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Spotlight On Russia: A Promising Market Hit By Geopolitical, Economic Challenges

July 30, 2014

With Russia at the forefront of the news these days, Shanken’s Impact Newsletter has taken an in-depth look at the country’s emerging premium drinks market in its latest issue. Long considered one of the global drinks industry’s most promising areas for premium-level growth, Russia is now confronting an increasingly turbulent short-term outlook, clouding prospects for the rest of the year and potentially beyond.

Even before the current crisis in Ukraine and its repercussions for the Russian economy, Russia’s spirits category was under pressure from waning consumer confidence and regulatory measures aimed at curbing alcohol consumption. Spirits volumes in Russia have declined for three consecutive years, falling 9% to 119 million cases in 2013, according to Impact Databank. Since 2008, the country’s vodka category alone has eroded by 50 million cases, or nearly one-third, as minimum pricing initiatives and higher excise duties have led some consumers to switch to black-market products, which now comprise as much as half the total spirits category. The drop-off in legal vodka has been partially offset by growth in other categories, resulting in a 42-million-case (or 26%) decline in the overall legal spirits market over the past half-decade.

“Russia’s spirits market has been slowing since the second half of 2013, on the back of economic and political challenges,” says Svetlana Naumova, general manager, Diageo Russia. “Real GDP growth softened in 2013 and the first half of 2014 due to slow export growth, declining capital investments and slowing domestic demand.” Still, drinks majors like Diageo, Pernod Ricard, Campari and Brown-Forman—along with key local players like Russian Standard and Synergy Group—say price hikes on mainstream vodka are leading to some trading-up activity, and narrowing the price gap with other categories like whisk(e)y, rum and Cognac. Premium whisk(e)y in particular has been growing by double-digits.

Russia’s wine market has also been in flux lately. From 2000 through 2007, it rose from 52 million cases to 141 million nine-liter cases, with imports expanding nearly fourfold to 72 million cases. Since 2007, however, the market has struggled, receding by 25 million cases, with imports alone surrendering about 17 million cases. In 2013, both imported wines and the total Russian wine market eked out nominal growth, advancing 1.6% to 55 million cases and 0.5% to 116 million cases, respectively, according to Impact Databank.

While the Russian government has announced ambitions to grow its domestic wine industry—and hinted at easing advertising restrictions on wine—the category may still be suffering collateral damage from rising vodka prices. “Russia has a very high consumption of spirits, and price increases in this category—especially on vodka—may reduce the available budget of households for wines, because we believe that in the short-term consumers are unlikely to reduce spirits consumption,” says Thomas Domeyko, corporate export director for Viña Concha y Toro.

Even so, Concha y Toro—which inked a new distribution deal with Russian Standard earlier this year—and other wine marketers say growing sophistication among Russia’s wine consumers bodes well for the long term. “The wine market is following a premiumization trend,” confirms Giampiero Maggioni, marketing director, Campari Eastern Europe.

For a full report on Russia’s wine, spirits and beer markets, see the July 15 issue of Impact.

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