Illicit alcohol in Russia ‘generally not affecting’ imported spirits

28th July, 2017 by admin

Recession and high taxes have driven increasing numbers of consumers towards illicit alcohol in a market where official volumes are down – yet prestige is making headway. Kevin Rozario asks how legitimate brands are handling the Russia conundrum.

Recession and high taxes have driven increasing numbers of consumers towards illicit alcohol in Russia

*This article was first published in the April edition of The Spirits Business

There remains a chill in the air for Russian spirits. The sector has endured sustained annual contractions in volumes since 2014, according to Euromonitor, and the market analyst forecasts further declines this year and next of -3.3% and -2.1% respectively, with the difference between 2018 and 2013 down a colossal -15.9%.

This looks bad, but the volume losses have been at the ‘value’ and discount end of the market, whereas prestige and premium lines have done much better, resulting in some uplift. In dollar terms, Euromonitor data shows that both the off-trade and on-trade have grown over the past three years, although the off-trade has done significantly better, climbing by 3% in 2016 compared with the on-trade’s relatively stagnant 0.8% rise. Within spirits, rum was the pace setter, followed by liqueurs and whiskies, then white spirits – predominantly vodka.

Long-lasting trend

Georgij Grebinskij, lead analyst at Euromonitor International, says: “If we look at sales of alcoholic drinks in Russia and per capita consumption, we observe a long-lasting negative trend.” He notes that in terms of per capita consumption, converted to pure alcohol, there was a substantial decrease from about 12.3 litres to 8.7 litres over the 2009-2016 period.

Grey-market channels, smuggling and ‘alternative’ alcohol have also been increasing in Russia, exacerbated by a stricter tax regime. “In the light of constantly growing excise duties for the majority of alcohol categories, consumers have been switching to illicit alcohol, such as counterfeit spirits and even surrogates,” notes Grebinskij. Surrogates are not alcoholic beverages but products such as cosmetics, for example, that may contain alcohol but are not made to be consumed, and therefore do not attract high taxes.

Economic woes

The rise of counterfeit alcohol has taken a significant toll on the market as the perfect storm of tax hikes, soaring inflation and lower incomes fuel demand for illegal products. A February report from Russia’s Ministry of Trade estimated that a whopping 70% of the alcohol market is illicit or counterfeit.

Euromonitor puts the illicit trade of vodka in Russia at around 30%-50% of total sales, so while the official data shows a decreased volume trend “we have rather observed a redistribution of spending from legal to illicit alcohol,” says Grebinskij. “Illicit trade and the fight against alcoholism stand behind the market dynamics, and while the statistical figures show a strong decline, these other factors hide the real picture.”

That fight is not easy, given that official sources put annual consumption of alcoholic surrogates at 170m-250m litres, leading to a recent spate of deaths. Drinks companies are concerned by the trend – but are aware, too, that, so far, not all brands or sectors are being directly affected.

Dmitry Kimelman, marketing director at Rémy Cointreau Russia, points out that the illicit alcohol problem is mostly relevant to the local vodka segment. Jevgeni Linko, export manager for Russia and CIS at Estonia’s Liviko agrees, saying: “Illicit alcohol is mostly affecting the cheapest categories of spirits and Russian-made spirits. Imports are not generally involved.”

Jägermeister’s Stefan Schneider

However, Moscow-based Oksana Pevtsova, vice president and managing director of Eastern Europe at Bacardi, notes: “Previously, it mainly affected local vodka producers, but bootleggers have started to counterfeit international brands, and the capacity is multiplying every year. We see an increasing number of cases of poisoning from products carrying internationally-known labels.”

Stefan Schneider, regional vice president of Eastern Europe/Pacific and global trade marketing at Jägermeister, adds: “Illicit alcohol sales negatively affected key official vodka producers, as most price-sensitive consumers were switching and volume decreased significantly. This also had some negative effect on imported spirits, as official vodka companies distribute international brands and, with lower market share, they had fewer resources to develop premium portfolio sales.”

Surrogates spectre

Pevtsova’s point about poisoning was underlined in December, when 74 deaths in the Irkutsk region were attributed to methanol poisoning from drinking bath lotion as a cheap alternative to regular alcoholic beverages.

The government has stepped up its counterfeit fight in response. Last year, there were attempts to improve transparency and control in the drinks industry, including the closure of factories making illicit spirits as part of an end-to-end monitoring of alcohol production under the EGAIS system. “This resulted in the growth of mainstream vodkas of compliant producers from Q2 2016 and a decrease of illicit spirits share,” says Schneider.

Pevtsova believes that multiple measures, “including balanced excise policy to encourage consumers not to consider counterfeit products during times of economic difficulty”, are the way forward. “If excise is reversed following the presidential order, we could see good news in favour of this fight,” she says. “For international brands, the impact on volumes is probably not that big, but there is an issue of public safety and the equity of our brands.”

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