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.

American wines made their long way to Russia back in 1990s and are still doing pretty well. With the tiny 0.6% of the total US exports, Russian consumer is obviously out of focus for the huge winemaking industry – but is it going to stay that way? Considering the volatility of wine market the question not so easy to answer.

Two-dimensional world

Statistics of the US wine imports to Russia show what many wine trade professionals would consider surprising.  More than 80% of all the US wines sold in Russia are cheap, mostly sweet or semi-sweet, mass-market wines branded Paul Masson, Carlo Rossi, Gray Fox, and others – the brands many Russians know since the early 1990s at the dawn of the introduction of legal wine imports in the post-USSR country. The wines can easily cost lower than 10 dollars in retail which is extremely low by the Russian standards (with import duties as high as 18%, many other taxes and margins, quality wines tend to start at around 15-20 USD).

Wine market insiders know what it takes to get Russian consumer to like the wine. Elena Kazakova of Whitehall, the distributor of Paul Masson, comments: “Paul Masson sells well because it has such a long presence on the market, such an uncommon packaging and considering all this – quite a normal quality and an attractive price”.

Like many other people in the world common Russians are stereotypically fascinated by Italian and French foods. And drinks, too. Below a certain price point you actually stop looking for regional diversity, but mostly start looking for the lower price, better package, nicest label, simpler taste (e.g. sweeter taste in Russia). This is what big US brands take advantage of. Some consumers buying these wines will never realize they are actually drinking wines from California. While easily excused, one can hardly call it the best motivation for buying the American. Producers of quality wines will need live, conscious people, knowing what they are doing.

Live conscious people

Although Putin does his best to make Russians hate America, there are things hard to control, especially with the development of Internet, a huge economy of imported goods and better relations between the countries on the visa regime questions. Apple helps a lot, too: with more and more people coming to the United States to grab their MacBook with 30% discount from the Moscow price. The connection between tourism and wine consumptions is so obvious that it cannot be ignored.

Being more expensive in general, these travels require not only a fascination and interest in the country, but also some financial means to pay five times more for the round trip than a weekly hangout in Turkey, a long established resort for the low-demanding. This means the US tourism attracts wealthier public in the first place, better educated – secondly, more focused on what they need – to sum up.

But do they need the American wines? Do they travel to the USA to drink wine at all? Actually, doesn’t really matter. If you see these wines every day in the restaurants there’s quite a big chance you’ll start trying at some point. And that’s what’s really happening, says Christina Monkus, the marketing director at Eurowine. “Visas are granted so easily, that I almost see more friends flying to the US than to Europe. Of course, they are introduced to local wines there, doesn’t matter if they fly to Cali or to the beaches of Miami. Some of them will even get inspired enough to collect these wines later”. Member of the board at Simple Group Sandro Khatiashvili agrees: “Compared to other countries, United States attracts wealthier people, which means they are more sensitive to expensive wines”.

Not only this. Russia is bound with the Americans much more than you might think. The so-called americanization of the culture has not stopped since the first McDonalds opening in Moscow in December of 1990. Consumerism is walking proudly around the country – Russians watch more American movies, buy more American clothes, go to the American bars. “American steak houses could be a great opportunity to promote the California wines on the market”, – says Olga Tuzmukhamedova, the head of the Russian office of the Wine Institute of California. “And it could be even better if the Russian government didn’t stop the imports of the meat”. Russia has banned the import of beef and pork from the US in February 2013 due to the traces of the animal drug ractopamine approved by the U.S. Food and Drug Administration as safe.

Ironically enough both the meat and wine imports are controlled by the Russian safety and sanitary watchdog RosPotrebNadzor with Gennady Onishchenko as a head of it. This institution is considered by many market players to be one of the reasons of consequent wine crises have been taking place in Russia since 2006. Onishchenko is often seen declaring controversial measures in support of public healthcare like staying at home during the opposition manifestations (not to catch cold) or banning Georgian wines imports. Or the US meat imports, as of 2013. He was also one of the people in charge of lobbying the new law on advertising that banned all the alcohol-containing products advertising  on TV, press and even the Internet.

André Tchelistcheff, the Russian pioneer who mapped wine America

While many of you might believe that there is a huge gap between Russia and the US in terms of wine history, it is not exactly so. Far from it – one of the major figures that put US wines on the world wine map was a Russian immigrant André Tchelistcheff, who was forced to flee the country during the tragic political turmoil of the 1917-20-th. He fought against the upcoming regime eventually moving to study agriculture in Czechoslovakia and then oenology and microbiology in the French Institut Pasteur and the Institut National Agronomique, finally finding himself working for the US winery Beaulieu Vineyards in Napa as a chief winemaker and a vice president. The technological improvement and the new winemaking philosophy he brought to the US were tremendous. Winemaking techniques we take for granted today have been a nanotechnology of that time – fermentation control, better vineyard management, use of small French oak barrels. Consulting numerous California wineries he gained a petname “the doctor” for his ability to “treat” badly made wines of that time. Among dozens of those at different time points were the famous Chateau Ste. Michelle and Columbia Crest Winery – just to give an example of his scale. Mr. Tchelistcheff died in the same region he first came to – Napa – in 1994 at the age of 92. Still, he liked to say: ”When I think of wine, I think in French”, pointing that he always remained too European in his thoughts and style of work.

Top of the food chain

Luckily, Russians have great examples of fine American wines on their tables too. Wine importers are looking for the ways to diversify their US portfolios. Many prestigious wineries have already been on the market for some time – Paul Hobbs, Ridge, Opus One, Sine Qua Non, Kistler, Pahlmeyer, Diamond Creek, Ste Michelle and others. But what kind of consumers buy these wines? Are they oligarchs looking for something besides Bordeaux? The good news is the answer is clearly “no”.

As Alex Krause, the exports director for Bonny Doon Vineyards that has some years of experience with Russia, puts it: “While certainly there remains a contingent of very wealthy consumers and still living oligarchs for whom price is no object, and the purchase of wine is perhaps more an exercise in long-suppressed conspicuous consumption, the reality as I see it for American wines sold there is that the broader class of consumers now purchase higher end wines at retail and consume them at home”.

Capacity of luxury

In 2011 McKisney Moscow released a report on the dynamics of the luxury goods’ sales in Russia.  This news could pass unnoticed for the wine media if the results weren’t so stunning and giving hope for luxury beverages producers. As it turned out, nearly 45% of all luxury goods sold in Russia was alcoholic beverages. Another 36% correspond to expensive clothes which leads us to an interesting point: Russians like to look great and to drink in an extremely luxury manner. Russian luxury market rose astounding 17% last year (2010-2011), said McKinsey. This corresponds to 5.3bn USD. At the same time the rise of the global luxury market was just 4% for the same time period.  Some wine market players believe that expensive alcohol products replace goods that Russians don’t buy due to the lack of culture, education and local conditions.

The shoe that fits

Russian wine-drinking style has its peculiarities. We are not drinking wines like the Americans do. In almost all cases we do not care about the food pairing. Wine is something made to drink alone. And that’s exactly why wine should have a personality of its own – loud and clear.  “New World wines are ideally fit to the Russian taste”, – says Christina Monkus.”Russians would choose these even more often if they were not obsessed with the stereotypes of French and Italian wines. We love friendly, fruity, bright taste. We do not want to spend 15 minutes trying to understand what’s in a glass. We like to be blown away with taste”.

Vlada Lesnichenko, the director of the premium Grand Cru wine shop network sees American wines stylistically fit to the Russian taste: “There is a growing interest in the US wines and in part it can be explained by our similarities in terms of food and wines style. Reds – fruity and rich, powerful but soft with a good potential, but ready for drinking at the same time, round, but with high alcohol content. Whites – dense, oily, close to Burgundy style but easier to approach. Simplicity and clearness is the main reason to choose an American wine for many of our consumers”.

Of course, simplicity is not the feature of such “monsters” as Opus One by Robert Mondavi and Baroness Philippine de Rothschild. Sold by several wine distributors as an exclusive offer, this wine remains a flagman of the US winemaking in Russia. Market experts speculate that this wine is liked by the technical prime-minister Dmitry Medvedev. Speaks for itself, really.

Stop counting

While the cheaper supermarket wines from the US can be found at as low as 200-300 RUB (7-10 USD), other demonstrate much higher prices. Russian wine market stays very fragmented and consumers are either looking for a bargain at the low end or buying wines at 200-300 USD a bottle. The middle-priced US wines are what we are currently lacking.

The bastion of wine business in any country – the law of price/quality ratio, so often quoted by wine pros all over the world, doesn’t work well in Russia. “Forget it”, – says Khatiashvili. “Russians do not choose their wines based on price / quality relation. With quality wines people choose brands, and then goes price”. This is also true because of the shifted price structure for any wine in Russia. Paying at least a double price for any bottle of wine compared to the same bottle price in Europe is what Russians are used to do. Unfortunately “at least” is a keyword here. Restaurant prices could add another 100-300% depending on the owners’ boldness. And it’s not necessarily a bad thing for the American bottlings. “At least, no one will stare at you if you order a 200 USD bottle of a New World wine in a restaurant any more. This snobbish “drink France” attitude is mostly a matter of past now.” – agrees Monkus.

Private clients of the wine distributing companies – the most important asset for trading top US wines – are generally happy with how the American wine evolves. Wealthy Russians, frequent travelers to Europe and the US, are appreciating the shift towards lighter and more elegant wines with less barrel ageing (in whites, overoaked Chardonnay, specifically). “The industry is moving in the right direction there, globally the style is changing for better”, – says Khatiashvili.

Geographically speaking seems like Russia is a great spot for the Californian reds. Alex Krause is very straightforward: “It’s bloody cold in Russia most of the time, thus primarily [we sell] reds. I think in general wines that sell in the US for $15-20 have the largest potential for doing volume in Russia”.

Lesnichenko agrees specifying the potential of American Zin: “Our clients recognize Zinfandel which shows great both in middle and top wines – lush, rich and powerful, quite fruity, but with soft tannins, a bit creamy, it attracts many”.

The dark side

Of course, the difficulties of working on the market are substantial – both on commercial and educational and promotional sides. With the new advertising ban and limited possibilities of conducting wine tastings that are of tremendous importance for wine promotion, Wine Institute of California has to adapt to the new rules. “New legislation makes us invent new ways of wines promotion. We are tending to work more with the chefs and connect the wines with fine dining. We also used to run activities with the meat producers and importers, but the new ban on meat severely damages our initiatives”, – says Olga Tuzmukhamedova and adds: “The other difficulty is bringing to Russia samples of wines not currently present on the market – for our big annual tasting, for example. Officially these samples have to pass a long, expensive and bureaucratic customs control, which makes the whole event impossible to organize properly this year”.  And these problems are painfully familiar to any wine promotional body working in Russia.

It’s true more people are drinking better wines in Russia, but with no government support of healthy wine consumption and the increasingly banning practices most Russian populations is still unaware of the “wine issue” in general. The arrival of a younger flock of wine bloggers and enthusiasts helps, but the overall result is still quite modest. “There is no real knowledge even about the basics of wine”, – says Sandro.

US wines are also considered generally more expensive in 10+ USD price category – mostly due to high domestic consumption and the lack of motivation for the middle and top producers to come to work to Russia. Russian wine importers themselves are usually seeking either the entry-level wines possible (with unclear identity) or the most expensive wines (leading to low volumes of sales and a low PR-impact). “There’s no middle point”, – confirms Tuzmukhamedova.

More players, more wines

Despite all said and the difficulties, the market for American wines seems to be rather alive than dead. Most experts agree that the US wineries need a dedicated wine importer who realizes the niche and demand for the American wines and is ready to promote their American identity despite discouraging circumstances. And while some Russian importers still do not see the real deal for the US wines, others are taking advantage of this still fairly uncompetitive market. The interest to the market is heated up by the market growth figures and the intentions of such big players as Diageo and Constellation to strengthen their wine positions in Russia with their American middle range wines. On the other end, expensive US wines are also selling surprisingly well, with Russians wine importers having to ask to increase their “quotas” for top bottlings.

So what are we talking about here: a little spring or a potential waterfall?  If the first stage was just a simple Paul Masson era, the second – a fast ingression of high-end wines, then the third and so awaited wave will be the arrival of more mid-level fairly-priced wines with a clear American identity able to approach a consumer who counts money and involved enough into the US story. Say, a 30+ proactive wine lover of new generation. Who has maybe even seen the famous Sideways movie.

This shortened version of this article first appeared on Russia beyond the headlines, May 21, 2013

Anton Moiseenko
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