In focus: Eastern and Central Europe

Russia offers a certain stability even if consumer confidence is fragile, reports Tom Bruce-Gardyne, who also considers the prospects for international brands across Eastern and Central Europe.

SB considers the prospects for international brands across Eastern and Central Europe

*This article was first printed in the August 2016 edition of The Spirits Business

Who knows whether Vladimir Putin danced round the Kremlin thumping his bare chest with glee when news came through of Britain’s impending divorce from the EU. The Russian president never breathed a word in public about Brexit beforehand, possibly because he didn’t need to.

It was widely assumed that he must be in favour as punishment for those EU sanctions. “And that should probably tell us all that we need to know,” the UK’s then foreign secretary, Philip Hammond, said darkly.
What we do know is that the markets hate instability and unforeseen shocks like Brexit, and on that score they might almost prefer the grim, yet stable, Russian economy.

“We’ve seen signs of stabilisation driven by the exchange rate,” says Yiannis Pafilis, Brown-Forman’s general manager in Russia. “The rouble is around 63-65 to the dollar, compared to the beginning of the year when it was almost 80. Performance is also a little bit better for us over last two or three months.”

At the time of writing the oil price had rallied to almost US$50 a barrel from its 13-year low in February and that matters hugely to this energy-dependent economy. Alex Ouziel, Bacardi’s MD for Eastern Europe and Russia, shares Pafilis’ cautious optimism.

“We’ve always had very quick rebounds,” he says of Russia’s periodic crises. “This time we always said it was going to be a slightly longer rebound, and right now we are 18-20 months into the crisis, so we’re about half-way through.” Aside from the oil price, he feels the recovery will take longer because of the currency, the sanctions and the fact there was a slowdown before Putin near-reignited the Cold War in early 2014.

Last year inflation was 15-17% while wages rose by only 5-6%. “This year we’ll see an improvement on that, with inflation expected to come down to 9%, or possibly better with the strength of the rouble,” predicts Ouziel. “With salaries up by a similar amount, consumers won’t see an erosion of their purchasing power.”

This year consumers won’t see an erosion of their purchasing power, says Alex Ouziel, Bacardi’s MD for Eastern Europe and Russia

Yet Russian consumer confidence is at rock bottom – the lowest in history, according to the latest reports. “But the feeling I have is that things are getting slightly better,” says Pafilis, who sums up trading conditions as “stable but quite fragile.”

Yuri Grebenkin, Beam Suntory’s MD of emerging Europe and MEA, says: “The current crisis is the longest since the collapse of the Soviet Union, but we have consistently grown our market share and outperformed others.” He insists the old dynamic of consumers shifting from local to international brands upon joining the middle classes remains good.

It may have been a tough few years, but he points to “the phenomenal growth in average incomes since 1993” and to “demographics – young consumers prefer imported brown spirits to vodka”. It is a similar message from Giampiero Maggioni, Gruppo Campari’s marketing director for the region, who talks of “value growth, especially at the premium end” despite “volumes declining 10-15% over the last 12 months”.

While shipments of international spirits have shrunk, Maggioni notes that “last year saw a lot of destocking of the market”. The high levels of stocks must have added pressure to price promotions and cushioned consumers from a collapsing rouble. “The intensity of promo right now is higher than it was six months ago,” says Pafilis, referring to the regular 50% price reductions around Christmas.

Maggioni believes discounts are not quite as deep as they were, though he accepts they have become a way of life. “Upper and middle class Russians are still buying more-or-less the same brands, but they’ll wait for them to come on promotion,” he says. As such they are not so different from UK consumers who have learnt to shop the special deals on spirits in the supermarkets.

How brand owners respond however, remains a dilemma. To join in with deep discounts might protect, or even enhance, your market share, but at what cost to your brand image and equity?

Maintaining a presence in the Russian market throws up many questions such as this for brands. For Gabriele Knigge, brand manager for Danzka Vodka owner Waldemar Behn GmbH, the challenges are worth facing. “We decided not to reduce our investment in Russia and Eastern Europe, which is paying off,” she asserts.

Obviously vodka still dominates with domestic production at 666 million litres in 2014. It was the lowest in modern Russian history, down 22% on 2013 thanks to a mass migration to moonshine, rather than any surge in sobriety. That tide is turning according to Synergy Group’s CEO, Alexander Mechetin. It seems the authorities’ crack down on illicit factories while implementing better tracking systems is bearing fruit. The Moscow Times reported official vodka production was up 30% in April-May versus the same period in 2015.

Synergy posted 16% growth in the first half of this year, while its vodka brands – entry-level Gosudarev Zakaz, mid-range Belenkaya and Beluga with its reported 70% share of the super-premium category – have done well. At the Ladoga Group, development director, Ruslan Grigoryev, reports half yearly sales of Tsarskaya vodka doubled to 330,000 cases. All being well he hopes to hit a million cases by the year’s end.

Beluga is reported to have 70% share of the super-premium category

Meanwhile the group has expanded its import portfolio to more than 200 lines including Janneau Armagnac and Loch Lomond whisky. For its part, Synergy represents Camus and William Grant, and this year began bottling Bacardi’s price-fighting Scotch brand William Lawson’s near Moscow.

Mechetin calls it “a big step for both companies to retain leadership position in the market”. Local bottling of western spirits is something Alex Ouziel believes “we’ll see a lot more of”. He feels it shouldn’t impact quality, and by bringing sourcing closer to the consumer and boosting the local economy, it will be “a good thing for the long-term”.

One international brand that is “almost perceived as a quality local brand” is Havana Club, according to its international marketing director, Nick Blacknell, who dates its presence in Russia back to the 1970s. “Imported from Cuba, it’s well-known and well-liked,” he says. “In the Black Sea resorts it’s a popular beach party drink.”

The rum category is growing, but there is stiff competition from cheaper, local lookalikes such as Diageo’s Shark Tooth.

“We were worried consumers would defect en masse,” admits Blacknell. “Some did, but actually our sales have been remarkably resilient, and we’re in growth.”

Among consumers he predicts a shift towards quality, well-priced western spirits, and a growth in premium, smartly-packaged local brands, saying: “Overall, it’s quite a complex market dynamic in Russia.”