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IWSC Market Insight: the Russian wine market 2020

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The phrase ‘Russian wine market’ might sound incongruous, but Russians are wine drinkers both historically and by nature. It was for Tsar Alexander II, after all, that Louis Roederer developed Cristal in 1876.

This isn’t to say that Russians have been drinking fine Champagne for 150 years, but the westernisation of the elites and the middle class started by Peter the Great hasn’t been slowed by 70 years of communist rule, nor by Vladimir Putin. No, the reasons Russia isn’t the world’s leading wine consumer are not cultural. Rather it is political and economical realities that have hampered the development of wine culture and consumption in Russia

Russia is a hard market to break into. Some wine producers continue to think it’s a magical land where bottles sell themselves but the reality is strikingly different. There are wineries, though, which have been doing great business whether their focus is on hotels, restaurants and cafés (the HoReCa segment), or the off-trade: specialised stores or big retail. As a result, organisations such as Wines of Portugal and Wines of Germany have seen an increase in the average bottle price sold in Russia and decided to increase their promotional activity in 2018-2019.

Wines, not spirits

One paradox of the Russian market is that it is wines, not spirits, that have shown the greater growth over the last few years. According to the chairman of the Beluga Group, vodka sales in Russia have halved in the last 15 years. Deloitte’s 2019 CIS report shows around 60% of Russians favour wine, while only 36% prefer vodka.

Alcohol sales in Russia are strictly regulated by the Unified State Automated Information System (EGAIS), which requires every wine bottle to carry an excise duty stamp (so preventing the sending of samples). EGAIS is controlled by the alcohol market regulation body (RAR). In common with many government systems, it’s regarded with a good deal of suspicion – many market players openly consider it corrupt.

There is very little free flow of information about the Russian market. Wine advertising was banned in 2013 both online and offline. The government, however, is keen to push local production – especially from Crimea – so the legislation has been softened and now wine advertising for Russian wines is theoretically possible, if not widely practised. Social media users and wine bloggers remain relatively unchecked, no matter what their user base is.

Importers

Overall there are around 60 notable specialised importers and distributors in Russia. Despite their ‘enigmatic’ Russian ways (as Winston Churchill said), importers play the same role in Russia as in the other parts of the wine world. A great importer with a professional and passionate team can do great things for a winery; a lazy or unfocussed importer will fail.

In most cases the importer distributes across the entire country: there are regional operators but they are rare. Agreements mostly suggest exclusivity, but big producers with a substantial number of SKUs often share their portfolios across several importers. Most distributors established in the 1990s and 2000s are still operating, but new, smaller players have also appeared as the market matures and trends evolve.

“Classic” importer-distributors (eg Fort, Simple, Alianta, MBG, DP-Trade, Marine Express, Vintage-M, Luding and others) started in the 1990s and have been instrumental in developing the market, educating people about wine and bringing big international brands to Russia. They carry a wide range of wines and spirits; some, like Luding, are more focused on entry-level offerings, while others, like DP-Trade, work with more upscale wines. These operators normally deal with all sales channels.

A number of spirits producers – for example Ladoga in St Petersburg and Beluga in Moscow – have also developed wine portfolios. Some companies that started as spirits distribution businesses (like AST) play an important role in the wine scene and have developed strong and diverse wine portfolios.

In the 2000s a new wave of companies appeared and quickly claimed market share with serious educational programmes, focussing on sommeliers and catering to a younger clientele: Vinoterra, Grape, L-Wine, Classica, Vinicom are a handful of examples. Then there are small, niche players targetting new and dynamic market segments like grower Champagnes and biodynamic and natural wines. Many of them are start-ups run by former employees of bigger companies. Two examples are Real Authentic Wine, focused on biodynamic and natural wine, and Wine & Only for “hand made” wines.

The retailers’ share

Retail accounts for the lion’s share of the volume side of wine sales: in 2019 food and alcohol made up one third (31%) of Russian household expenses (Deloitte CIS report, 2019). And in recent years, retailers have been gradually moving in on importers’ territory, cutting them out of the supply chain and taking care of their own imports.

Most big international retailers haven’t managed to get a foothold in Russia — there is no Wal-Mart or Carrefour here, although the French chain Auchan and the German Metro Cash & Carry are the two international brands that seem to be doing a pretty good job in moving volumes across Russia. The biggest national retail group is X5 Retail with chains like Pyaterochka, Perekrestok and Carousel, but there are other big players including Lenta, Magnit and Diksy. Wineries normally don’t deal with them directly, unless they are a very big (and mostly entry-level) producer. Top-tier retail is limited to Moscow and St Petersburg – the Azbuka Vkusa chain is the strongest player in this category, with no real competition. They, of course, carefully curate their own wine portfolio.

Specialised wine and spirits retailers

There are specialised wine and spirits retailers: some belong to wine importers, but the biggest are independent entities. The development of chains carrying affordable goods shows that the Russian consumer likes shopping close to home. The main players are Krasnoye & Beloye (“Red & White”, around 5,000 retail outlets), Bristol (2500 retail outlets), Otdokhni (around 200 outlets) and Aromatny Mir (“Aromatic World”, around 500 outlets)

Price is, of course, the major factor with retailers on this scale, but quality has been improving over the years. In wine terms it can mean wines become drier and more sophisticated and we are seeing more regional styles (like wines from La Mancha in Spain or inexpensive Gruner Veltliners from Austria) making their way onto the shelves.

Tax and excise: the cost of importing wine

The Russian government has been steadily increasing taxes despite the demonstrably obvious logic that if you want to persuade the population to move from spirits to wine, you need to lower excise duties for quality wines. Wine importers have been unsuccessful in fighting this, just as they have been unable to oppose the advertising ban of 2013, the online wine trading ban or other unpopular measures.

Up to the end of 2019 the excise duty was around €0.26 per litre (for still wines), but from 1 January 2020 it was almost doubled to €0.44 per litre. The excise duty for sparkling wines is much higher (it was also raised, from €0.51 to €0.57 per litre). Both still and sparkling wine duties are expected to be raised further in years to come. There’s also a 12.5% customs duty and 20% VAT.

Importers’ mark-ups vary greatly depending on the nature of the business and its sales channels; HoReCa, and private client businesses might see 400-500% mark-ups, while off-trade specialists are more moderate, going as low as 40-60%. This is not to say there’s nothing in between, but most Russian wine importers prefer to over-inflate their price lists in order to be able to give impressive-looking discounts later; and Russian consumers love discounts.

Hotels, Restaurants, Cafés (HoReCa)

Despite the crises that hit Russia on a regular basis, the restaurant segment has been dynamic for several years. The 2015 anti-sanctions that cut the country off from important EU produce (cheese and meat for example) stimulated local farming and led to the re-birth of interest in Russian cuisine. Restaurants in Moscow and St Petersburg have been gaining serious international reputations – two Moscow restaurants, White Rabbit and Twins Garden, were at 13 and 19 respectively in the “World’s 50 Best Restaurants” list in 2019.

The on-premise market is highly concentrated in Russia’s two most outward-looking cities, Moscow and St Petersburg. Both are dominated by restaurant groups, such as the long-established Novikov Group, Dellos Group, Ginza Group, Alexander Rappoport’s restaurants, catering for a 45+ age group. Others include the young and ambitious White Rabbit Family, Perelman People, Twins Group and Probka Family.

Freedom within constraint is the best way to describe the management of wine lists in Russian restaurants. Most groups have a chef-sommelier overseeing the overall concept of the group — Ginza, Dellos, Perelman and Twins are managed this way. Others, like Novikov Group and Rappoport, allow individual restaurants more autonomy. Their wine lists carry the names you will likely find in major international cities.

There’s definitely wine life outside of Moscow and St Petersburg, albeit on a lesser scale. Restaurants in the bigger cities of Ekaterinburg, Rostov-on-Don, Novosibirsk and Kazan are booming, and their passion for wine is clear. The former Olympic capital Sochi also seems to be waking up in terms of new openings.

 

The full version of this appeared on IWSC website on the 9th of June 2020.

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