CRISIS IN RUSSIA’S ALCOHOL MARKET PLACE

CRISIS IN RUSSIA’S ALCOHOL MARKET PLACE

Kiselev V. M., Doctor, professor

Orlov A. A., sommelier, post-graduate student

Russian State University of Trade & Economic (RSUTE, Kemerovo branch)

Reference: Kiselev, V.M. Crisis in Russia’s alcohol market place / V.M. Kiselev, A.A. Orlov // Current trends in commodity science: 10th International Commodity Science Conference. IGWT Symposium Series.- Poznań University of Economics; Polish Commodity Science Society, Poznań, Poland, 17th – 18th September 2009

2008 is a year of recession in the economics of most developed countries including those that are the key players at alcohol market. What are the perspectives for the alcohol world market in 2009-2010? We’ll try to define some tendencies which can become the main in this field of economy, very important for Russia.

Market size is calculated traditionally according to formula ‘production+import-export’. F. Kastelucci, the Director of OIV, announced in his report the quantity of wine produced in EU in 2008. He noticed it was the lowest point since 1991.

The total quantity of wine produced in EU is lower 13 million dal (1% in comparison to 2007 level of production, which was not very high, too). Mostly, the recession today depends on processes taking place in France (- 2,9%), Portugal (- 11%), Austria (- 9% in comparison to 2007). But at the same time, Mr. Kastelucci notices, in the countries of the southern hemisphere including the USA growth of wine production is taking place almost thanks to Australia, USA (+2,2%), New Zealand (+15%).

The State Statistician Committee informs about the volumes of alcohol sales in 2008 – they are lower by 2,7% in comparison to 2007. Wine sales are lower by 15,5%. The alcohol market size in Russia in 2008 is 78 million dal of wine, which corresponds to 2007 level. Wine and fruit wine sales in Russia, as the State Statistician Committee informs, is lower by 9,5%. Fruit wine market size grows (+37%), 4 million dal are drunk. Champaign sales are lower by 5%. Champaign market size had lost its growing tendencies, showed 2% of growth only. Even the New Year holidays didn’t help the situation.

Annual quantity of wine materials produced in Russia in 2008 (including those from which distillates and Champaign were produced) makes 22 million dal. 64 million dal of wine materials were imported: 35 million in neutral reservoirs, 29 in bottles and paper bags. So, total wine market size in Russia in 2008 was 86 million dal. It’s 10 million more in comparison to the data given by the State Statistician Committee. The difference is legal adulterated wine (beverages produced from distillates and flavor and aromatic components).

Crisis in alcohol market is revealed in the following tendencies.

Foreign alcohol market place:

Decrease in production of wines marked «appellation de origin controlleé» (approximately – 3-4%). For the New World countries – 0,5-1% can be forecasted.
Wine production in EU and the New World countries will be divided into ordinary wine production and export production. We think it will concern 1/3 of all production.
Decrease of vineyard areas firstly in such traditional winemaking countries as France, Italy, Spain, Austria and Germany. Northern European trends unfortunately will lose. Leaders in vineyard areas and therefore wine production will be Italy and Argentina. Argentina’s leadership will depend on economic factors: an abundant supply of cheap labor, opportunities for inner wine production growth. Also money of western investors is not tied up there. So, it’s a big temptation to buy up wine materials for low prices.
World wine market size will decrease by 8-10%. Production will fell due to middle price segment (15-20$ for a bottle). Bonus segment will not suffer. Wine for 50-150$ for a bottle will be in demand; it will shift from HORECA to boutiques or special supermarkets. Wine for 2-3$ for a bottle will suffer less than all: wine drinking cultures cannot reject wines at all.
On our point of view, wine quality will also change. The reason is not in global warming or age-related changes but in distribution changes. Crisis will necessarily lead to new technologies but this is also the reason for which only big players will stay. It is more and more evident that producers and cooperative producers are absorbed by corporations having in their portfolios ten or more glorified titles. Corporations need volumes and image, not quality. Of course, nobody will ignore standard quality, but nobody is interested in higher quality. Most companies will speed to product realization.

Russian alcohol market place:

Wine production in Russia will be in stagnation during 2009. Wine market size will reduce to 67-68 million dal. Import will prevail over sales: it will make 55 million dal. Russian wine sales will make 13 million dal, so it will be lower by 40%.
Wine importers will struggle for territories and distributors.
Wine importers will struggle with Russian producers for regional markets. Foreign wines (150-200 rubles for a bottle) will force out Russian wines from the markets. Russian cheep wines (100 rubles for a bottle) will compete with each other. There are more and more consumers who prefer wine in paper bags for 55 rubles for a bag. Wines of this segment will compete. Counterfeit port for 35 rubles for a bottle will be in demand.
Wines will struggle for loyalty of the customers who lost their usual incomes.
Branch businesses will reduce: in these circumstances the role of distributors who have straight access to the premises and actively react on the problems with the goods they sell will grow.
The inner structure of alcohol drinking will change. A national tradition of hard drinking will still dominate. Probably hard alcohol market size will grow: Russians can consume 250-270 million dal per annum.
Excise tax rates will be revised. They will grow, and it concerns not only hard drinks but beer and wine, too.
Regional markets will be defended by regional administrations.
Distributors will be probably pressured by their importers (of cheap and middle price wines). The situation in high quality wine sector will be almost the same: the quantity of operators will reduce a little bit.
There is a struggle for the trade mark «Soviet Champagne semi-doux». At best it will change its name into „Soviet sparkling wine“.

We doubt whether the results of 2009-2010 will be great but these years will necessarily lead to soul-searching on Russia’s alcohol market place, to substitution of inefficient players by efficient ones, to introduction of innovative methods and technologies of production and distribution of alcohol and its consuming.