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| December 6th 2006 |
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| The evolution of the Russian wine market |
by Eleonora Scholes
After the fall of socialism, Russia was opened to numerous new luxury goods, including wine – and the past fifteen years have witnessed the emergence of a highly competitive wine market with key players, thousands of brands and constantly changing consumption patterns.
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For that reason, the Russian wine market remains, largely due to the lack of hard data and the age old stereotype of Russians drinking nothing but vodka, a curiosity to many observers. In absolute figures, vodka and spirits still account for two thirds of the alcoholic beverages consumed in Russia, with another quarter being done for by beer. Which leaves only 10 percent for wine. Stereotypes aside, though, Russia is statistically far from being a hard drinking nation. In 2003 its alcohol consumption peaked at 9.3 litres per capita, placing it 19th on the world list, behind France, Ireland and the Czech Republic. Further, Russia’s relatively stable economy over the past few years is leading to a new reality. Higher disposable incomes are reversing the trends and leading to a better appreciation of wine. The beer market, in the meantime, has neared its saturation point. Its growth fell from 10 to 5 percent over the past year and appears to be slowing even further.
Only thirty years ago Russians were drinking 17 litres of wine per head each year. Gorbachev’s anti-alcohol campaign of 1985 and the ensuing economic turmoil, which caused a sharp drop in personal income, nearly annihilated the wine market. By the mid 1990s wine consumption had plummeted to 2.5 litres. Vodka and spirits were seen as ‘better value’ alcoholic drinks. A slow recovery of the wine market began after the 1998 economic crisis. Current consumption is estimated at 5.1 litres per capita, with figures for wealthier cities such as Moscow, St. Petersburg, Ekaterinburg, Kazan or Novosibirsk considerably higher.
Currently wine is the fastest growing segment of the Russian alcohol market and is estimated at 730 million litres, having posted steady annual increases of 8% by volume and 15% by value over the past years. The Russian Winegrowers and Winemakers’ Association evaluates the total wine market at 2 billion US dollars.
Despite Russia’s image as a non wine producing country, it has vineyards in the south-western part of the country between the Black and the Caspian seas. Last year they reportedly accounted for over 190 million litres of wine. Since most Russian-bottled wine is blended with imported bulk product, it is hard to define what is and isn’t genuinely Russian wine. Moldova, France and Spain have traditionally been the key suppliers, but the current ban on Moldovan wines is shifting the focus to Spain, new European suppliers and Central Asia. New World countries, notably Chile and Argentina, are losing this segment of the market, but gaining in sales of bottled wine. Total imports of bulk wine increased last year by nearly 5% to 128 million litres. Total volume of bottled Russian wine is 320 million litres. It sells mainly in the lower price bracket, at up to 150 roubles, or (Ø4.5 ). The biggest success story on the Russian market, however, is that of imported wines sold in bottles. With the exception of a short period following Russia’s economic crisis in 1998, |
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this segment has over the past 15 years enjoyed dynamic growth in terms of both volume and value. With a 25% increase over the previous year, the total volume of imported packaged wine reached 400 million litres in 2005.
Moldova, Bulgaria, Georgia and France have led the wine import charts for a number of years. The picture, however, will dramatically change after 2006 as Moldovan and Georgian wines were banned from the Russian market earlier this year, ostensibly for health reasons.
A new round for imports Still light wines dominate the market for imported packaged wine, accounting for 93 percent of total volume. Until 2006 Moldova was the absolute market leader and supplied as much as 70% of all bottled wine. Cheap production, historic ties and favourable economic conditions have long made Moldova the prime source for the lower end of the Russian wine market. After the ban on Moldovan wines, other countries have jumped at the opportunity to fill the void, but there are limitations. New producers will have to compete at the highly sensitive price points of 50 to 100 roubles (€ 1.50 to 3) retail, which do not leave much room for quality offers. Good prospects have thus arisen for production facilities with bottling plants inside the country as well as for the less costly wines of Eastern Europe, table wines from France, Spain and Italy and entry level ranges from Chile and Argentina.
Imported bottled wines have firmly established themselves in the medium (150 to 300 roubles or € 4.50-9.00) and premium (>300 roubles or > € 9) price segments. While the former features inexpensive wines from European and New World producers, the latter range is as good as in any other serious wine market. It thrives on the names and labels of the world’s top producers, from Bordeaux first growths to New World cults. The sparkling wine category enjoys a significant share of the Russian market, but most of that volume is produced and bottled in Russia in tanks, with imported bulk wines often blended in for good measure. Average shelf prices range from 100 to 150 roubles (€ 3-4.50). This makes Russian sparklers an affordable and highly popular drink. Imported sparkling wines, on the other hand, play only a small part in the overall category with under 10% over the past several years. In 2005, Italy was the second largest exporter after Moldova, thanks largely to Asti wines with their good visibility and adequate promotional support. The Ukraine came third with its Crimean production, while France takes fourth place, largely represented by the leading champagne brands. Russian consumers drink 70% red wine; white wine takes about a quarter of the market, with the rest going to rosé. One particularity of the Russian consumer is that he still opts for off-dry or semi-sweet flavours, even in red wines. Dry wines play an important role only in the premium and ultra-premium categories, reflecting the more sophisticated drinking culture of this wealthier consumer group. A recent study |
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of wine sales in Russia done by the Business Analytics research agency revealed that over 50% of all sales come from the lowest segment of the market, below 100 roubles or € 3. The niche of premium and ultra-premium products remains small as well, at only 7% of the total market. Although a country with a population of 143 million, the actual income per capita is low, with the average Russian earning only 2,610 USD (€ 2,088) per year according to the World Bank. The situation is different in Moscow, St Petersburg and other key cities. Drinkers there, with much higher disposable incomes, spend more on fine wines. Moscow and St. Petersburg have the highest concentration of premium wines in their markets, reflecting the purchasing habits of a new class of wealthy consumers – and as long as world oil prices remain high, the Russian fine wine market will continue to grow.
The maze of pricing from a cellar in Western Europe to a shelf price in Moscow is kept opaque by the complex customs duties, transportation and certification costs as well as margins at the various levels of the supply chain. The excellar price plus transportation costs must be declared at customs, where 20% import duty, varying excise and 18% value added taxes are paid. Further, each label must be certified to comply with Russian wine regulations. An importer must also possess a valid license that allows him to import alcohol. A single license costs up to 100,000 roubles (€ 3,000), a general license 1.5 million roubles (€ 44,500).
Importers’ margins are generally dictated by the type of wine being sold. Products for the low end of the market generally have a higher turnover, and thus the margins stay lower at 10-30%. Wholesalers add another 10% to importer’s price. The pricing for premium wines is, however, different. The importer’s mark-up is generally 25-35%, sometimes up to 50%. Shops add another 50%, while a restaurant can multiply the wholesale price by 2 to 3 for expensive bottles, and up to 6 for entry level wines.
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