American wines: gambling on Russians

There is no easy way to say it. Wine market in Russia is subject to serious diseases – with subsequent choking and loss of conscience. It’s violent, it’s turbulent. It’s bureaucratic and irrational most times. Ah, yes – it’s corrupt, too. Wine is widely and openly treated as a serious problem by the Russian authorities. Wine is a political instrument for the relations with the former USSR-bloc countries. There are banning taxes and even greater margins in the major networks and wine shops. You would probably ask – why would any sane US winery be willing to be here? Obviously – there are reasons.

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The castaway market

In the second half of 2011 I was consulting a well-known British wine merchant. The topic was entering into business with the Russian wine distributors and have wealthy Russians buy wine stocks and hold them in Britain — an understandable desire.

It is widely known in Russia that the best wine distributors in Russia are usually those who actually import wines themselves. So, it’s kind of a vertically integrated business structures — one department imports wines, other department sells wines, and another one promotes and markets wines. Another company or department might be a structure owning a network of wine shops, but this is not a necessary thing.

The mere nature of this interest from the British side was the desire to make business on those wealthy Russians who are wise enough to be aware about the price margins they pay when they buy expensive bottles in the country. Yes, it usually is minimum 50% higher than you expect to pay in Europe, even in restaurants. This figure becomes completely volatile when we move away from Moscow where savvy consumer restrain those margins from skyrocketing.

What the British didn’t consider seriously was the amount of government control and beaurocracy involved in any Russian business, as well as the economy instability and political situation that pushes business risks in the country to heaven. I might say that the resulting extra margins one can make in Russia are what often attract foreign investors to the country. Yet, wine business seems to be one of the most regulated and hard to deal with in Russia.

After some meetings with the importers we seemed to find several major problems in regard to supplying wines from UK to Russia: first of all, weak legal basis and competence of Russian wine importers’ lawyers — they know how to work in the Russian market but they usually have no idea how to build international contracts with third parties (not direct wine suppliers like negociants in Bordeaux). Russian import legislation requires lots of documents to support any bottle entrance and you cannot send a bottle via DHL or any service of that kind.

Secondly, wine importers here would rather prefer less headache and maybe less money than establishing a brand new service for their clients wishing to buy wines abroad — but with lots of paperwork and worries about keeping the client. At last we can imagine that a wealthy person would finally decide to exclude a middleman from the chain. This also corresponds with the competence of the sales staff that is simply not ready to deal with such cases on the regular basis.

And, third, Russian consumer is still buying wines for immediate drinking in 99% of cases rather than for the purpose of laying down. There are, of course, big cellars here — bit these people are usually kept by the wine importers as their golden reserves and the contacts are held in top secrecy. Afterwards, maybe they prefer to buy wines at much higher prices and have much less choice, but to have a good local supplier who speaks their language.

High and dry in Russia

In 2006 the importers and producers of alcohol products estimated their losses as a result of implementing the new regulations system called EGAIS as much as $1 bn. In the beginning of 2010 the imports almost stopped once again.

Summer 2011. Despite all the efforts of wine importers trying to do their business and provide wine culture as opposed to the beer / vodka culture, Russian officials represented by organizations with hardly pronounced names Rosalcogolregulirovanie and Rospotrebnadzor are making the life of importers even more miserable.

I am told that wineries’ representative can hardly believe it when they hear what’s happening on the Russian market. They just fail to understand why would the government officials invent so many rules that have no other explanation of existence than those of stupidity. Or, let’s keep it more clear, existence of greed, money-to-pocket flows and corruption.

This summer isn’t a relaxing time for virtually all wine importers in Russia, oh, no. The new game invented by the above mentioned regulations bodies is called «Get a new trading license». This is a striking addition to the recently adopted and UPGRADED certification system for each and every alcohol containing product that you bring to Russia. Well, you might not have heard of it if you are not dealing with Russia yet. But if you do, you might already have received a number of screaming emails and phone calls from your importer in Russia asking you to send your appellation rules, thorough description of the production process and of each wine as well. And, forgot to mention, have all of those docs legalized and apostiled.

Now it seems all of those were just minor problems in comparison to the danger of losing the trading license. I mean, why would you bring all this wine to Russia if you cannot trade? The process of getting new licenses is hard and connected with bureaucracy, bribes (obviously), long queues (you can image how many would like to renew their licenses at a time) and waiting for the final official confirmation letter. Which is sent to your company by ordinary mail, by the way, and can travel a week or two and still not reach your mailbox.

From my personal talks with wine importers I have a feeling that not all of them might survive this process and have their new licenses approved. This especially refers to the smaller companies with less buying power (in all the meanings of the word «buying»). Lucky are those big players who were big enough to create another trading company and get another license for it. At this hard time they are still capable to trade running all the business through another company, whose trade license hasn’t expired yet. All the rest just have to stop all the sales. Which means losses, losses and more losses threatening their businesses.

My personal advice to the wineries — be patient to your Russian fellows. This is not their fault their own government prefer money in their pockets, not in the Russian economy. Or are they just being stupid? Well, both factors might collaborate to this situation.

Russian sanitary regulator eases the pain. A bit.

Russian certification and regulating body – Mr. Onischenko’s RosPotrebNadzor  (in plain English – the Federal Bureau Supervising Customers’ Rights and Human Well-Being) – has just issued a document that partially eases the burden on the wine importers in Russia and on their partners abroad. The document dated 13.12.2010 reads among the other things that there’s no need to apostil and legalize the copies of the documents certifying the safety of the product and the documents can be signed by any certified translator or an attorney.

Should we be happy with this small favour? I don’t think so. This is a mere drop in the ocean of what has to be done to civilize the wine market.

Russia’s wine sales’ golden month

December. It’s a magic word for every wine importer and distributor in Russia. You can see why – they say about 40% of all yearly wine sales take place during the New Year time. Yes, Russia doesn’t have a traditional European Christmas time from 24th of December, but people relax during the long holidays that usually last from the 1st of January and finish in the middle of the second week (10th, 11th). Usually Russians buy a lot of alcohol in advance to sit comfortably at homes for several days and to eat their favourite “Olivier” salad (called Russian abroad).

I can confirm that the usual sales per month usually multiply during December, especially before the 15th when it’s the right time to buy for all the major corporations – they will have their corporate parties somewhere in between the 10th and 25th and thus have to plan in advance. Aside the corporate parties the second major source of cash flow during this period is wine gifts for corporate clients, partners and staff.  It’s typical for oil & gas companies, banks, consulting companies, advertising and PR agencies, actually almost all of them do this. Except those where alcohol is prohibited as gifts by the corporate policies. Huge amounts of cheap plonk is sold during this time – as well as huge amount of fine wines. The latter go as gifts to the major partners and clients. Wine package is crucial at this time of the year.

I never could’ve imagined what may restricted Champagne supply do to a Russian wine importing company and its business. Let me assure you – the company may be shaken starting from the lower managerial level (clients are raged with Champagne absence!) and finishing with the owners who lose their major profits. Especially during this 2010, when new stupid regulations of the Russian licensing bodies seriously complicated the process of documents preparation on the side of a wine producer (not mentioning wine importers, who are used to those «nice» presents of the Government). We already heard stories of Baroness Philipinne de Rothschild having to run herself to the notary company in Bordeaux to make sure all the documents are certified as they have to. I do hope they are not anecdotes! The same concerns to the Champagne producers who are not fast enough to realize that any delay in certification during this extremely hot period may lead to import collapse and, thus, to zero sales.

This is also the time to buy for all the private clients. Lots of them will flee the country for this period to ski in Austria or Italy or to go diving in the Maldives. Anyway they tend to open their bottle of Cristal or Veuve Clicquot here, in Russia.

Moscow is a fascinating view at the New Year’s eve. If you have ever travelled here – you know that Moscow traffic is as horrible as that of Mexico D.F. Now imagine what happens when all the people from around Moscow and Muscovites rush to the city center to buy their presents! And now – imagine that the delivery service of a wine company has to work during this time twice, three times harder. Our warehouse switches to almost 24/7 work schedule, cars are loaded early in the morning and till the 22.00 in the evening. And because most of the Russian wine importers still have little desire (and funds) to invest in modern warehouse facilities, they turn into bee hives with once important difference – these bee hives are far from being in order.

Orders, orders, orders, urgent orders, no Champagne, no packaging, take what we have – this is how it works this year. You can have 600 bottles of top EUR400 champagne sold out in seconds if you are not fast enough to reserve some of it for your client. It’s a competitive world, a world of fighting for orders and clients.

The good news is we are still able to satisfy the majority of the clients – especially those who think and plan in advance. Merry Christmas and a Happy New Year!

New regulations threaten wine business. Again.

If you are a foreign winery exporting wine into Russia, then you do remember 2006 – the EGAIS scandal with new licensing and stamps that delivered Russia from most of fine wine for some 2-3 months when we were astonishingly observing empty shelves where the imported wine used to proudly stand. Since then the market has almost recovered.

But the Russian government and the Ministry of Mr. Onischenko do not sleep. All this time their minds were actively working on new barriers to make wine imports even harder. And a new Customs Union between Russia, Belarus and Kazakhstan gave a really nice opportunity to create some new sophisticated bureaucratic tools to benefit well on wine business. New licensing was the first bird in winter 2010 – all of a sudden the importers were put in front of the fact that they have to re-certificate most of their bottles. If you remember that EGAIS (the electronic system controlling the turnover of the alcoholic products) was set up to cancel some stupid paper licenses. But in 2010 the licenses came back – and amazingly EGAIS was not cancelled. The new rules also made almost impossible to send wine samples to Russia via ordinary transport companies like DHL or TNT. But this is a minor problem compared to the others stupid rules we have now. Continue reading

Medvedev stops wine imports

European leaders should point Medvedev better

We live in interesting times, when the Russian wine market is just being formed. Surprisingly, in contrast to the civilized wine markets the wine market in Russia is much more affected not by demand, economic situation, the efforts of winemakers or even the power of major importers (who would have thought!). In Russia the wine market is influenced by the foolishness of the officials.

We’ve seen this in 2006, when wine disappeared from the shelves as a result of the actions of a human being called Onishchenko. The month of August is a month when everyone is expecting political and economic upheavals, it seems that January will soon have a very bad reputation for the wine market. Importers had good New Year sales – enough! I am rocking my brain to comprehend Mr. Medvedev when he declares a war on alcoholism and the war affects everyone except the enemies who would be, for example, vodka producers and importers.

January the 11th has become another «Black Monday» — dozens of trucks with wine are stopped on the Russian border. And the reason for that is not brainless bureaucracy; it’s rather a Customs Union of Russia with Belarus and Kazakhstan. As it turns out from now on the importers of wines should arrange imports in quite a different way. RBC-Daily explains the way it should be: «Within the framework of a Customs Union on its territory there’s now a list of goods subject to prohibitions or restrictions on imports from the third countries (except the countries – members of the Union). These products must pass a licensing process. The web-site of the Federal Taxation Service reported on the 29th of December that a single list of goods will come into effect starting the 1st of January 2010. Still, vodka, tequila, and some other spirits imports fall out of this new rule”.

I have heard that only fools make the same mistake twice. I don’t want to repeat what others have written about the necessary documents and the nature of those new rules. The situation in 2006 is repeated with high precision: of course, the agency issuing those new licenses is not ready for this (they haven’t yet woken up after the Big Russian Holidays). Not only they aren’t ready, but we can foresee they won’t be in the coming several days, more likely — weeks. As Maxim Kashirin (Simple) puts: « Minpromtorg should issue those licenses, but currently has no idea how to do that”. Media sources claim that a one day car delay costs about 250-300 euros, but it seems to me that media is hugely mistaken, 2500-3000 euros seem a more realistic figure given the missed earnings. Total losses of the wine importers may again reach tens of millions of dollars, as we already have seen in 2006. I am not taking into account that this money will miss the State budgets as taxes, wine drinkers  won’t receive their wine, representatives of government and businesses will again fray each other’s nerves. But someone is about to win, for sure. Somebody will gain political points, somebody will use this fact as an excuse to declare that the country began to drink less.

The other obvious winners are vodka importers. Again, gives a lot to think about. If the importer sagaciously stocked with wine just before the New Year — lucky you! And what about the country? The country should know its “heroes”.

Cristal changes importer

It’s official — the world-famous Champagne House — Louis Roederer — has changed its wines importer in Russia. This news was a tremendous result of almost 2,5 years of negotiations the Champagne house has been conducting with different importers in Russia. Obviously not satisfied with the job done by his former importer Vinicom, the management chose Simple as a more promising deal.

Simple’s management stated that never before has Russia been give that big allocation of Cristal champagne, initially blended for Russian Tsar Alexander the Second in 1876.

Hidden losses of Russian wine importers

vinicom logoI never stop wondering about the communication abilities of Russian wine importers. You will get unbelievably surprised looking at web-sites of those who represent the most famous brands in the world. But most of Russian importers don’t bother themselves with communicating – why should they? A long living and well-established importer — Vinicom — is a good example.

It’s not a secret that weaker companies lost some of their producers during the financial downturn 2008-2009. Another big established importer — Simple – for a long time was known for its aggressive behavior on the market. Just recently Simple has taken two famous Champagne brands from other importers – Laurent-Perrier from Kazumian and Gosset from Graft Trading (seems like they went bankrupt, their web-site not responding).

And that’s not all. Another established importer Vinicom seems to be losing some of its producers. The very same Simple has just overtaken the imports and distribution of the famous Cognac house – Hine. My sources told me the cognac house was very unhappy of the way Vinicom staff works and obviously not happy with the sales in Russia.

And this is not the first time Simple attracts a producer from Vinicom – Villa Sparina from Italy’s Gavi was taken on board just about a year ago.

Still, on Vinicom’s poor web-site anyone can see that both Villa Sparina and Hine brands are still on the list. I even don’t think that this is done on purpose to delude its customers – they just don’t care about their customers coming to their web-sites. The same way you can see the strategy of Kazumian – Laurent-Perrier Champagne still listing on their web site.

Importing wines to Russia: easy to start, difficult to handle

I sit down with Maxim Kashirin, one of the owners of fine wine importer and distributor Simple Wine Co and the owner of the Grand Cru wine boutiques in Moscow to talk about the structure and current performance of the Russian wine market.

«I’d say the overall structure of the wine trade in Russia is more similar to that of Japan. First, Russia imports virtually all of its wine, although it possesses its own production. Second, we have no historical preferences to wines from specific wine regions like some other countries. The rest of the system is fairly traditional: there are importers who have the right to sell wine to retailers or directly to final consumers and to the on-trade. If a company wants to sell wine in the regions then it has to look for a distributor.

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Russian wine importers go bankrupt

Magister Bibendi logo

The global financial meltdown caused a serious damage to some of the major players in wine imports in Russia. Several small and middle-size wine importers have already stopped their operations and the producers they deal with have to seek new importers. Quite a known company Magister Bibendi used to import New World and Spanish wines and stopped operating on the market some time ago. Its director, Oleg Osipov, a former head of a leading wine importer Whitehall, had to close the business down and even sell some of the private assets to cope with the situation. The Saint-Petersburg importing company Svarog seized its operations in Moscow too. Some of the other leading wine importers do lose their producers to the crisis natural selection – if you can’t sell the wine, get rid of it faster.

Ineffective EGAIS

Dmitry MedvedevRussian officials like to do things first. And think afterwards. This happened in 2006 when the shelves of  wine stores suddenly became miserably empty – everybody seemed to return to the “good” old days of the Soviet Union. This was a result of a new government alcohol controlling system – EGAIS, that was enabled 1st of January 2006 and led to great losses for the whole wine trading business. Wine importers were obliged to sell all the wine with brand new excise duty stamps which haven’t even been printed in required enormous quantities by that sad moment. At the same time a very uncomfortable and poorly-made full-of-bugs software needed to be installed at wine importers offices to comply with the new regulations.

Well, 3 years passed by and at last the government seems to have heard the voices of Russian wine importers. During the 26 of May meeting with the top entrepreneurs Dmitry Medvedev suddenly replied to Maxim Kashirin’s proper questions regarding the necessity of the ineffective EGAIS system. Medvedev actually said that he’d never believed in the system and it needed to be revised carefully. The President gave appropriate instructions to his ministers Kudrin and Shuvalov to work out some suggesting on the system restructure. By the way, Simple Wine Co owner Maxim Kashirin also pointed out that the expenses to service the system continue to rise for his company – twofold – and now it’s 114 000 rubles a month (US$3650). This is a minimum package for a single company, it includes 4 workplaces to maintain the system.

Still there’s clear evidence that the EGAIS software developers do take advantage of their monopolist position on the market and state higher prices for different companies. Rosstat says there’s more than 170 importers of alcoholic beverages in Russia meaning they can earn more than 665 million rubles (about 21.4 million U.S. dollars). And they surely can make a market of the software updates. Not necessarily a fair market.