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FOCUS RUSSIA – Move Over Moldova
“standfirst”>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.
© db September 2006