THE INFLUENCE OF PRODUCT SUPPLY STRUCTURE ON CONSUMER VALUE APPRAISAL

THE INFLUENCE OF PRODUCT SUPPLY STRUCTURE ON CONSUMER VALUE APPRAISAL

(CASE STUDY: RUSSIAN VODKA)

Vladimir Kiselev

Abstract: Based on analysis and systematization of vodka production and consumption data, over the last 7 years we have studied the primary developmental trends of the vodka market in Russia as a whole and within its specific regions, in particular, the Kuzbass region with its two major cities — Kemerovo and Novokuznetsk. In order to achieve our research goals, we studied a number of factors such as product distribution and consumer demand and preferences. The study also involved identification and systematization of factors significantly influencing consumer appraisal of vodka quality. As a result, we were able to develop a multi-attribute model for consumer appraisal of vodka quality with quality function deployment. The study also helped define the primary needs that purchasers of vodka seek to meet through product consumption. The proposed model was assessed in terms of its ability to meet the identified consumer needs. The study also involved evaluation of the diverse interests expressed by participants of the product distribution process. Such participants were systematized into groups in view of their specific interests and this resulted in the development of a mathematical model for parity of needs among those participants. The suggested models were also tested within the distribution process, thereby establishing both their social and economic effectiveness and providing a basis for drawing conclusions and making practical recommendations.

Organization of the Experiment

Objects of research included:

factual data for the period 1999-2008 reflecting vodka production and consumption volume in Russia and its regions, price levels, trademarks, and peculiarities of ingredients and composition;
buyer preferences in vodka consumption during 2004-2008 among a select target buyer audience in Novokuznetsk supermarkets;
factual statistics covering wholesale and retail vodka sales in major supermarkets in the cities of Kemerovo and Novokuznetsk during 2000-2008;
vodka distribution channels in Novokuznetsk as well as individual members scoring high in the factors most influencing consumer demand;
assortment lists of vodka retailers experiencing the largest consumer demand;
vodka consumers in integrated product distribution channels;
samples of the most popular vodka brands purchased in Kemerovo and Novokuznesk retail networks during the summer of 2008.

Research Methods

Market research was based on the following methods: quota, selective, standardized, structured (based on a number of features), combined (depending on the method of information acquisition — open or closed), and personal observation of Novokuznetsk vodka retailers.

Study of the product supply structure among homogeneous product groups was conducted by market auditing of sales statistics, including product turnover in physical and monetary terms, quantity of items (SKUs), and retail prices. Output data analysis was based on techniques suggested in earlier studies by Professor V. M. Kiselev and his colleagues [1].

Qualitative marketing research into consumer preferences was conducted by means of focus groups and panel discussions among the target buyer audience in Novokuznetsk.

Analysis of theoretical data was conducted using methods for registration, systematization, grouping, classification, comparative analysis, and summation of scientific and methodological publications, regulatory documents, statistics digests, periodicals, and Internet resources.

Statistical processing of experimental data was conducted through use of standard methods for statistical and correlation analysis (SPSS, MS Excel software).

1. Study of Product Distribution Factors

One particular property of the distribution channel, namely, product availability for the target consumer group, has been shown in previous publications of professor V.M. Kiselev and his associates to be one of the factors affecting the quality of product selection, and consequentially, the quality of its component products. This property, in our opinion, includes two major aspects: physical and economic availability.

With respect to the product group under consideration, these aspects can be described by: the volume and quantity of the product supply (vodka assortment saturation), the variety of consumer properties capable of satisfying the diverse needs of the target buyer group (vodka assortment structure), and finally, the product price levels.

1.1 Product Volume

The beginning of vodka production in Russia dates back to the late 15^th century (1472-1505). Commercial production of vodka in Russia began in 1861. Aimed at removal of contaminants and, more importantly, fusel oil, it was at this time that mandatory dilution of distilled grain alcohol with water took root. It is because of this important technological operation that the traditional Russian alcoholic beverage produced from grain alcohol was called vodka (from Russian «voda», which means water). In light of both historical and cultural traditions and the technical backwardness of the country at that time, it was this particular technological element common only to Russian vodka manufacturers that indirectly established vodka as a uniquely Russian alcoholic beverage.

Today the global market for vodka is estimated at 4.5 billion liters per year. Most of this production volume is consumed by Russians (57%). The current status of vodka production, beginning in the last decades of the twentieth century, is characterized by variability. The end of the twentieth century marked a decline in vodka production by more than double — from 155 million deciliters in 1991 to 70.5 million deciliters in 1995. Analysts tend to attribute such a sharp decline to the general stagnation of the economy during that time period. Beginning in 1995, there began a steady growth in the production of vodka into the next decade, marked only by minor fluctuations. From 2001 to 2004 the growth of vodka production came to a halt. Since 2005 there has been a noticeable decline in vodka production (in physical units) (Figure 1).

The growth period in vodka production coincides with the overall trend in Russian economic development of the time. Increase in the commercial production of vodka corresponded to a growing consumer demand, which, in its turn, was supported by a growth in the real income of the population. Today, personal income growth rates among the Russian population remain high, supported by a combination of varying sources of income including wages, social benefits, income from property and entrepreneurial activities, etc. At the same time, there is a noticeable downward trend in vodka production in Russia, mirroring reduced demand for the product. Several non-economic factors have contributed to this phenomenon in modern Russian history:

The overall trend in consumer preferences away from alcoholic beverages with high alcoholic content towards lighter alcoholic beverages (wine, beer, low-alcohol carbonated drinks), a tendency common not only in Russia but in other developed countries.
Unique to Russia, a growing mistrust of vodka quality (after a 2005 mass poisoning that occurred through consumption of counterfeit alcoholic beverages and resulted in an outbreak of toxic hepatitis in a number of regions of Russia). These events occurred as a result of the distribution of low cost alcoholic drinks containing polyhexamethylenguanidin hydrochloride and capable of causing instantaneous damage to the liver. In response to this, a number of preventive measures were taken geared to shut down illegal vodka manufacturers in these regions.
Increased consumer demand for expensive, brand-name alcoholic beverages with a stronger alcohol content (cognac, tequila, whiskey, etc.) and manufactured by reputable licensed producers.

Despite growth in sustainable income among the Russian population, the short-term prospective through 2012 is that of continued decline in consumer demand for vodka. This tendency may be adequate to satisfy current governmental policies geared toward reduction of alcohol consumption in the Russian population.

The development of the uniquely Russian trend of vodka quality distrust can be largely explained by the large degree of fragmentation in the product supply within the vodka market in Russia (Figure 2).

According to the study, the 10 largest producers of vodka account for only 50% of the product supply in the Russian market. The other half is provided by the remaining 310 producers. This makes quality control a challenge. This issue is dramatically illustrated by the fact that one half of
the consumed volume consists of illegally produced vodka, unaccounted for by state control agencies. Since its packaging is marked with official excise stamps, this vodka, despite its illegal nature, is still included in the overall product supply structure of traditional product distribution channels (stores licensed by local authorities to sell vodka).

The largest producers of vodka in Russia today are the Commercial and Industrial Group Crystal (Moscow) and Veda LLC (St. Petersburg) both holding equal shares and accounting for 16.8% of annual vodka production.

Despite the slump in demand for vodka mentioned previously, the world’s largest global vodka producers have been increasing their production volume annually (see Figure 3).

According to the international rating agency of alcohol producers (Drinks International, 2006), included in the list of the top twenty most dynamic global product brands (and not including traditional leaders like Diageo (Smirnoff), V & S Group (Absolut), and Brown Forman (Finlandia)), were Russia’s largest alcohol producers: Russian Alcohol (Green mark), Omskvinprom (Five Lakes), Harvest (Parliament), and Russian Standard. Also listed were Ukrainian manufacturers Image Holding (Khortitsa) and Union-Victan (Medoff). These vodka producers demonstrated the highest global production growth rates during 2005-2006; rates ranged from 6-8% (Diageo, V & S Group) to 146-385% (Russian Standard and Omskvinprom). The other producers mentioned have been demonstrating rapid production growth during this time as well.

Such activity on the part of vodka producers can be explained by a desire for changes to the parity of forces in the supply structure of the Russian consumer market. Analysts anticipate a significant change in the short-term prospective: by 2012, 80% of the vodka sold in Russia will be produced by approximately 10 major producers. Such changes in the product supply structure is closely related to emerging trends in the state regulation of vodka production in Russia, including the introduction of the USAIS (Unified State Automated Information Structure) and the establishment of a state monopoly on ethyl alcohol. These trends will not only require investments in infrastructure technology by vodka manufacturers, but will also necessitate reevaluation of their economic and social role in Russian society. While the first issue has practically been resolved, the second is still being actively debated by members of product distribution channels, including politicians, government officials, healthcare specialists, and public consumer organizations.

Emerging trends of vodka production in Russia are mirrored in its regions. Buyer preferences established during Soviet times are still quite strong in favor of local vodka manufacturers. As exemplified by vodka production in the Kuzbass region [9,10], over half of the total volume sold in the region is manufactured by local producers (Figure 4).

Thus, while the share of local vodka producers in the Novokuznetsk product supply structure is almost 1/3 of the total supply volume, the share of Novokuznetsk vodka producers in the product supply structure in Kemerovo is only 6%. For this reason, it would not be objective to speak of
the superiority of absolute values of vodka quality indicators for vodka produced in Novokuznetsk. Rather it is more appropriate to speak in terms of relative perception of these indicators by the target consumer group. The latter may be confirmed by examining the share of vodka produced in the town of Mariinsk within the overall consumer demand structure in Kemerovo [9,10]. This value is estimated to be 36.8% of the total sales volume in Kemerovo, i.e. similar to the share of local producers in Novokuznetsk (about1/3). At the same time, the market share for various Mariinsk vodka manufacturers is different. Despite identical production capacities, the share of vodka produced by Mariinsk Distillery (MLVZ) is 4.3 times that of the Mariinsk Alcohol Plant.

Numerous findings by independent reviews geared towards assessing critical quality indicators suggest that both companies produce high quality vodka. In this case it is important to recognize that consumer demand is influenced not so much by the producer’s geographical location, as it is by the image established by the company and its business reputation. Take for example a nationwide consumer poll conducted in 2007 where consumers rated the following brands of vodka as being reliable (based on a scale of 1 to 5): Absolut (4.5), Nemiroff (4.4), Russian Standard (4.4), Finlandia (4.3), Soft (4.2). Ranked as unreliable were such brands as Poltina (2.3), Istok (2.5), and Capital Doctor (2.5). This observation should be recognized as one of the factors perceived by the target consumer group to be an indicator of vodka quality.

It should be noted that the production capacity of local vodka manufacturers (there are 4 large vodka producers operating in the region) is quite sufficient to meet regional consumer demand. Analysts estimate that existing production facilities are largely underutilized, with only 35% of available production capacity actually in use. However, the abovementioned trends toward repartitioning of the Russian vodka market among global and domestic producers, including aggressive product distribution through regional channels and acquisition of local producers, significantly impact the perception of the product supply by the target buyer group. This situation also becomes one of the factors of quality and value from the consumer standpoint.

Vodka demand can also be characterized in terms of per capita consumption. Given the difference in alcohol content in various types of vodka, it is appropriate to calculate the per capita consumption index in terms of absolute alcohol equivalent. The value of this indicator is crucial in determining a nation’s health and quality of life. A safe level for annual consumption of vodka in an absolute alcohol equivalent is no more than 2 liters per capita. Figure 5 below illustrates actual vodka consumption volume in the Russian population.

During the entire observation period, the per capita vodka consumption volume in Russia demonstrated a tendency towards growth. It should be noted that the absolute value of this indicator is much higher than the abovementioned safe threshold. This, undoubtedly, will affect the quality of life for the Russian nation as well as national health indicators. Moreover, the figures above illustrate only official statistics. According to a report of the Russian Federal Consumer Rights Protection and Human Health Control Service (2006), it appears that the real value for average per capita vodka consumption in absolute alcohol equivalent is closer to 15 liters, 7.5 times exceeding maximum allowable norms. In a society concerned with the reduction of its overall vodka consumption, this factor must certainly be considered in developing a model for perceived vodka quality. In order to resolve these figures, in-depth studies into consumer attitudes towards vodka consumption are needed.

Emerging tendencies in the Russian market can be clearly observed in its various regions [9,10]. Figure 6 reveals the analyzed data associated with the Kuzbass region and its largest cities.

As you may notice, the absolute values for vodka consumption in the major cities of the Kuzbass region are similar to and consistent with national levels. We should also note here that the average per capita alcohol consumption rates refer to alcohol consumed in the form of vodka, a factor consistent with the goals of our study.

Important to note is that for the Kuzbass region, according to the research of E.I. Mazanko and his associates [9,10], the average estimated alcohol consumption volume (in absolute alcohol equivalent) for the population over 18 years old is greater than 15 liters per capita. This figure continues to rise annually by 7.5%. Thus, per capita alcohol consumption rates in the Kuzbass region, as well as for Russia as a whole, range significantly above safe levels.

As mentioned earlier, this also affects overall quality of life for the population and presents challenges in the rethinking of alcohol consumption patterns. Nonetheless, for such an urgent matter as this, neither the Strategy for Consumer Market Development in the Kuzbass Region nor the Strategy for Improving the Quality of Life in Kemerovo Region 2005-2008 Through 2010 [11,12] adequately address the issue.

There is obvious need for continued in-depth research in this field geared towards the development of adequate government policies regulating alcohol consumption in Russia. Such policies will undoubtedly improve the quality of life and health of the nation. This situation must also be considered as a factor in the vodka quality model.

In our opinion, smaller numbers in the vodka consumption index for the Kuzbass region as a whole are due in part to inadequacies of official data sources in reflecting the actual vodka sales volume in regional product distribution channels, and part to the regional traditions of consumers satisfying their demand with home-made concoctions. These traditions will have a significant impact on consumer valuation of vodka amidst weak product distribution in the regions of Russia, especially in the provinces. This is another factor that must be taken into account when estimating the value of vodka to a particular consumer group.

Thus, our analysis of product distribution factors allowed us to make the following generalizations conclusive to the goals of this research, namely developing an integrated model for vodka quality:

A trend has been recognized that reveals movement in consumer preferences away from vodka towards drinks of lower alcoholic content (wine, beer, low-alcohol carbonated drinks).
A tendency peculiar to Russia, there is growing distrust toward vodka quality.
A trend has developed toward increased consumer demand for expensive, brand-name vodka labels manufactured by reputable, licensed producers.
The product supply structure for vodka will significantly change in the short-term prospective: 80% of Russia’s vodka sales volume will be manufactured by 10 of the largest manufacturers by means of aggressive product distribution via regional distribution channels and takeovers of local producers.
A vodka producer’s geographical location has been noted to be influential to consumer demand.
There is a push in Russian society toward lowering per capita vodka consumption to 2 liters per year (in absolute alcohol equivalent), a level considered to be safe.
Further in-depth study is needed in order to develop state policy adequate to regulate alcohol consumption levels, including vodka, and geared towards improvement of the quality of life and health of Russian citizens.

1.2 Quantity of Product Supply (Vodka Assortment Saturation)

Saturation of product assortment is a crucial factor in customer value perception. It can be clearly seen in the analyzed product group. Saturation can be evaluated based on the number of items, or stock keeping units (SKUs) within an analyzed homogeneous product grouping. With this in mind, we examined the vodka selection within the retail sales network of Novokuznetsk. The number of vodka products offered was determined based on the method of Professor V. M. Kiselev and was applied both to individual retailers as well as to groups [1]. Characteristics of our test subjects can be found in Table 1.

Table 1 – Characteristics of Distribution Channel Members: Share in Alcoholic Beverage Sales; Share in Alcoholic Beverage Saturation; Share in Combined Sales Floorspace; Area of Floorspace; Description of Test Subjects; Test Subjects; Distribution Channel Leader; Distribution Channel Leadership Contender; Local Operators

As illustrated in Table 1, the subjects of our research included one member of the vodka distribution channel, the leader in total sales of alcoholic beverages in Novokuznetsk; the two closest contenders to leadership; and a group of integrated distribution channel members, registered within the confines of the city.

The distribution channel leader holds a considerable advantage in the sales share of the analyzed market (close to 40%) and together with the two closest contenders provides for ⅔ of total alcoholic beverage sales. The average share of vodka sales (in monetary terms) for the analyzed product group in Novokuznetsk is 70%, a figure consistent with data from other regions [9,10].

It should also be noted that local members (retailers registered in Novokuznetsk) occupy a predominate position in the integrated product distribution channels, accounting for more than ¾ of the SKUs, and around ⅔ of combined sales floorspace.

The allocation of floorspace for integrated vodka distribution channels in Novokuznetsk is illustrated in Figure 7.

As is clear from the illustration, the floorspace for integrated distribution channels is occupied by a small number of distribution channel members, with the first five of them accounting for ⅔ of the resources in the analyzed product channel. It is worthwhile noting that channel leaders cumulatively own 32 retail outlets (RO) selling alcoholic beverages in Novokuznetsk. For this reason, the channel being analyzed is defined as integrated along the distribution chain: it involves a uniform order and supply system and a unified approach to determining product selection within the retail chain.

Consequently, product saturation patterns within the analyzed product distribution channel can also be applied to the whole of the analyzed product market. To identify these patterns we explored vodka assortment saturation within the identified integrated product distribution channel. The results are illustrated in Table 2.

Table 2 – Characteristics of Vodka Assortment Saturation in Product Distribution Channels: Product assortment saturation indicators, Values: Average for all distribution channels; Average for integrated distribution channels; Leader in distribution channels; Average for distribution channel leadership contenders; Average for all non-alcoholic beverage distribution channels; Correlation with sales floorspace, Correlation with the average RO receipt value; Correlation with number of buyers on the RO sales floor; The most common value; Statistically undetermined

As it is clear from Table 2, the average saturation of alcoholic beverage product assortment is 117 SKUs. For comparison, the table also illustrates non-alcoholic beverage saturation, which is 154 SKUs. At the same time, figures for the primary members in the analyzed distribution channel for alcoholic beverages are 874 SKUs for the market leader and an average of 546 SKUs for the closest contenders. By comparison, the non-alcoholic beverage assortment saturation of the channel leader is only 560 SKUs, with contenders averaging 379 SKUs, i.e. 1/3 less compared to the group of non-alcoholic beverages.

Comparison of the most frequently encountered product assortment saturation values for alcoholic and non-alcoholic beverages reveals a similar difference (1/4). This illustrates the significance of alcoholic beverages for product distribution channel members and should be noted as one of the factors in the comprehensive model for vodka valuation by suppliers and retailers. This indicator can also be indirectly applied consumers.

Based on study of product assortment saturation values it bears mentioning that the most realistic value for this parameter in the comprehensive model for vodka quality should be the average value of 275 SKUs.

It should be noted that the analyzed indicator reveals an expressed dependence on amount of sales floorspace (the correlation coefficient is r = 0.6 for the cumulative distribution channel and r = 0.58 for the integrated channel) and the price of the average receipt (r = 0.6 and r = 0.45, respectively). The largest channel members have an even greater correlation factor (r = 0.89 and r = 0.81, respectively, for floorspace and receipt value). This last observation is crucial for the purposes of this research, as it indirectly reflects the value of the assortment saturation factor to the target consumer group. For the non-alcoholic beverage assortment these coefficients are likewise meaningful: r = 0.64 and r = 0.7 respectively, which indirectly confirms the validity of our conclusions.

These correlation coefficients illustrate the high level of dependence between the customer flow indicator and assortment saturation indicator. Thus, the higher the value of assortment saturation, the more it attracts buyers (correlation factor between these indicators is r = 0.61). For comparison, the value of this indicator for non-alcoholic beverages is r = 0.56, which indirectly confirms the validity of our findings and conclusions drawn from our study of alcoholic beverage assortment saturation in the retail channels of Novokuznetsk.

Alcoholic beverage assortment saturation for the largest members of the analyzed product distribution channel is illustrated in Figure 8. It is obvious from Figure 8 that product assortment saturation values for the largest members of the analyzed distribution channel substantially exceed the averaged value used as a basis for the development of the integrated model for vodka quality (275 SKUs).

Members included in Figure 8 have cumulative alcohol product assortment saturation values of 784 (in three RO) to 3764 (in ten RO), i.e. from 261 to 376 SKUs per retail outlet. This generally meets the required conditions and supports the validity of the calculated value of alcoholic beverage assortment saturation, ⅔ of which includes vodka, that is, over 180 SKUs of vodka. This value has been adopted for the purposes of this research, namely for the development of a comprehensive model for vodka quality.

In support of our conclusion we considered the structure of the overall sales assortment for alcoholic beverages in Novokuznetsk, as illustrated in Figure 9. Here we see that primarily members of the integrated channel for alcoholic beverages create the product assortment of the analyzed group, i.e. they form a significant share of the total product supply in the analyzed product group. This is a direct confirmation of the validity of our earlier findings in terms of assortment saturation of alcoholic beverages in general, and vodka in particular.

Thus, our study of the product assortment saturation indicator for the analyzed product group enabled us to define the most important characteristics of this indicator to the purposes of our research – namely, the development of a comprehensive model for vodka quality:

Alcoholic beverages are significant to members of the distribution channel: the higher the value of the indicator, the more buyers are attracted.
There is a direct correlation between this indicator and both floorspace and the average price of a retail outlet sales receipt.
The value of this indicator should be more than 180 SKUs for one point of sale.
There is high physical availability of vodka in the distribution channels.

1.3 Product Price Levels

The retail price of vodka is an important factor influencing product value as perceived by the target consumer group. In the context of our research it is one of the most important factors influencing the quality of life of Russian citizens since it impacts overall national health.

The question of the price of vodka is a historical one since many milestones in Russian history are associated not only with major geopolitical events but with the price of a bottle of vodka. Thus, the price of a bottle of vodka during the Soviet era (thirty years ago) was 3.62 rubles; the minimum monthly wage was 70 rubles and average monthly wage 125 rubles. Consequently, the correlation between the price of a bottle of vodka and monthly wages at the time was 1:19 (minimum) and 1:35 (average). Minimum monthly wage today is 2,300 rubles (as of January 9, 2007) and the average wage is 13,810 rubles (Federal State Statistics Service, June 2007), while the minimum retail price for a bottle of vodka is 60 rubles. Therefore, the current ratio is estimated at 1:38 (minimum) and 1:230 (average). These results clearly illustrate the fact that, over the last thirty years of Russia’s development, vodka has become at least twice as affordable, and for the average wage earner — six and a half times more affordable. Needless to say, this inevitably effects overall national health.

The end of 2006 marked a rapid rise in grain prices leading to an increase in the price of ethanol by 15-25%. Since the cost of alcohol effects the price of vodka (10.40 rubles for 0.5 liter vodka), there seems to be no grounds to expect any significant fluctuation of the economic affordability indicator in the near future. In addition to this, in the end of 2006, the State Enterprise Rosspirtprom began to produce the so-called «people's vodka,» a high quality vodka sold at minimal cost (retail price of one bottle is 60 rubles). Government officials defended their decision as an attempt to „collapse“ the market of illegal vodka and protect consumers from counterfeits. Such measures clearly illustrate the lack of adequate state anti-alcohol policies and confirm our previous conclusions regarding the need for in-depth study into the factors influencing the valuation of vodka from the consumer perspective and by society as a whole.

To confirm the significance of the retail price of vodka in appraisal of product value by different buyer groups, we studied the influence of vodka retail prices on consumption volume during 2004-2006. The entire range of vodka prices (from 60 to 1000 rubles per bottle) was divided into 4 price categories: low-priced (less than 65 rubles), mid-priced (65-109 rubles), sub-premium (from 110 to 200 rubles) and premium (above 200 rubles). The illegal vodka market (with prices below 50 rubles per bottle and by some estimates having up to 50% of the total sales volume of the legal vodka market) has not been included in our study. Price levels have been determined based on the results of similar public polls conducted earlier. The results of the study are illustrated below in Figure 10.

As illustrated by Figure 10, the low-price segment grew from 44% in 2004 to 57.1% in 2005, accounting for a significant share in total sales (in physical units). However, over the last year, the share of this price segment declined by 7.1% due to growth in other segments (mid and sub-premium). This is a very significant factor in the context of our study, since it indicates a shift of consumer focus from economic to other factors. As we pointed out earlier, beginning in 2006, aside from the usual factors impacting consumer choice, other factors like product reliability and business reputation of vodka producers also became important.

For purposes of integral estimation of average vodka prices and product distribution factors influencing them, a case study was carried out in the city of Novokuznetsk (2007). As a product-indicator we took into consideration the most common locally produced vodka (Novokuznetsk, NLVZ).

The objects of our research included both the entire product distribution system as a whole, and the more advanced methods of product distribution, i.e. the integrated channels. In addition, we evaluated the parameters demonstrated by the leader of the integrated distribution channels and the closest contenders. The data are included in Table 3.

For clarity and objectivity of the study, we compared the price and assortment parameters of product articles with the same alcohol content (40% Vol.) and the same bottle size (0.5 liter). The cited figures do not include gift (souvenir) vodka types. For this reason the premium price segment is limited to 900 rubles per bottle.

To confirm the validity of this assumption, we evaluated the influence of both sales floorspace and average receipt price on consumer behavior at points of sale.

Table 3 — Price Levels of Vodka Assortment in Novokuznetsk Distribution Channels: Price Level Indicators of Product Assortment

As illustrated by the results, these factors have no effect on vodka retail prices (the correlation coefficients were r = — 0,06 and r = — 0,14, respectively). A similar conclusion can be drawn regarding the correlation between vodka retail price and customer flow (r = — 0,01). Such implications can be made not only concerning the overall product distribution system in the analyzed region but also with regard to the other subjects of our research, namely, integrated product distribution channels, their leaders, and immediate contenders.

Other evidence of consumer indifference to the price factor, in our opinion, can be illustrated through the study of product assortment in its various price segments. Such a case study was carried out based on the integrated vodka distribution channel in Novokuznetsk. Results show that the numbers of SKUs differ between various vodka price segments; in the context of the study this constitutes a compromise between all members of the integrated product distribution channel: manufacturers, suppliers, retailers, and consumers. At the same time it is worthwhile noting that the same manufacturers produce vodka for different price categories. As an example, vodka produced in Mariinsk is represented in 10 and vodka produced in Novokuznetsk in 6 out of the 25 price segments registered in our study. Similar observations can be made regarding vodka producers from other regions. This is an indirect confirmation of the desire on the part of the most active members in the Russian vodka market to increase their market share by attracting customers with differing vodka price demands. Characteristic also is the presence of only one producer in the «people’s vodka» segment (under 60 rubles), the Federal State Enterprise „Rosspirtprom.“ This is considered important to the purposes of our work, namely, the modeling of a comprehensive consumer appraisal of vodka quality and the respective impact of other members of the product distribution system on that appraisal.

Another indication of consumer indifference to the price factor (in the framework of the same study conducted in the integrated product distribution channel) can be seen, in our opinion, in our study of the range of vodka assortment in the various price segments, based on the ratio of three factors: retail price, physical product turnover, and product turnover in monetary terms. The results of this study are illustrated in the Figure 11.

As illustrated by the price distribution vs. turnover chart, consumer attitude to the retail vodka price is different depending on the absolute value of retail prices. Thus, buyers in the low-price level (curve 1) demonstrate high indifference, in other words, these consumers choose vodka within this price segment without regard to emotive qualities of the product, but based on their own experience and the particular purchase occasion. The equation describing the extent of this indifference, where Y = vodka retail price in rubles and X = product sales in physical terms (units), is as follows:

According to Figure 11, there are 7 different price level

Equations describing the indifference level for the following curves are as follows:

Comparing the coefficients of x for the functions closest to the analyzed price segment, we observe an increase as the absolute level of retail prices grow within the analyzed segments. This means that the level of indifference in other price segments declines with an increase in the absolute value of the retail price for vodka. That said, the lowest level of consumer indifference is observed in the highest retail price segment (curve 7). In developing a comprehensive model for vodka quality, this observation should be taken into account in response to customer needs.

For the purpose of data systematization, it seems appropriate to group the shares of the analyzed price segments and cumulative sales (in monetary terms) of the integrated product distribution channel. To do this, we grouped the data found in Figure 11 into a diagram (see Figure 12).

As illustrated in Figure 12, the analyzed function has more than 10 peaks of various range and intensity. In essence, each peak reflects a particular consumer demand for vodka within the analyzed price segment. The 301-310 ruble price segment holds the largest share in cumulative sales (in monetary units). However, its share is very narrow and has the appearance of a «Japanese candle» trend. The segments from 110 to 140 rubles, 180 to 200 rubles, 240 to 270 rubles, and 500 to 700 rubles, on the contrary, are expressly extended, thus characterizing a tendency despite their insignificant impact on the aggregate value.

Based on this observation, we conclude that consumer preferences are toward six different price levels (segments of consumer demand for vodka). These levels are determined based on the price per bottle: «the people’s vodka» (60 rubles), low-priced (from 61 to 100 rubles), below market average (from 101 to 160 rubles), market average (from 161 to 300 rubles), above market average (from 301 to 500 rubles), and premium (more than 500 rubles).

The estimated weighted average of the average market price for vodka is 167 rubles. It seems appropriate to define the characteristics of the established price segments of consumer perception in the integrated product distribution channels via three indicators. Shares of segments are evaluated on the basis of product selection (the number of SKUs), physical turnover (quantity of bottles sold), and monetary turnover (revenue from sales over the analyzed period). Such an approach illustrates the importance of price segments from various viewpoints: suppliers, retailers, and buyers. This breakdown of price segments is illustrated in Figure 13.

As seen from the data, interests of integrated product distribution channel members often do not agree. Vodka from the people’s segment holds a substantial share in physical turnover (18.44%) reflecting significant buyer interest, and as a result, conflicting with the economic interests of both sellers (insignificant share in the monetary turnover – 4.7%) and manufacturers (a small share in vodka assortment – 3.0%).

Similar conflicts have also been observed in the low-price segment (8.2% of physical turnover, reflecting interests of consumers, against 4.1% in monetary turnover, reflecting interests of retailers). To the contrary, the substantial economic interest of retailers in the premium segment is reflected in the significant share of monetary turnover (12.6%), a factor that conflicts with the interests both of producers and suppliers (share of the product assortment structure is 8.9%) as well as buyers (share of physical turnover is 3.47%). Similar conflicts of interests among members of the product distribution system have also been observed in the above market average price segment – 24.0%, 19.1% and 3.3% respectively.

In the market average and below market average segments these differences are somewhat less obvious. These segments are considered dominant based on all of the three parameters. However, full agreement between members of the product distribution channel has not been achieved even in these segments: in the market average segment there is infringement of producer interests, while in the below market average segment there is infringement of retailer interests, whose shares in the product assortment and turnover (in monetary terms), respectively, are below the shares of other members of the product distribution channel within the analyzed segments.

The findings of our research at this stage have allowed us to conclude that parity of needs between members of the integrated product distribution channels has not yet been reached, making studies geared towards its achievement highly demanded and urgent. In order to ensure full satisfaction of diverse consumer needs, it is crucial to accommodate the economic and other interests of the remaining members of product distribution channels. Otherwise, accomplishments achieved will be short-term and easily voided.

Based on the study of vodka price levels in product distribution channels, the following conclusions can be drawn, each related to the goals of our research:

Over the last thirty years, economic affordability of vodka increased by an average of 6.5 times, a factor negatively effecting national health.
Consumer indifference to vodka price has been observed. As a result, customers often make purchases at prices 23% greater than the lowest price for the exact same vodka sold elsewhere in the same city.
Neither sales floor space nor average receipt price has an effect on vodka retail prices.
Vodka retail price, in its turn, has no impact on customer turnover.
Vodka producers supply product to different price categories thus attracting buyers with different vodka price preferences.
Buyers of low price vodka make their purchase decision without consideration as to the emotive qualities of the particular brand, but based on their own experience and particular purchase occasion. Buyers preferring the premium vodka segment, on the contrary, exhibit price indifference in favor of other factors unrelated to the price of the product.
A distinction of consumer preferences has been identified in six price levels (segments of consumer demand for vodka): «the people’s vodka» (60 rubles), low-priced (from 61 to 100 rubles), below market average (from 101 to 160 rubles), market average (from 161 to 300 rubles), above market average (from 301 to 500 rubles), and premium (more than 500 rubles).
The average weighted price of vodka in integrated product distribution channels has been estimated at 167 rubles.
When evaluating product assortment and price, the interests of members of integrated product distribution channels do not match: consumer interest is in conflict with the economic interests of retailers and vodka producers.

1.4 Diversity of Consumer Properties (Vodka Assortment Structure)

As a food product vodka does not have a complex formula. However, consumers tend to attribute a specific set of unique properties to their favorite type of vodka; these properties are integrated into their particular preferences toward specific product brands and manufacturers. In order to investigate these preferences we studied the vodka sales structure (in monetary and physical terms) in Russia and its regions (case study: Novokuznetsk).

The structure of vodka assortment is illustrated below in Figure 14.

As seen from the data above, the market leader who with the best reputation among Russian consumers is Veda LLC with its featured product «Russkiy Razmer.» We should also note that the 10 largest vodka producers succeed in meeting up to 45% of the consumer demand. This confirms our previous findings regarding the increase in vodka production consolidation. The share of imported vodka filling the demand structure in Russia is very low with only one of the producers listed in Figure 14, Nemiroff (2.3%), supplying foreign-manufactured vodka to the Russian market. Another Ukrainian vodka producer, Soyuz-Victan, (3.9%) has transferred its production facilities to the territory of Russia.

A similar study was conducted in the integrated distribution channel on the regional level (case study: Novokuznetsk). The product supply structure in regional distribution channels is characterized by three indicators: physical product turnover, monetary turnover, and by the number of SKUs. These indicators are illustrated in Figure 15.

The histogram includes the five largest producers meeting consumer demand in the analyzed region. As illustrated in Figure 15, these producers meet approximately 53% of the consumer demand for vodka (turnover in physical terms). It indicates a higher degree of vodka production consolidation in the regions when compared to Russia as a whole. In overall turnover (in monetary terms), the share of these producers is as high as 57%. Notably, their share in the vodka assortment is much lower — around 33%, and consistent with overall national indicators as illustrated in Figure 14. The last observation suggests that the structure of vodka consumption in the remote regions of Russia is different from that of the central regions. The most significant difference concerns so-called «local patriotism,» implying consumer preference to locally manufactured vodka. It is a well known fact that consumers give their preference to locally produced food products [24, 25]. In contrast to the national vodka assortment structure (where the share of Moscow and St. Petersburg consumers exceeds 1/3), over 41% of the regional consumer demand for vodka (in physical terms) and 43% (in monetary terms) is met by Siberian producers Kuzbass Manufacturers, Omskvinprom LLC, and Itkulsky distillery. In all other aspects the list of leading regional vodka producers is similar to that of the national.

With respect to vodka producers’ share in the product assortment volume, it should be noted that, in terms of satisfaction of consumer demand within the analyzed product distribution channel, the mentioned leaders have no advantage and account for slightly more than 22% of the total product supply volume. That said, Kuzbass vodka producers account for approximately 20% of the analyzed share. This testifies to the high degree of competition in the product supply structure due to the availability of non-regional vodka brands. Therefore, the above-mentioned consumer preference to regional brands remains a strong factor in competitive market conditions. This appears to be an important factor influencing consumer selection of vodka and should be taken into account in the development of a comprehensive model for vodka quality.

As mentioned before, local producers possess a number of psychological advantages. They help buyers appreciate their local way of life and also promote responsibility of regional vodka producers for the quality of their product. In addition, regional producers possess significant logistical advantages that are manifested in the economic affordability of the regional product distribution channels. This factor has a positive impact on the structure and size of their vodka assortment. In order to define the structure of the vodka assortment produced by members of the distribution channel listed in Figure 15, we studied the main types (brands) represented in the product supply of the analyzed region. Based on assortment volume, Kuzbass Manufacturers surpasses the remaining members of the product distribution system considerably, in practice implementing the abovementioned logistical advantages and thereby influencing consumer choice.

It is a well known fact that there is an inverse relationship between the size of the product assortment and its efficiency (salability of SKUs constituting the assortment) [2]. This means that effective sales management can only be achieved through limiting product diversity. In order to analyze the efficiency of the vodka assortment we studied sales data of different vodka brands in Russia and the city of Novokuznetsk. Figure 16 illustrates the vodka assortment structure in Russia through the sales volume of individual brands

As clear from Figure 16, the most popular vodka brands among Russian consumers are Nemiroff (4.9%), Zelenaya Marka (4.4%) and Putinka (4.2%). Comparing these results with overall vodka sales in Russia (Figure 3.14), it should be noted that the Nemiroff brand, (manufactured by the producer of the same name) pushed the former Russian leader (Veda LLC) into fourth place. With regard to Zelenaya Marka and Putinka, brands of the companies Russian Alcohol and Crystal (respectively), their leadership parity has remained unchanged.

In respect to brands manufactured by regional producers, the structure of regional consumer demand is significantly different from the national. Characteristics of the regional demand for vodka (exemplified by Novokuznetsk) expressed in monetary turnover are illustrated in Figure 17.

As evident from Figure 17, over 26% of regional vodka sales is represented by Siberian brands Beluga (Mariinsk Distillery), Pyat Ozer (Omskvinprom), and Altai (Itkulsk distillery), whose shares in monetary sales amount to 10.6%, 10.5%, and 5.7% respectively. This confirms earlier findings regarding the psychological and logistical advantages of regional producers compared to national. The leadership position in regional vodka sales volume belongs to Zelenaya Marka (Russian Alcohol Group).

The retail price of 1 bottle of Zelanaya Marka (average price — 176 rubles) corresponds to the average weighted price for the analyzed distribution channel, while Pyat Ozer (average price — 158 rubles) is below this value. One of the reasons for the great popularity of these vodka brands could be their correspondence with well-established buyer perceptions of vodka prices in the region. However, the price of Beluga vodka (average price — 843 rubles) exceeds the weighted average price in the region by nearly 5 times. Nevertheless, Beluga’s share in the total sales volume is similar to the abovementioned brands. To explain this phenomenon, it seems appropriate to consider the structure of regional vodka sales in physical terms (Figure 18).

As illustrated by Figure 18, Zelenaya Marka and Pyat Ozer have maintained their rating in the structure of consumer preferences and have demonstrated this by the number of product purchases (their shares amounted to 12.7%). However, the honorable position held by Beluga vodka in relation to monetary sales is not evident in the demand structure measured in physical sales (which amounted to only 2.4%). This illustrates how the indicator of consumer demand is characterized by diversity in buyer audience, a point made earlier during our systematization of consumer demand into various price segments. It should also be noted that vodka trademarks represented in Figure 18 account for about ⅔ of cumulative monetary sales and over a half of a physical sales. This in turn proves the validity and accuracy of our findings regarding the analyzed distribution channel.

According to Figure 18, name-brands of regional producers play an important role in the structure of consumer demand in physical terms, as well as in monetary. Among the 12 leading brands, 7 are represented by Siberian producers. This confirms our previous conclusions.

Understanding the relevance of taste and of other useful vodka properties is crucial to understanding consumer vodka preferences. For this purpose, we conducted a study of consumer demand for vodka with various flavoring and physiologically active ingredients as compared to vodka without additives. Consumer demand, as expressed in the structure of regional product turnover in monetary and physical units, as well as in the volume of vodka product assortment, is illustrated in Figure 19.

As it is obvious from Figure 19, consumer demand for vodka with flavoring is estimated to be 19% of the total cumulative demand in monetary terms and 23% in physical terms. It points to the significant consumer interest in the taste properties and variety of vodka, as well as the presence of physiologically active ingredients. It is worthwhile mentioning that vodka producers have also taken this into account. Thus, 28.4% of the product selection consists of flavored vodka.

Study of the consumer demand for flavored vodka revealed that the highest consumer demand in monetary terms is associated with vodka containing pine tree extract (4.1%), birch tree buds, etc. (2.4%), honey (1%), lemon and blackcurrant (each 0.8%). The structure of demand in physical terms (number of purchases) includes the same components, except for black currant, which gave place to pantohematogen. In terms of the number of distinct SKU items, among flavored vodkas birch tree bud vodka leads (4%), followed by vodka with honey (3%), and then lemon, pine nut, and black currant (each 2%). This indicates that consumer demand for flavored vodka is adequate to the product supply and directly dependent on the producers.

The following conclusions have been made based on the results of the study:

Compared to Russia as a whole, vodka production in the regions of Russia has greater consolidation and higher competitiveness in the product supply structure due to the presence of a large number of non-regional brands.
Vodka consumption in the outlying regions of Russia differs from that of the central regions due to «local patriotism,» reflecting consumer preference to locally produced vodka.
Consumer preference to the regional vodka brands is stable in the context of competitive market conditions.
Regional producers possess a logistical advantage that positively affects the size and structure of the vodka assortment and likewise influences consumer choice.
A significant buyer interest has been observed in regard to the variety and flavor of vodka, as well as the use of physiologically active ingredients, all of which have been taken into account by producers.

2. Study of Consumer Demand and Consumer Preferences

To determine the correlation between consumption of and knowledge about a particular brand in a target consumer group, a study was conducted among consumers in integrated product distribution channels to determine product consumption and knowledge of the leading national vodka brands. The case study was conducted in the city of Novokuznetsk, the results of which are illustrated below in Figure 20.

The probability of selection of a specific brand from the variety of vodka brands included in the product supply structure is 0.17%. As it is clear from Figure 20, there is an express correlation between vodka consumption and knowledge of the product (correlation factor r = 0.76). Thus, the largest percentage of consumers is aware of the properties of Gzhelka (Crystal Group) and Nemiroff – 60.3% and 58.3% respectively. According to Figure 3.20 these two brands have reached the highest consumption rates in the tested consumer group – 28.5% and 28.9% respectively. In the other cases, the percentage of respondents familiar with the properties of a particular trademark was roughly equal (42.4 — 47.5%). In a similar fashion, the respondents were active in consumption of the analyzed vodka brands (16.8%-19.4%). This means that one of the significant factors affecting consumer evaluation of vodka is recognition by the target consumer group of specific brands, types, and varieties of products. This is illustrated by their demonstration of preference to one product over another when faced with multiple choices. The average knowledge to consumption ratio is 2:3. The only exception to this is Absolut vodka, where the ratio is 3:1. The fact that this value is 35% larger than the average implies a communication failure between brand producers and suppliers and the target customer groups.

Another aspect of the comprehensive model for vodka quality is product packaging, including its volume and type. To determine consumer attitude towards these factors, a survey was conducted in the specified product distribution channel. The results are illustrated in Figure 21.

As illustrated by Figure 21, the most preferred vodka package is a 0.5 liter glass bottle (74% of the respondents). It is notable that more than 16% of consumers prefer to buy vodka in large bottles.

Thus, the package size is not a factor influencing consumer perception of vodka quality, as the overwhelming majority of product articles in vodka assortment are traditionally packaged in 0.5 liter glass bottles.

Of particular interest to the goals of our research is the study of the relative importance of factors influencing consumer choice of specific trademarks, types, varieties, or product articles. To this end, a survey was conducted among buyers to determine the significance of such factors as alcohol grade, softness of taste, color, brand, and retail price. The results of this study are illustrated in Figure 22.

As seen from the data, the importance of each of the analyzed factors to the consumer varies. The greatest influence on consumer perception of vodka quality is the grade of alcohol: 60% of respondents indicated that they closely study this information when selecting a particular product article.

The second most important factor is the organoleptic appraisal of vodka quality. Forty percent of respondents indicated that their choice of a particular product article is based on previous purchase experience. If by drinking a particular vodka brand in the past a consumer was able to determine softness of taste, the choice of such a brand was considered to be correct. However, softness is not considered to be a decisive indicator of quality for such a specific beverage as vodka; 60% of respondents demonstrated indifference to this characteristic. This observation is especially typical of the Russian consumer who often shows preference not to the soft, but rather to the strong taste of vodka. This is also supported by the data on consumer demand for vodka with additives, among which are pepper, horseradish, etc. As an example, take the popular drink «Gorilka» made with pepper.

Since the consumer audience also includes women, it is of interest to study the various factors relating to quality appraisal and assessment of vodka consumer properties that are particular to females. To this end, the female audience was addressed with a number of specific questions, as reflected in Figure 23.

Survey results revealed that approximately 44% of female respondents prefer the sweet taste of vodka, while nearly 41% believe in the health benefits of biologically active additives. This confirms our previous findings indicating significant buyer interest in the taste of vodka and the presence of physiologically active ingredients.

In addition, it was established that more than ⅔ of women use vodka to make cocktails. For this reason vodka should be labeled with all the information necessary to this end, and vodka flavor properties should be compatible with cocktail ingredients. These indicators reflect the depth of the underlying factors important in consumer appraisal of vodka quality and should be considered in the development of the integrated model.

Based on the survey of consumer preferences for vodka properties, the following conclusions can be drawn:

There is an express correlation (2:3) between vodka consumption and product knowledge.
Package size has no influence on consumer perception of vodka quality.
Alcohol grade has the largest impact on consumer perception of vodka quality.
Product choice is based on previous purchase experience.
Softness of taste is not indicative of vodka quality.
The vodka label should carry all information necessary for making cocktails.