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The Russian market

Alcohol taxes dent the market but economic recovery will bring new packaging opportunities

Regina Maiseviciute Euromonitor International

Alcohol taxes dent the market but economic recovery will bring new packaging opportunities.

Vodka is without doubt the most popular alcoholic drink in Russia. In 2010 alone Russian citizens consumed 1.5 billion litres of this drink via the retail channel, 45% of all global consumption. Per capita consumption of vodka in Russia is 21 times higher than on average globally.

But this high consumption brings problems. It is estimated that up to 600,000 Russians a year die from alcohol related diseases or by accidents caused by intoxication. Alcoholism is openly perceived as a country wide problem.

It was only in 2009, the Russian President and the Russian Government expressed concern about high alcoholic drink consumption in Russia. Following this, alcoholic drinks tax hikes have been presented as a measure to fight alcoholism. However, the massive increase of taxes started before this, in the early 2000s, and was purely for revenue gathering. It is not clear if increasing taxation is effective in fighting alcoholism and it may cause even greater harm to the domestic alcoholic drinks industry as it boosts illegal consumption of cheap substitutes.

Historical precedent has repeatedly proved the futility of such sweeping initiatives as well as the – temporarily – catastrophic effects for both legal sales and public health in the country. For example crackdowns were launched in 1958 and 1972, while a period of prohibition lasted from 1914 to 1925. Short-lived as much as short-sighted, such attempts only exacerbated the problem by opening the floodgates for illegal production to thrive.

The last legislative overhaul, instigated by Mikhail Gorbachev, to only be unceremoniously withdrawn in 1987, adopted the now all-too-familiar approach of price rises and severe restrictions on sales and resulted in a gaping black hole in the state's finances; along with a couple of thousand additional deaths from poisoning through the consumption of industrial alcohol.

What happened?
During 2001-2010 the excise tax on vodka increased by 140%, from RUB88 to RUB210, with further increases planned for 2011, 2012 and 2013. In addition from 1 September 2010 it became illegal for all off-trade outlets including kiosks and supermarkets to sell vodka between 22.00hrs and 10.00hrs in most regions, including Moscow. It was, interestingly, the same month that Russia's head of public health chose to step forward, calling for a blanket ban on all advertising of alcoholic drinks in the country.

Vodka was not the only alcoholic drink which was affected by rapidly increasing excise taxes. Up to 2010 beer was practically a non excisable alcoholic beverage; however now it is considered a regular alcohol. Taxation on beer caught everyone by surprise. The rate of excise duty for beer increased 200%, from RUB3 to RUB9 per litre in 2010. This increase will continue in 2011, up to RUB10, and in 2012, up to RUB12 per litre. Beer, having ridden the growing westernisation trend in Russia for the best part of the last decade, and being well positioned as a healthier alternative to spirits, saw its newfound place in the Russian sun come to an abrupt end.

Six months on from the introduction of this latest set of measures and both vodka and beer sales in the country are feeling the pinch. According to Euromonitor International's latest research, vodka posted a volume decline of 5% in 2010 in Russia, in line with the downward trend witnessed over 2005-2010 when beer was a primary benefactor. However in the same year beer then saw a virtual collapse in sales, with a near 10% dip, a sobering finding if ever there was one, especially considering the category's bullish performance before the recession.

Taxation and alcoholic drinks packaging
The major decrease in beer sales affected retail sales of alcoholic drinks packaging, in particular metal as one of the more expensive pack types for beer. According to industry players some beer manufacturers reduced their orders for metal beverage cans by 30%, concentrating on cutting costs and shifting to cheaper PET bottles. As a result retail unit volume of metal beverage cans in beer dropped by 32% in 2009 and by another 8% in 2010. And general consumption of all beer packaging dropped by 11% in 2010, reflecting the severe measures in beer taxation.

In white spirits, of which the majority is vodka, glass packaging is the most widely used pack type. This pack type was doubly hit, first by the overall drop in consumption and then by loosing share to PET bottles, a relatively new pack type for this category. As such in 2010 retail unit volume of glass packaging decreased by 5%.

The difficult alcoholic drinks market in Russia has forced alcoholic drinks manufacturers to look into alternatives. For example beer manufacturers are diversifying their business into non-alcoholic drinks. Since 2009 and through 2010, beer manufacturers such as Pivovarennaya Kompaniya Baltika ZAO and Ochakovo OAO have started production of their own carbonates (kvas Klebniy Krai by Baltika ZAO, carbonates Ah! by Ochakovo) and bottled water (Zhivoy Ruchey by Baltika and Luchezarnaya by Ochakovo).

This move into non-alcoholic drinks, where PET bottles are common, has provided these producers with the facilities and expertise to further push PET bottles in the beer market, eroding the share for other pack types.

Forecast: Potential for premium products
Currently Russian citizens are drawn towards cheaper alcohol over premium offerings reflecting the poor economic climate in the country. However Russia is quickly recovering, for example the percentage of households with annual disposable income over US$25,000 grew from 4% in 2005 to 14% in 2010. Forecast economic growth is very positive, with 52% of households expected to exceed this threshold by 2016.

This highlights future the potential for sales of premium products in premium packaging. Beer manufacturers will continue their uphill battle to capture or maintain share in a shrinking market and will increasingly turn to premiumisation to appeal upper-middle income Russians. As for vodka, exports and a focus on higher-end varietals will be the strongest responses to volume consumption declines in this category.

The economic recovery should bring opportunities metal packaging to reassert itself. One metal packaging format that has made a niche for itself as a premium packaging format in alcoholic drinks is the metal bottle. While use of metal bottles remains insignificant to date, the growing premiumisation of alcoholic drinks in Russia is expected to open up new opportunities for this pack type.

Report by Regina Maiseviciute, Packaging Analyst at Euromonitor International

Image courtesy of SXC

1 June 2011