Market; Russian riches

08 August 2008 By db staff writer

d=”standfirst”>Russia’s economy has been growing steadily since 2003, and it is now a consumer power to be reckoned with. Euromonitor’s Catherine Mars examines how the emerging status culture will change the shape of the country’s spirits market

One of the most striking developments in Russia is the growth of the new elite, which has already overtaken Europe in terms of conspicuous consumption. Consumer potential, and the scope of western brands, is boundless once wealth trickles down to the bulk of consumers. In Russia, which is the second largest spirits market globally after China, there is great scope for international spirits brands, particularly as consumers are turning away from traditional vodka.
Although vodka continues to dominate, accounting for 89% of total spirits volumes in 2007 (down from 93% in 2002), sales have been eroded by international spirits. Whisk(e)y, Cognac, rum and Tequila all saw solid double-digit volume growth over the past five years. What makes this growth even more laudable is the excise fiasco of 2006 which sent the country’s spirits industry into crisis.

Government regulations crisis
2006 and 2007 were tough years for spirits producers in Russia as the government introduced reforms aimed at curbing the illegal production and trade of alcoholic drinks products in the country. Although the reforms appear to have had little effect on the black market (which continues to account for almost half of all consumption in the domestic market), the introduction of a new spirits control system and updated excise taxes for all alcoholic products resulted in a severe decline in production of vodka and other domestically produced spirits in 2006. The volume of spirits produced in 2006 was down 13% compared to 2005 due to an insufficient number of excise stamps and glitches in the new software.
Imports were also negatively affected by the additional controls on import and trade of spirits as they also had to obtain new labels, and volumes were down 17% in 2006 compared to 2005. However, imported premium spirits have seen more dynamic growth than domestic spirits, with large companies such as Diageo, Pernod Ricard and Maxxium Russia (Denview Limited ZAO) actually benefiting from the new regulations as small importers struggle to cope with the stringent regulations and are driven out of the market. As a result imports saw growth of 30% in 2007, according to Global Trade Information System (GTIS), bringing volumes back to the pre-crisis levels.

Urban middle-class demands
At 13 litres per capita, spirits consumption is among the highest globally and even before the introduction of more stringent government controls, sales of spirits were in decline in Russia due to the near saturation of the market. There are, however, definite opportunities for producers to drive up value sales. The emergence of an urban middle class attracted to prestigious western spirit brands has driven demand for higher-priced imported products in Russia. For example, imports of whisk(e)y, rum, Tequila and even vodka have been growing and are expected to continue to perform well.
Additionally, although overall sales of vodka are down, premium and super-premium brands have grown dynamically (39% and 23% respectively between 2005 and 2007, while total vodka volumes declined by 7% over the same period). Despite the overall downturn in vodka, international brands such as Absolut and Smirnoff remained buoyant in 2006, with Absolut volumes up by 212% on 2005, albeit from a small base (the brand remains tiny, with a 0.1% market share in 2006, compared to established local favourites).

Multinationals muscle in
Given the impressive performance of international brands, Russia is increasingly becoming a focus for the geographic expansion policies of major multinationals. At this stage, the spirits market remains highly fragmented due to the prevailing dominance of local products and the strength of local brands. For example, Diageo, the leading player in global spirits, holds a volume share of less than 1% in Russia.
Multinationals have thus far avoided Russia’s spirits market due to its risky environment. Although unpredictable changes to regulations represent a major potential threat to growth, larger players stand to benefit from such a situation when weaker ones are forced out of the market. The presence of international brands and manufacturers was more keenly felt in 2007 as major players looked to the developing Russian market as a potential opportunity too good to miss.
Euromonitor believes that multinationals will target single-brand Russian spirits companies in the future. Although there has been no precedent of multinationals acquiring leading domestic manufacturers of spirits, the process of consolidation in the spirits market is expected to be similar to that of the beer market, which is now controlled by multinationals. In 2006, the leading players in the Russian beer market were international players Baltic Beverages Holding AB (BBH), InBev and Heineken NV, which collectively accounted for 68% of total volume sales.  db © June 2008