Weekly analytical column of Vadim Drobiz
Week April, 04 2016 – April, 10 2016
Vadim Drobiz – Head of the Center for Federal and Regional Alcohol Market Research (CFRAMR)
The most quoted in the Russian media expert on the alcohol market of Russia, former Soviet republics and Eastern Europe. The latest news, detailed analysis, commentary, statistical databases on the alcohol market since 2002.
Full versions of the materials published in Russian on the website Vadim Drobiz http://cifrra.info/
Email: alko-pr59@yandex.ru
Briefly…
Today, the Russian state has a net profit from alcohol in the form of excise duties and value added tax of more than 300 billion rubles a year, even with the fall production of legal vodka in 2015. With the exchange rate at the beginning of April 2016 ($ 1 = 70 rubles) 300 billion rubles corresponds to $ 4.3 billion.
According to the Russian statistics agency Rosstat for 2015 the price of alcoholic beverages in Russia grew by 7.7%. Since the beginning of the current year – by 2.1%, for the month of March – by 0.9%.
At the time, the Soviet Union shared with Spain third largest producer of wine, followed only to France and Italy. Gorbachev’s prohibition cut down 200 thousand hectares of vineyards. The country has lost its own place in the market of production of grapes and irrevocably destroyed several unique varieties. At the same time the existing Russian vineyards not contaminated chemistry as eminent European, simply because purchasing imported chemicals are expensive, and it can save twice as organic.
The well-known Russian economist Igor Nikolaev noticed one contemporary “amazing” phenomenon in the Russian industry: in the Russian Federation falls the production of almost all kinds of goods and services, and only increased the production of yeast and just by 40.3%. This is easily explained – the reason for such a sharp rise in demand for yeast is moonshining mass of the population.
Medicine and alcohol…
I found a good foreign medical material (good – because honest!) What is behind the “spectacular” discoveries in the field of medicine and healthy lifestyle? How many times have you read that red wine prolongs life? And how much of that alcohol is harmful? Often articles of publications contradict each other. In the case of competing editions it becomes mandatory aspect of the struggle for the reader.
Why should not believe in “spectacular” discoveries in the field of medicine? In American Journal of Medicine published a study that may help answer this question. “… From 1979 to 1983, in scientific journals had announced about 101 the openings in the field of medicine. All they had to help deal with a variety of diseases, but only five have entered the market over the next 10 years, and only one widely used until now. The new assumptions that contradict all previous experience, are often wrong …”
There is a thousand-year experience in the benefit of wine and alcohol in moderation: evidence of that – the preservation of man and his culture in at least the last 2000 years …
Alcohol and budget
I have already mentioned here that in the USSR in 1970-1980-s alcohol gave about 5-6% of revenue in the budget. For comparison: in 2015, alcohol has brought only a little more than 1% of revenues to the Russian budget. And what was before the Revolution, in tsarist Russia? Statistics says that in those days the state budget by 20% -25% was covered by taxes on alcohol. At the same time, according to official statistics, at the turn of the 19th and 20th centuries in Russia per year per capita consumes only 4 liters of alcohol! (Obviously underestimated by official statistics figure!) In fact, in the country was incredible drunkenness! Then the production of alcohol and tobacco monopolized by state.
It would be a disaster if ever again in Russia is 20% -25% of the budget from alcohol. This will mean full economic degradation – we simply will not have any economy in the country in such numbers. And tsarist Russia, no matter how much it did not admired individuals, in the period 1885 – 1917’s was just economically backward agricultural country. While at the same time and excellent built warships, and railroads with locomotives, and weapons made good, etc. But in general, the country has been severely economically backward.
Russia’s “import substitution”…
(From an interview with the owner of one of the Russian retail chains…)
– We had to give up part of premium goods, for example, from frozen snails. Also, there is a shift in demand segments: beef has become expensive and people are buying cheaper pork. Those, who bought pork before, switching to chicken. A chicken lovers now prefer simply to fry potatoes. That is, consumption remains at the same level, but seriously reduces the quality of food … Alcohol also belongs to the group of goods, for which demand falls in the population. And here comes the same flow of consumers in the lower price segment. And those, who drank before cheap alcohol, now switching to illegal drinks and surrogate.
– Is there any food shortages in the country today?
– There is no shortage, including through reexports. Forbidden by Russian “anti-sanctions” Polish apples began to be supplied to Russia via Belarus. When and this channel is blocked, the Poles began to send apples in Serbia, which was not included in the list of countries to which Russia extended “anti-sanctions”. There apples repacked in other boxes under the guise of Serbian and delivered to Russia. And these “Polish-Serbian” apples, because of the double repackaging and additional distance, rising in price. Today, according to the certificates, we sell Azerbaijan tomatoes, but how in a short period of time in this country appeared the new greenhouses and such volumes of production, history is silent. However, it is well known that Azerbaijan has a great relationship with Turkey and very likely this is Turkish tomatoes, which are banned for direct deliveries to Russia.
In the premium segment the story is the same. If in restaurant to order oysters and ask the owner where they were taken, he replied with a smile: “From Tunisia.” And we realize that in fact they from France, but under the certificate of the country, does not come under “anti-sanctions”.
Error of the authorities? ..
In the current difficult economic conditions in Russia should take steps to strengthen the demand from the population. But Russian authorities have relied on the support of producers. In the entire history of any national economy failed to emerge from the crisis without the resumption of effective demand of the population. Therefore, the government antirecessionary plan would be to focus on stimulating consumption, but this did not happen one and a half years of crisis. The turnover of Russian retail trade in 2015 fell by 10%, the worst figure for the last 45 years. In 2016 the trend is maintained, while the real incomes of Russians to the beginning of the spring fallen for 16 consecutive months.
The economic crisis is changing the consumer behavior of Russians. It begins to dominate the savings model of consumption. As a consequence – a steady increase in interest from both buyers and retailers to their own brand (OB). Today, almost all retailers who are engaged in their own brands, fix the increase in demand for them – their share in the average check is steadily growing. Experts explain this state of affairs the new economic reality. The fact that more than 70% of Russian consumers have started to save, including food products.
Ukraine
Experts have called, in their opinion, the most effective mechanism for combating with counterfeit alcohol. While the state distilleries will sell “gray” alcohol, there will be an illegal alcoholic products on the Ukrainian market. According to government authorities of the country the shadow alcohol market in Ukraine is not less than 40%. (Very similar figures observed in the Russian alcohol market!)
Over the past few years it has not been established any prerequisites for reducing the amount of illegal products on the alcohol market. Some actions of the state only contributed to an increase in its amount. For example, a sharp increase in excise tax, which is paid by the buyer. New excise taxes take effect from 1 March 2016. They grew by 50% – up to 105.8 ukrainian grivna (UAH) per 1 liter of pure alcohol, or $ 4 at the exchange rate at the beginning of April this year.
In addition, selling prices for ethyl alcohol were increased from 1 April this year. This decision was adopted in mid-March the state monopolist “Ukrspirt”. The rise in price of ethyl alcohol “Luxe” was 18.75%. Increasing the value of the ethyl alcohol company explains the rise in price by 30% of the grain from which it is produced, and by 16% – electricity. Thus, the price of half-liter bottle of vodka increased from 55 to 74 UAH ($ 2.8), growth of 35%. All this in a difficult economic climate and the low purchasing power has led to the reorientation of consumers to the illegal, but more price affordable product and a surge in home moonshine.
It is worth noting that we are talking exclusively about the strong alcohol. The share of counterfeit wine production is very small because it illegally to produce economically disadvantageous.
Today in Ukraine there is a state monopoly on ethyl alcohol production – the main component of vodka, which is concentrated in the hands of the group “Ukrspirt”. And while the state distilleries will sell “gray” ethyl alcohol, there will be illegal products on the Ukrainian market. According to Ukrainian experts, the most effective mechanism for combating with counterfeit alcohol is privatization of distilleries. (It is worth noting that in Russia today there is an opposite trend. There is now distilleries in private hands, and Russian government wants to introduce a state monopoly on ethyl alcohol production!)
The principles of state regulation of the alcohol market
I am often asked: “What are the principles of state regulation of the alcohol market?” The last one came from France. My opinion on this matter as follows:
Firstly: the regulation of the alcohol market – it is always “playing with fire”, it is difficult and dangerous. We must always remember that 80% of the adult population in almost every country will consume alcohol (except for those where alcohol consumption is limited cultural traditions, religion, economic factors, etc.). It is always the most active, healthy, energetic group of people, which develops its own state, its economy and society. Of these 80% – to 10% -15% – will abuse it.
Second: adjusting the alcohol market, the state thus intrudes into the sphere of private life of this large group of people. And most importantly – in the sphere of obtaining pleasure! Therefore, a maximum caution and deep consideration the psychology of consumer behavior.
Third: Do not allow to process of regulation of alcohol market of various deputies, officials, ministers, who will try to make on this a PR company. It is necessary to add also the doctors and public organizations that have a strong influence on decision-making by the state. Their opinions are often biased and subject to certain opportunistic considerations. But the influence of these groups of people in the European and North American countries are not very significant, since any prohibitions and restrictions are ridiculous at maximum affordability of alcohol for all social groups in these countries. It is quite another to Russia, where alcohol is expensive and prohibitions and restrictions only push consumers in the illegal sector of alcohol or moonshine.
Fourth: only adjusting restrictions and prohibitions cannot have an impact on the final consumer in the right direction to reduce alcohol abuse. The degree of excessive alcohol abuse in country define those consumers who abuse alcohol. And the prohibitions and restrictions tend to hit the moderate part of the consumers. As a result, the effect is zero.
Fifth: the real goals and objectives of alcohol regulation as follows:
– most importantly – the safety of products for the population;
– enough to comply strictly with quality standards;
– the formation of a reasonable culture of consumption;
– the formation of a reasonable structure of consumption;
– correspondence between the real physical needs of the population in alcohol, its income and the legal alcohol prices;
– reasonable anti-alcohol advertising and education;
– the legality of production and fiscal policies;
I knowingly put legality and fiscal in last place – it’s the final indicators of efficiency of alcohol policy. If you do everything correctly and competently, it will be illegal not more than 10% -12% of the market (so historically in Western countries in the last 30 years). And excise tax will be collected safely. Then no meaning if certain industry sectors (production, sales, etc.). will have state ownership. It is already at will; If the state wants to problems on his head and discredit government institutions – please, let them do it. If not – then let it be a private business.
Russian market of beer and malt
| Year | Manufacture of malt,million tons | Production of beer,billion liters |
| 2010 | 1.01 | 10.29 |
| 2011 | 0.96 | 9.94 |
| 2012 | 1.22 | 9.55 |
| 2013 | 1.11 | 8.31 |
| 2014 | 1.07 | 7.66 |
| 2015 | 1.06 | 7.30 |
The largest brewing companies in Russia
| Name | % of the total beer market in volume amount |
| Балтика (Baltika) | 33.6 |
| САН инБев (AB inBev) | 13.9 |
| Эфес (Anadolu Efes) | 13.4 |
| Хайнекен (Heineken) | 12.8 |
| Moscow Brewing Company | 3.7 |
| Other | 22.6 |
If every Chinese person would buy a bottle of Moldovan wine…
Moldovan winemakers have long dream of the Chinese market, especially after the loss of the Russian. Currently, there is 1.1 billion people live in the age permitted for consumption of alcohol. As they say in the Moldovan wine industry, if every Chinese would buy a bottle of Moldovan wine, it would solve most of their problems. Over 2014 customers in China was sold 4.3 billion liters of wine (including grape wines – 2 billion liters) of almost $ 40.5 billion. Since 2009, sales of wine in volume terms is growing by an average of 7% per year, and is projected to continue the growth trend of about 6% to 2019 per year. The five largest wine suppliers in China in terms of volume included France, Chile, Spain, Australia and Italy. The share of Moldovan wines in the segment – less than 1%. Studies show that in recent years the Chinese market has been focused on the mid-price segment, as in the country continued to campaign against bribes and expensive gifts to officials, as well as the economic slowdown. Because of this, in China significantly decreased sales of wines of “premium” class.
In quantitative terms, wine consumption in China inhomogeneous. The largest – in the eastern part (6.9 liters per capita) and the smallest – in the north-western part of (0.5 liters). In retail sales of natural wines are the most popular red wines (74%), due to its color symbolizing prosperity. Sparkling wines in the country are the smallest sales (in liters), but they have the highest prices for a bottle of the product – almost three times higher than other wines. They promoted as drinks for weddings and celebrations.
When importing Moldovan wines in China is subject to the following taxes: excise duty is 10% of the cost, duty- 14% for wines and 65% – for fortified wines, VAT – 17%. Therefore, Moldovan winemakers are asking their government, following the example of Chile, to conclude an agreement with the Chinese authorities on the duty-free import of wines. Currently, because of the duties, Moldovan wines difficult to compete with Chilean and Spanish, which are the most affordable of the imported products.
The Chinese, in principle, know little about wine, so Moldova may come to the market on an equal footing with other countries. In Europe, the Moldovan wines difficult to compete with a very strong culture of Italian, French and Spanish wine. In China, Moldovan wines can have a success, and they begin to be present there.
(In my opinion, this is all from the field of fantasies Moldovans, Georgians, French, Spanish, Australians, Italians, etc. On the Chinese wine market are not so simple…)