Eastern Europeans swap bling for quality

Subtlety seems to be replacing the brash and the ostentatious in Russia – a trend reflected in the country’s spirits market and right across Eastern Europe, writes Chris Mercer

Spirit brands like Ballantines are latching onto the new wave of hipsters in Eastern Europe

Russians’ love affair with bling is being usurped by a taste for stylish subtlety and traditional values, and as a result quality, international spirits are on the rise.

Two decades of hedonistic excess have spawned a new generation of Russian consumers who are keen to acquire the finer things in life in a less brash manner. Witness reports in July of Louis Vuitton “toning down the bling” on its handbags in the country.

“The trend is away from ‘showy’ towards ‘informal and high quality’,” says global marketing director at Havana Club rum, Nick Blacknell. “There’s a big trend towards older, more traditional values, such as spending time with friends and consideration for the community.” He continues: “When capitalism started it was about grabbing everything you could. But now there’s the third generation coming through. They are better travelled, better educated and there’s more maturity in society.”

Bars are mirroring this switch to understatement, peeling off the chrome plating to be more like their western counterparts. “There’s a change to a more grungy feel,” says Blacknell. “The hipster phenomenon is happening in Moscow.”

And not just any old bottle will do. Drinkers in Moscow and St Petersburg in particular, have developed increasingly sophisticated palates, whether it be cocktails or liquor served straight-up. While many consider Russia as an emerging market for Scotch whisky, Blacknell believes current trends are good news for brands like Havana Club and Jameson Irish whiskey, which carry an informal, yet premium image. Both are already strong performers in the country.

Whisky and rum

Euromonitor analysts forecast that whiskies and rum, including both white and dark varieties, will be the fastest growing spirits categories by volume in Russia up to the end of 2017, and are set to increase by 50% and 68% respectively.

For all the talk of sophisticated bar drinking, a lot of volume growth is also fuelled by brands in the mid-to-lower end of the market, such as White Horse and Passport blended Scotch.

“In Russia four to five years ago it was all about the high end,” says Philip Ainsworth, international regional director at Chivas Brothers. “Now we’re seeing most growth in standard, as well as premium segments.”

A similar pattern is emerging in rum, although it’s currently a quarter the size of the 24.7m-litre market for whiskies. Diageo has launched Shark Tooth, a domestically- bottled, rum-based, brown spirit at 40% abv.

“Shark Tooth is well positioned to play in the lower-end segment, which is projected to grow by four times within the next five years, recruiting new consumers into the category,” says Diageo Russia’s innovation and marketing director, Russell Jones. Captain Morgan and Zacapa are already on sale in the country.

International whisky brands are finding Eastern Europe represents an important opportunity

Easy mistakes

Big distillers may be playing for scale and market share, but they are also throwing down a rope ladder for emerging middle class consumers to climb. “There [would be] a huge benefit from rum becoming the entry level spirit of choice among young consumers,” says Havana Club’s Blacknell.

That said, distillers sometimes misplace rungs on the ladder. Senior Euromonitor drinks analyst Jeremy Cunnington has criticised Diageo for pricing Johnnie Walker Red and economy brand White Horse too closely together, the former at RUB1,240 per litre and the latter at RUB1,100. “Consumers probably conclude that there is little point trading up,” he wrote.

Some also feel international spirits could work harder outside of Moscow and St Petersburg. “Each time we go there, part of our planning is to give the regions a bit more focus,” says Stuart Thompson, area director for Europe at Ian Macleod Distillers (IMD). He advises: “Put the work in, and you’ll reap the benefits.”

The same goes for much of Eastern Europe; a patchwork quilt of markets where the  opportunities look good for many foreign spirits. “It’s gone from a small part of our business to really being quite important now,” says Thompson.

Rum is projected for double-digit volume growth in several countries and is headed for a region-wide increase of 29% by 2017, says Euromonitor.

Within whiskies, Irish is coming up behind Scotch. Diageo’s Jones says this is the number one region for Bushmills, which is showing “strong growth in Russia, Bulgaria and Ukraine”.

Big guns dominate

In white spirits, Tequila is adopting Eastern Europe as a spiritual home outside of North America, with overall volumes set to rise by a third in the region by 2017 to 7.1m litres, according to Euromonitor. Olmeca will launch its easy-pour, super-premium Altos bottle in Russian bars later this year.

Pockets of opportunities abound in smaller countries. Euromonitor analysts highlight Georgia’s thirst for Tequila shots, while IMD’s Thompson says whisky drinkers in Slovakia are lapping up Glengoyne single malt. Belarus is rocketing for Havana Club, while Kazakhstan is currently a surprising buzzword in the Scottish glens.

That said, bigger markets like Russia and Poland tend to dominate discussions in international distillers’ boardrooms. Of those bigger markets, Ukraine has emerged from Russia’s shadow. There’s even room for gin here, having largely struggled to venture eastward since the fall of the British Empire. IMD talks up its London Hill gin in the country.

Scotch is aspirational in Ukraine, as it has become in Russia, and it also appeals to women who dislike vodka’s image as unrefined, liquid testosterone. “The female consumer should not be underestimated,” says Rowan de Arkotxa Mackenzie, regional director covering Eastern Europe at International Beverage Holdings.

Scotch blends Hankey Bannister and MacArthur’s are key for de Arkotxa Mackenzie in Ukraine. It’s a rather different story for single malts beyond the very top end. He candidly declares: “The biggest challenge for single malts is that the consumer is quite ignorant.”

On a more general note, he identifies Eastern Europe with Latin America. “It’s quite dynamic, fast moving and the big brands are very dominant. The biggest benefit for any of us is that the sector is growing and so everyone is growing with it.”

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Continuously changing goalposts

However, securing that growth can be relatively costly, at least in the short-term. In the first half of Diageo’s most recent fiscal year, Russia and Eastern Europe was the only geographic business division where company overhead costs rose in double digits. Part of the reason for bottling Shark Tooth rum in Russia itself is to “optimize supply expenditures”, Russell Jones says.

Beyond European Union borders, distillers must navigate a regulatory swamp. “Russia seems to change its legislation every year,” says IMD’s Thompson. “For a time Ukraine was looking more positive. However, it’s more the Russian way now than the European [Union] way,” he says. Like Russia, Ukraine is striving to pursue the dual policies of minimum pricing and excise tax hikes.

International Beverage Holdings pulled an ad in Ukraine late last year to avoid falling foul of a rule change. “You have to be on your toes,” warns de Arkotxa Mackenzie. More generally, though, IMD’s Thompson explains: “The key thing is to be with the right distributor.”

Back in Russia, president Putin’s war on cheap vodka has been widely reported. It remains a tense atmosphere among vodka distillers, according to Veniamin Grabar, president of Ladoga Group.

As predicted by many, he says steep rises in minimum pricing and tax hikes have reinvigorated the black market, despite the best efforts of Russia’s three-year-old federal service for alcohol market regulation.

Takeover deals

Regulation, together with a broad consumer shift away from vodka, is driving consolidation. Russian Standard’s slowroast-style capture of Central European Distribution Corp (CEDC) is arguably the most high profile case.

Russian Standard owner Roustam Tariko has let it be known that he’s in the market for more deals, should opportunities present themselves, although a clean-up at CEDC will doubtless dominate his agenda in the shorter term.

It will be interesting to watch how an emerging range of locally produced premium and luxury vodkas fare in Eastern Europe. How will they match up to the aspirational qualities of brown imports?

Ladoga reported record production volumes in 2012 for its super-premium Imperial Collection Gold vodka, sold as Czar’s Gold in Russia, although exports are an increasing focus for the group.

Finally, as The Spirits Business goes to press, speculation has re-emerged that Oaktree Capital is again considering selling some, or all, of Stock Spirits.

Whether drinks firms show interest will depend heavily on the asking price, which was deemed too steep last time around, in 2011. One thing is clear, and that is international spirits are embedding themselves ever deeper in the cultures of many Eastern European markets.