SPIRITS: EMERGING MARKETS – Euro-vision

As the EU spreads eastwards, so are international spirits brands which are finding receptive markets in Russia, Poland and Romania. Ben Grant reports

Europe is in a perpetual state of evolution. The accession of 10 additional states to the EU in May 2004 prompted an enormous cultural, economic and societal shift. In January, Romania and Bulgaria will be next to sign on the dotted line while it looks likely that Turkey, too, could eventually be invited to join the party.

The burgeoning membership of the EU has profound implications, not just in the new states, but across the entire continent. Tariffs have been broken down enabling wealth to gradually trickle into the long-beleaguered Eastern European nations, while an unprecedented movement of people around the continent is resulting in cultural trends spreading rapidly between markets. The spirits trade is no exception, but it is not merely the accession nations that are demonstrating stark evolution of consumption patterns.

Russian revolution
While the growth of the EU is presenting a host of new opportunities to exploit, by far the biggest prize on offer is in Russia. The population of almost 150 million have embraced capitalist consumption values with gusto; per capita alcohol consumption is among the world’s highest; relatively high liquor prices enable favourable margins; and consumers display an unerring tendency to trade up whenever possible. Frankly, it’s a marketeer’s dream, meaning that international suppliers have been working tirelessly to establish a foothold.

Average annual consumption of pure alcohol in Russia stands at over six litres per head, with a strong tendency towards spirits. This preference for liquor is matched by a similarly insatiable thirst for Western brands. All categories are experiencing rapid growth, with vodka, unsurprisingly, leading the line.

While total alcohol consumption is gradually declining, there is an increasing tendency towards wine and beer, which would seem to suggest bad news for the spirits trade. But not so; Russians appear to be following a Western-style consumption pattern. When it comes to spirits they are drinking less, but better.

Vodka is a case in point. “There is a trend towards premium vodka as consumers with increased disposable income are trading up,” explains Anne Nugent, account manager at Euromonitor International. Russian Standard has stolen a march on the business, assuming a dominant position in the vibrant Moscow and St Petersburg on-trade and thus deriving a 60% share of the premium vodka business. Chairman Roustan Tariko explains that, “From the very beginning we decided to focus on luxury brands.” It looks to have been a sensible strategy – domestic sales shot up 50% last year, while the brand is also in the early stages of an ambitious export strategy.

Premium possibilities
However, the discerning Russian’s drinking repertoire now extends well beyond the traditional penchant for vodka. Blended Scotch is finding favour – as long as it’s premium – with Chivas Regal reporting 20% market growth last year. Commercial director, Patrick O’Driscoll says, “The more expensive a product is, the better. Of course this is traditionally a white spirits market, but it is rapidly opening up.” Gaining a strong presence in the on-trade and ensuring high – but premium – visibility is key. While the priority was establishing a strong position in the two major cities, O’Driscoll reports that Chivas Brothers is
now “focused on developing the secondary cities”.

Recognising the potential that Russia affords, the world’s leading spirits company created Diageo Distribution, a Russian joint venture, in September. For Andrew Morgan, president of Diageo Europe, the move “marks the beginning of a new era for Diageo in Russia and is central to our focus on growing our strength in emerging markets”.

Tour of duty
While the environment is overwhelmingly positive, there was one minor dark cloud last year. Maria Castroviejo, spirits analyst for Rabo Bank, explains that business for international brands was slightly tempered by confusion over new duty stamps rules. Regulations were implemented “without proper preparations”, resulting in minor disruptions to supply. This
year’s numbers are slightly below forecasts as a result. However Castroviejo is confident that this was an anomalous occurrence and the market will continue on its impressive upward curve next year.

Looking west
It is difficult to generalise about the remaining states of Eastern Europe, as the various markets are currently displaying markedly different patterns in their spirits consumption. Broadly speaking, however, most territories are posting slightly reduced total consumption levels, while showing a growing tendency towards international brands at the expense of traditional local spirits, particularly vodka and, to a lesser extent, brandy.

O’Driscoll of Chivas Brothers believes that the Eastern European states can be divided into two distinct groups. A number of markets such as Ukraine and Kazakhstan are following the Russian model. A large influx of wealth, generated predominantly by surging oil prices, has reached only a small portion of the population, creating a dynamic market for premium products, but only among a small fraction of the total population. The remaining territories tend to follow a traditional Southern European model, with branded international products coming to the fore, dominated by blended Scotch.

Within this booming blended Scotch territory, Diageo is enjoying considerable success. Beth Davies-Ryan, head of brand communications strategy for Diageo Europe, explains that Johnnie Walker Black Label is proving to be a major hit with Eastern Europeans, with 2005 volumes up 14% in the region year-on-year. Similarly, she reports that J&B “has performed extremely well in Eastern Europe”.

Talking shop
Meanwhile the retail map is rapidly evolving across the region. In 2004 Euromonitor statistics indicated that just 15% of total spirits sales were made in supermarkets or hypermarkets. Instead over 50% of spirits transactions took place in independent food outlets, kiosks and convenience stores.

The retail landscape now has greater numbers of large modern stores – many of them established by the major Western European retail chains – commanding an ever-increasing share of the market. These stores, with a high-quality shopping environment and efficient distribution structures, tend to lend themselves more effectively to the sale of well-marketed international brands.

Cultural exchange
Aside from the obvious benefit of increased personal wealth, EU accession is undoubtedly playing an important cultural role in redefining drinking conventions across the continent. The EU allows unfettered travel between member states, enabling huge numbers of Eastern Europeans to migrate across the continent. Settling throughout Western and Southern Europe they have become acquainted with foreign drinking cultures, and they have gradually drip-fed this knowledge and experience back to their homelands. Nowhere has this effect been more noticeable than in the bar scene.

The development of the on-trade is one particular area where there is a great deal of distinction between the various Eastern European nations. Romania, for example, has adopted a highly sophisticated bar culture very quickly. The quality of these venues makes them an ideal environment for showcasing premium brands, thus it seems safe to assume that the Romanian market will be particularly fertile ground for the international players. According to Euromonitor, brandy and vodka have both experienced rapid decline in Romania, while Cognac, liqueurs, single malt and blended Scotch are enjoying sustained growth.

Romania’s fondness for liqueurs is reflected across a number of the Eastern European countries. Tequila, too, appears to be finding favour, as does Irish whiskey. All three of these dynamic categories are, of course, growing from relatively miniscule base volumes. However, while sales are relatively small, they are indicative of a shifting drinking culture, with consumers actively seeking to experiment.

Polish potential
Rabo Bank’s Castroviejo believes that Poland is another Eastern market well worth watching, not least because, at 34m cases, it consumes the second highest volumes in Europe. A string of mergers and acquisitions in the last year has concentrated the market, resulting in more streamlined and efficient marketing. “The Polish market will increase in terms of quality as the brands get better visibility,” she explains.

Nugent also points towards the potential of Poland: “The legal market is benefiting, with lower taxes [which have been introduced since accession to the EU] there is less smuggling.”

The global brands are rapidly growing share but it must be noted that the vast majority of sales across Eastern Europe are still local products. “These companies are able to compete at the lower end of the market, which is still very important in many countries,” Nugent explains. In order to capitalise on this she believes that international spirits suppliers will increasingly look to move into the markets and buy up the most successful variants. This will create a strong position in the target market, and as a knock-on benefit “we could well see local Eastern European products become more international, similar to what is happening in beer”, according to Nugent.

If this prediction proves true, Belvedere vodka will be the big-name brand leading the charge. Mathieu Duchemin, business development director, Europe, explains that not only is it “clearly strong in its home country”, but it is additionally securing steadily rising levels of export business. France in particular is showing strong affinity towards the brand and the premium vodka segment as a whole.

Southern comfort?
Shifting patterns are also in evidence across Southern Europe, the most notable and uniform trend being a gradual decline in blended Scotch, traditionally the staple category of choice. Greece and Spain have both traditionally attracted plenty of attention due to their dynamic on-trade segments.

The Greek market has suffered slightly this year as a result of the inevitable post-Olympic slump in the economy. Jonas Tahlin, director, Western Europe, for V&S Absolut Spirits says, “The total market has not been growing this year, so it has been about fighting for market share.”

According to Euromonitor, the standard Scotch category has been steadily declining, down from an average of over two litres consumed per capita in 1997 to 1.6 litres last year. This 20% dip is a marked contrast to the vodka category, which has registered growth of almost 40%. The market is showing a growing tendency towards white spirits – tequila and gin are also on the rise – and Tahlin confirms that the vibrant on-trade is an excellent forum for building brand identity.

Brown spirits volumes are on the slide but, in line with the pattern across much of Western and Southern Europe, there is a growing tendency towards more premium products. The single malt business has been growing at a rate of 5% per year, and O’Driscoll reports that the premium blended trade continues to deliver strong sales in Greece. Davies-Ryan says that Johnnie Walker continues to perform well and that this is the top European market for the brand.

Local competition
Greece still delivers considerable business for local spirits, especially ouzo. Euromonitor’s Nugent says the category “has benefited in the last couple of years from a refocus by companies on packaging, brand and promotion. Whether this is enough to sustain growth in the long term is questionable but the strategy has worked well.” It is intriguing to see that the significant penetration of international brands into the market has forced local players to up their game. Perhaps the
higher quality of the offer could ultimately make it an interesting export opportunity.

Spain is also proving to be rich pickings for the spirits sector thanks to its massive tendency towards on-premise drinking. The total market is in excess of 26m cases, with approximately 80% of volume purchased in the on-trade. It has always had a tradition as a powerful standard Scotch market, with the category generating about a third of total volume.

While it would be rather excessive to suggest that the category is struggling, it certainly isn’t booming as it once was – years of sustained growth hit a plateau in 2000 and have remained relatively stagnant ever since. The other category that has been a recent cause for concern is brandy; it may be a traditional staple, but volume has plummeted by over 30% since 1997.

Spain represents the most important European market for Beam Global Spirits and Wine. Having acquired a clutch of top international brands from Allied Domecq last year the company is now focused on developing its European business, and has highlighted the Spanish market as a prime target for expansion.

In spite of the fact that the company’s two top brands in the market are in declining categories – DYC whisky and Larios gin – the company still believes that this “sophisticated” market has enormous potential for growth.

Latin lovers
Two of the most dynamic segments of the Spanish spirits business at the moment are rum and tequila, a factor that Nugent believes indicates a growing “Latin influence” in the country. Rum volume has almost doubled since 1997, overtaking gin and brandy to become the second largest category. Karine Lienhardt, marketing director for Havana Club explains that the convivial nature of the category makes it an ideal option for Spanish consumers. Increasing penetration of higher priced references makes it an opportunity to encourage trading up.

Brands looking for ripe emerging markets to exploit have been focusing hard on the BRIC nations in recent years. But it’s clear that – even excluding Russia – the remainder of Europe continues to provide a host of great opportunities for considerable growth. As these markets reap the rewards of economic progress, consumers are expressing their newfound wealth by quenching their growing thirst for international spirits brands.

© db November 2006