Turbulence hits the Russian wine market

Russia’s wine market had begun to bubble once again – and then came the pandemic. Sergey Panov reports on what has happened since.

Photo by Markus Winkler on Unsplash
Photo by Markus Winkler on Unsplash

At the start of this year, the Russian market looked attractive to exporters. By the end of 2019, imports of still wine had grown by 20% and sparkling by 15%, compared to the previous year. 

But the wine trade was suffering even before the pandemic hit. Russia’s economy is heavily dependent on oil, and when the bottom dropped out of the oil market, the ruble fell by 26%.  Then along came coronavirus. From March 30, all public events were cancelled, and restaurants and bars closed until June 26. Even now, around 90% of hospitality venues are at risk of bankruptcy.

While there are still some bright spots in Russia’s wine economy, the loss of the on trade will be keenly felt.

The on trade situation

Last year, San Pellegrino included five Russian restaurants in its Top 50 list for 2019. Vladimir Mukhin’s White Rabbit and Twins Garden by the Berezutskie brothers were ranked 13th and 19th respectively. This spring, Twins Garden had to find a new proprietor, and the famed CoCoCo in St. Petersburg closed. 

But it is the political context that is important. A vote on constitutional amendments is scheduled for July 1, which will allow Putin to be elected to the presidency twice more and to hold his chair for another twelve years. Despite 8,000 to 10,000 new coronavirus daily cases, Russian restaurants will open to generate optimism. Political observers point out that this is only a temporary measure, which will be repealed as soon as the amendments are passed.  

At first sight, this may not seem so terrible for wine producers, because HoReCa only represents 9% of wine consumption. However, it was the sommeliers and wine bar staff who were responsible for the increased popularity of Grosses Gewächs Rieslings and Loire Valley Chenins. Now producers have to ask: who will tell the story of their wine to the final consumer?

Wine in retail

While Russians have been spending less since the quarantine began, this has had no impact on their spending on wine. On average, total spending in retail has decreased by 14%, but spending in wine shops has grown by 23.8% in comparison to the same period in 2019. According to Andrey Ushakov, the marketing director of L-Wine, Russia’s number two importer by volume, sales in HoReCa fell by 80% to 90%. On the contrary, sales in retail and wine boutiques grew between 5% and 15%. 

Ten years ago, hypermarkets were the fastest growing retail format; in recent years, it’s neighbourhood stores that have grown. Both Metro C&C and Auchan have seen their market share decline, while the X5 retail group – which Deloitte put at number 42 in their list of Top 250 retailers – closes Karousel hypermarkets in order to open corner stores. The Okey hypermarket chain has also invested in the Da discounters. The biggest national wine and spirits seller is a chain of next-to-home small liquor shops, Krasnoe I Beloe (KiB); from 2018 to 2019, KiB opened more than 3,000 new stores, and was acquired by the Dixie supermarket chain last year. The consolidated company now has more than 13,000 stores across Russia.

Two important retail trends are the increasing use of direct import, and digitalization. In 2018, retail direct import accounted for 30% of all wine imports, increasing up to 35% in 2019. Last year, four of the top ten importers were retail chains, and the trend to import directly is increasing. 

Another trend is the collecting of consumer information and making personalized offers. X5 and Magnit are already selling anonymized customer data to their suppliers, putting a powerful tool in the hands of big brands. Brands can now customize targeted advertising in social networks and paid search, and track conversion into sales.
While the quarantines led to an exponential growth of e-commerce in other countries, the sale and advertising of alcoholic beverages on the internet in Russia is prohibited by law. The Ministry of Economic Development proposed an overhaul of e-commerce legislation to help spur an economy recovery; if a new law was passed, it would allow new players to enter the wine market. 

The current leaders of Russia’s e-commerce are Yandex Market, Ozon and Beru.ru, a joint venture of Yandex and Sberbank. Yandex and Beru already have alcohol sections, although functionality is limited to reserving goods in partner stores. 

But this is the kind of marketplace that eat markets. In 2011, Yandex launched Yandex.taxi, and in 2017 it bought their closest competitor, Uber Russia. In 2018, Yandex launched a restaurant delivery service; in 2019, Yandex.Eda opened dozens of dark kitchens, where dishes are made specifically for delivery. If existing alcohol distributors already face competition from each other, their new rivals will be even tougher competition: digital natives who can capture IP addresses, create customer segments, set up advertising in social media, and send SMS messages to those who viewed the ads.

How to stand out

One unappreciated factor behind the popularity of the wines of specific regions is the activity of that region’s marketing board. In 2018, for example, the German Wine Institute opened its Russian office after a long break. Last July it launched a Riesling week involving more than 150 wine bars and restaurants and Riesling sales almost doubled compared to the previous year. This year’s event has been scheduled for August-September and will involve both HoReCa and retail. Apart from this, there are only two more significant events on this year’s calendar: Russian Wine Days in October and California Wine Days in November. Other marketing boards activities are quite limited, such as Moscow Rioja Night 2019, which only involved six venues.

It would be naive to deny that a drop in GDP and a decline in Russians’ purchasing power will not result in a drop in wine imports. Nevertheless, though price pressures remain, sommeliers and buyers are proactively seeking out alternative regions and styles that offer a good price/quality ratio. It’s not unusual to find more Spätburgunders on offer in a Moscow wine bar than expensive Burgundy Pinots. In KiB liquor stores, Garnacha from Gredos is one of the bestsellers. There is still room for quality development.

Sergey Panov

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