummeted to nearer US$160m in 1999 (Global Wine Statistics Compendium). However, since then, consumption has been steadily on the increase and, indeed, exceeded the US$450m mark by 2004. Beer and spirits, which are produced in Russia, were not affected by the crisis in the same way. Perhaps predictably for a country with such a long history of spirits consumption, FABs hold a not-insignificant share of the market, and in fact have a higher percentage share of the market, at 4.4%, than wine on 4.2% (Canadean).

Vinous plight in Georgia
Russia’s taxation system of charging all non-former-Soviet states a 20% import tax, as well as import duty of 0.15%, excise rates and 18% VAT could be off-putting to potential exporters. And with wine’s share of the overall beverage market in slow decline, it might seem surprising that many wine-producing countries are viewing Russia with hungry eyes – but they certainly are. This is because the real picture is that wine consumption has actually been increasing by around 20% a year on average since 1999 (GWSC). Moldova, once “the garden of the Soviet Union”, has long been Russia’s major wine supplier, but in March this year the Duma issued a somewhat controversial ban on wine imports from Georgia and Moldova, claiming that they failed to meet basic health and safety regulations. The ban leaves a sizeable, Moldova-shaped hole in Russian wine retail – there are even reports of supermarkets with empty shelves and importers scrambling to find alternative suppliers.

Even if per capita light-wine consumption remains tiny at under four litres, it is still infinitely more promising than China’s 0.3 litres, and Russia’s population of nearly 145m offers significant opportunities for growth, particularly for New World countries, which currently hold just over 2% of the total light-wine consumption of 45.5m cases (IWSR).
Graham Dixon, wine business consultant at Millennium Wine Tech, is in the process of importing wines from Australia to take advantage of the shortfall created by Moldova’s exit. “Australia doesn’t have a particular advantage in Russia. In fact, our success in English-speaking markets – where we have a language advantage – makes it harder in other markets, where our competitors are used to dealing with other languages.

“Bulk is the only solution to take advantage of the Moldovan/Georgian import ban, because these wines are at the cheap end of the market,” Dixon continues. “At current prices, it is possible to put [bulk] Australian wine on the supermarket shelves at about US$2.50, but packaged would have to be at least US$5, due to higher packaging costs in Australia and import duty on packaging materials.” The Australian Wine & Brandy Corporation also insists that wine exported in bulk must be packaged by an ISO-accredited bottler wherever it arrives, to protect the quality image of Australian wine. Unfortunately, these are not so easy to find in the Russian Federation.

Slowly trading up
Even the most seriously overstocked Western European or New World producer would probably baulk at selling wine at less than US$1 retail, but that’s where 35.5% of the Russian market remains, though this figure has fallen from 37.8% in 2000 (IWSR). The majority of the market is, as it is in the UK, sold in the US$1-$4.99 bracket, which makes up 50.45% of sales. The highly sought-after US$5-$9 category represents 9.65% of the market, and the Holy Grail of the over US$10 price range currently accounts for just 4.4% of sales – though this figure has risen from 2.5% just five years ago, which represents an impressive jump for a country with a fledgling interest in quality wine.

In fact, the Moscow wine market alone is estimated to be worth upwards of US$300m, according to ratings drawn up by Russian information agency the RBC Group. Investing in fine wine, particularly classed-growth Bordeaux, has also become a status symbol among wealthy Russians, which is doubtless welcome news for an otherwise-troubled en primeur market.

Constellation sales executive Eastern Europe, Taco Lucassen, explains the import and distribution system for alcohol: “There are three market leaders – Whitehall, RusImport and DPTrade – all based in Moscow. Due to logistic and financial reasons, there is hardly anything sold directly to retailers, so everything is done by importers selling to retailers or to wholesalers. More then 75% of total wine sales is through only two cities, St Petersburg and Moscow.”
In effect, the complications of a large and unfamiliar market create an unofficial version of the US’s three-tier system – another reason why it’s not easy to get international wines on Russian shelves at the most competitive prices. There are 126 importers in the country as a whole, but just 16 of them control a 65% share of the market. Such consolidation is supported by the government, which – reports suggest – is continually seeking ways to tighten its grip on the alcoholic drinks market.

Constellation has been exporting wine to Russia for about eight years. In 2003 the company sent just 1,100 nine-litre cases over the border, but by last year this had risen to about 7,600 cases, and Constellation naturally has plans to maximise
its presence there. “Based on market analysis that we carried out last year, we see great opportunities for expanding and growing our business in this market. Initially we’ll be focused on fairly aggressive price segments, but expect value to grow in the next five years,” says Paul Koks, SVP mainland Europe, Constellation. “I see the market growing for New World
wines and probably, based on current politics, this growth will be quite rapid over the next few years. Old World countries will be well positioned from a production perspective, they are more flexible and can be more price-aggressive, yet the branded wine business definitely has a role to play in this young wine market.”

Concha y Toro is currently the biggest-selling New World brand in Russia, with the company’s Sunrise label leading the way. “This year we are planning to reach at least 230,000 cases in exports,” says José Antonio Sotomayor, regional director, Concha y Toro SA, “with a 45% growth from the previous year.”

Hungry for brands
The Russian Federation has a new generation of drinkers with much higher levels of disposable income – and more freedom to spend it – than their parents ever had. These drinkers are brand-savvy and seeking out new products as trends move towards a more Western style of drinking. However, it may be some time before the public as a whole begins to differentiate their drinks by type and style, rather than by price and strength.

As long as the export trade in oil continues to bolster the economy, the trend towards higher price points and lower-alcohol beverages certainly looks promising for the brewing industry and wine importers. It could be time to drop the stereotypes and pay closer attention to what the Russians are really drinking.

Eastern European drinkers go west

As Eastern Europe continues to modernise, drinking habits are also evolving (writes Tom Joyce of Euromonitor International). In Bulgaria, traditional rakia is under pressure from vodka; in Russia, novel flavours of vodka must be devised in order to maintain sales; and domestic producers are losing market share to importers of premium products as import taxes disappear and disposable incomes rise.

In most of Eastern Europe sales of spirits – traditionally the regional favourite – are waning as consumers switch to less potent alternatives such as beer and, to a lesser extent, wine. Countries like Russia, Poland and the Ukraine have experienced a surge in demand for beer in the past few years, and although these markets are now maturing, there is still opportunity for further growth.

Imported premium lager has registered dynamic growth due to significant increases in consumer purchasing power. Currently, Baltika, Stella Artois and Bavaria are the leading brands in the overall Eastern European imported beer market. On accession to the EU, which is expected after 2007, the elimination of duty taxes should make Romania and Bulgaria a much more attractive prospect for foreign premium lager exporters. Economy lager remains popular, however, and manufacturers will be obliged to target both the lowest and highest income consumer groups.

The ascent of wine
As with beer, wine is experiencing something of a fillip as consumers begin to eschew spirits in favour of lower alcohol beverages. A more international spread of wine is anticipated to grow steadily in the region, although it is crucial that these wines be priced competitively in order to remain affordable.

At present, outside of Moldova and Georgia, Old World wines are the leading imports to Russia. Pricing for table wine, where the bulk of the market lies, is aggressive. For example, Baron de Valls, a Spanish wine, is priced at RUB95.50 (US$3.57) a bottle (source: Euromonitor International storechecks) so that it can compete more effectively with Moldovan economy wine, which can retail for as little as US$2.50.

In March, Russia halted imports of Georgian and Moldovan wine over alleged doubts concerning its quality. The ban has serious implications for Moldova, whose wine exports, 65% of which go to Russia, account for approximately 80% of the country’s GDP. On the other hand, it offers an opportunity for other wine producing countries to fill this gap.

Premium spirits in demand
Although overall demand for spirits is stalling in the major Eastern European countries, this is largely due to a drop in vodka sales. There are signs that consumers are switching to premium brands at the expense of those in the mid-price segment, triggered by increases in the standard of living and purchasing power. Euromonitor International expects further polarisation between the premium and economy ends.

An increase in imported spirits has led to greater consumer choice. Demand is also being driven by increased levels of tourism in these once-closed markets. So while Euromonitor International’s latest research shows that in Russia, volume sales of vodka declined by around 11% between 2000 and 2005, blended Scotch whisky sales, led by the various Johnnie Walker labels, saw growth of 180%. In Poland, the statistics are even more striking: vodka sales grew by 23% (thanks in part to the shift away from contraband to the legal market when excise duty was reduced in 2002), but was outshone by blended Scotch whisky’s growth of over 200%. In actual volume terms, however, blended Scotch remains a niche product.

Particularly popular among young consumers and women, FABs recorded dynamic growth, primarily due to their emergence from such a low base. Russia, Poland and the Ukraine rank amongst the top-10 in terms of worldwide FAB consumption. Euromonitor anticipates continued growth, but predicts the pace of growth will gradually weaken as the products’ novelty factor starts to subside.

A “westernized” Eastern Europe
A distinct pattern is revealing itself all across Eastern Europe. Consumers are no longer so fixed to traditional drinking customs, with the younger generation progressively snubbing the drinking habits of their parents and grandparents, and this trend looks set to continue. As Eastern Europe becomes increasingly “westernized”, much can be learned from following the consumer shifts experienced in Western Europe itself.

Per capita consumption in major selected countries in Eastern Europe 2005/2010 (litres/year)

Czech Rep Hungary Poland Romania Russia Ukraine
Beer
2005 161 80 74 69 61 41
2010 158 83 84 80 95 59
Wine
2005 17 31 6 9 8 5
2010 22 33 6 13 11 7
Spirits
2005 10 6 7 5 14 8
2010 9 6 8 4 12 10
Source:  Euromonitor International

© db September 2006

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