Is Eastern Europe ready to ditch local spirits?
Glimmers are emerging in the tough Eastern European market for global brands as consumers seem to be ditching their local pours. Tom Bruce-Gardyn asks if this a trend that will last?
Ask what makes Eastern Europe such an exciting prospect for western spirits and the answer can be distilled to just one word: potential. International brands are often conspicuous by their absence, particularly outside the big cities.
In Russia they account for 5% of the spirits market, while in neighbouring Ukraine the figure is a mere 2% according to Pernod Ricard. Add in all the unrecorded consumption of illicit spirits and homemade “samogon” (moonshine), and the share would be even smaller.
Yet the tide is flowing in a westerly direction and it would appear to be irreversible. Recorded spirits consumption in the region fell 1% last year, with significant decline in Russia and the Slovak Republic, according to a report by market research company Canadean. The firm’s analyst, Ian Browning, says that, “unless tax burdens ease, many will be unable to afford the luxury of buying branded goods”.
In April, The Moscow Times claimed legal vodka production in Russia was down 17% in the first quarter of the year, while its illicit cousin is reported to have a staggering 55% share of the market. Duty is set to rise 20% in 2015 and 10% the year after, though Prime Minister Dmitry Medvedev is allegedly considering a freeze on spirits tax.
Christian Porta, Pernod’s chairman and CEO for Europe, Middle East and Africa, believes opportunities for growth are “mainly driven by the switch in consumers from local to international spirits”.
The latter achieved a CAGR of 4% from 2007-2012, while the former fell 3% (IWSR). Rising duty rates may be helping by narrowing the price gap between the two, yet to simply extrapolate the past into a linear projection and talk blithely of “huge potential” for western brands may be naïve.
“Yes, it could well be ‘famous last words’,” says Euromonitor analyst Spiros Malandrakis. “The truth is all in the detail whether you’re talking short, medium or long-term. In the short-term there are some severe headwinds.” He urges spirits industry bosses to study carefully what happened to Carlsberg — a major player in the Russian beer market since 2008.
The intervening years have seen the market shrink on the back of a 200% hike in duty and a complete advertising ban. Then, just when things couldn’t get much worse, Moscow attempted to annex Crimea in March. For Carlsberg’s CEO Jørgen Buhl Rasmussen, this unforeseen political crisis has had “a very negative impact on the Russian macro economy”.
In May the Economist published a gloomy assessment of the country, claiming: “The boom that once seemed to justify its inclusion in the BRICs is over.” Shortly afterwards the IMF revised its growth predictions for Russia to just 0.2% for 2014, which effectively means recession.
However, despite these “severe headwinds”, Malandrakis believes the long-term prospects for the region are encouraging, especially for Scotch and Bourbon.
A key goal for Pernod in Eastern Europe is to outpace the competition, so Porta was delighted to announce a 12.2% jump in net sales, including Africa and Turkey, in the nine months to March compared to a 0.1% fall for Diageo.
But Russell Jones, Diageo’s marketing director in the region, remains determinedly upbeat. He describes it as “a short-term blip” and says, “whisky still only accounts for 3% of spirits sales, and there’s no reason why over the next 10–20 years there shouldn’t be a continued trend from local to premium imported spirits.” He believes it’s happening irrespective of the geo-political situation, and points to “serious double-digit growth for whisky in the last 12 months”.
Scotch remains the biggest international spirit in Russia, and worth around £260m according to the Scotch Whisky Association (SWA), based on sales of 3.9m cases last year. The big volume swirls around standard blends priced at RUB 5-600 (£8-10) and competition is ferocious.
Bacardi’s price-fighting William Lawson’s blend was in the lead, but Jones insists White Horse has re-gained pole position with 32% growth (AC Nielsen), with Bell’s, Johnnie Walker and Ballantine’s charging along behind.
Meanwhile “the upper end of blended Scotch has been hit by slightly harder times,” he admits. Chivas Regal claims to have the edge over Johnnie Walker Black Label, but sales slipped 1% in the nine months to March, while The Macallan is Russia’s top-selling malt.
Much depends on how you define the whisky category, and whether you include Irish and American. Torsten Helbig, Beam Suntory’s regional VP, says: “The further east you go, the less people differentiate between them.”
Lumped together, he reckons Jim Beam is now “number four, and closing the gap on number three” within premium whisky. Beam came late to the party, “only entering the game seriously two or three years ago,” says Helbig. “Our growth is close to 30%, but it’s slowing down. It is getting tougher, there’s no doubt about it.”
Jameson says it became Russia’s favourite premium whisky in 2011-12, and while some might dispute that, there’s no doubt the Irish brand is well-established there. This was the first big new export market it developed after South Africa following Pernod’s acquisition of Irish Distillers in 1988.Success is put down to having the right marketing mix: a differentiated taste, strong Irish roots and Jameson’s so-called “dudes” communication platform.
Competing Irish whiskeys like Bushmills are having to grow “in the dark” with Russia’s advertising ban helping to protect established brands at the expense of new entrants. “We’d love to make Gordon’s gin big here,” says Russell Jones, but he concedes the ban “will make it slightly harder”.
And yet as Spiros Malandrakis points out: “In this day and age of social media, there is not so much focus on the ‘old world’ of TV and magazines.” While the restrictions extend to digital media, from banners to YouTube promotions, the worldwide web is not Kremlin-controlled, and the impact is certainly less than it would have been a decade ago.
Despite being a long way from Mexico, Russia is Tequila’s second biggest export market after America, and the culture of drinking spirits neat or in shots clearly works in the spirits’ favour.
However, at Beam- Suntory, owner of Sauza, they don’t sound entirely convinced. “Eastern Europe is primarily about whisky, with some pockets of interest in other spirits,” says Helbig about the non-vodka category.
“You see a lot of value-for-money Tequila emerging there, and while Sauza’s still an important focus, the category is slipping in value creation.” Rum is another matter, and Jones is clearly excited about Captain Morgan’s prospects, quoting a growth rate of 64% compared to a 15% fall for Bacardi, the market leader. “We believe Captain vs Bacardi is a battle we can win,” Jones says.
To help convert Russians, Diageo created Shark Tooth – a locally-produced rum launched last June. “It offers the taste and emotional benefits of an imported brand, but at an accessible RUB 300 (£5),” says Jones. “That’s towards the top end of local vodka.”
On which note, vodka still reigns supreme in Eastern Europe, the more so the further east you go. It is true that domestic brands are being squeezed from below by untaxed spirits and there is migration to western spirits at the top end.
That said, no-one should underestimate the sheer scale of domestic vodka, nor the desire of local brands to reinvent themselves as modern, consistent good-quality spirits, which a new generation of consumers can be proud of.