MOSCOW. (Vladislav Grinkevich for RIA Novosti)
The Central European Distribution Corporation (CEDC), registered in the United States, is hoping to acquire a majority stake in Russia's Parliament Group before the year is out. Other global players may follow its lead. But for the time being, stiff competition, the die-hard habits of Russian consumers and unpredictable government policy are standing in the way of foreign expansion.
The Parliament Group owns three production lines and brands: Parliament, Harvest and 999,9. Since the end of the past year, analysts have talked about the owners' intention to quit the spirits market. They named Diageo, Bacardi-Martini and Campari among potential buyers of its assets. But the highest bid eventually came from CEDC, which owns the Zubrowka, Bols and Soplica brands and distributes Remy Martin, Jagermeister, Metaxa, Corona, Foster's, Jim Beam and Guinness.
On July 18, CEDC announced its intention to buy the Parliament vodka brand, which last year accounted for a mere two percent of the Russian vodka market. Its competitors are convinced that CEDC is more interested in the company's ramified distribution system and production assets.
Foreign interest in Russian assets is understandable. Russia is the world's biggest market for hard liquor. According to the market research agency Biznes Analitika, last year 2.4 billion liters of vodka were sold in Russia, to the tune of $15.7 billion (not counting public catering). But it is quite an ordeal to work on the highly competitive Russian market - last year it had 250 producers and more than a thousand brands. The five leading breweries control over 70% of the beer market, whereas the five major vodka distillers have a modest 27% of the spirits market.
For the time being, global companies have achieved nothing to boast of in Russia - the share of imported vodka is going down. Ukrainian producers are the only exception. They have gained a firm foothold in the premium sector, selling half-liter bottles for 150-250 rubles ($6-$10). This lack of success is easy to explain: price-wise, imported vodka cannot compete with the mass-produced brands in the medium-priced brackets and automatically falls into a narrow super-premium segment (over 250 rubles per bottle), more than half of which is controlled by Russian company Russky Standart.
Foreigners are not good at marketing their products in Russia. In the West, advertisers target young patrons of night clubs and bars who do not drain a shot in a single gulp, preferring to order vodka-based cocktails. Here in Russia, foreign suppliers also tried to promote vodka as if it were a whisky without scent or color that was good for cocktails. But conservative Russian consumers drink vodka straight, just like they always have. Besides, vodka has always been considered a drink of the masses, and it is no surprise that the growing middle class is losing interest in it. Vodka sales are also on the decline - last year they dropped by 10%.
Foreigners cannot sell vodka at cheaper prices because they do not produce it in Russia. Their competitors believe that foreign players are afraid to invest in Russia because its market is a mess without clear rules of the game. Fake vodka is still widespread. Some estimates put its share of the market at 40%. The state-owned company Rosspirtprom has calculated that in 2006 a mere 1.19 billion liters of vodka were produced legally in Russia, which is much less than was sold by reputable retailers. Government officials keep changing the rules of the game, which is not encouraging, either. It is enough to recall how the market was shaken by the introduction of the uniform state automated information system last summer. The bulk of producers had to stop work at their plants for a month, if not for two or three months.
These factors influence the price which foreigners are willing to pay for Russian assets. While estimating the value of the Parliament Group at $200 million-$300 million, experts believe that CEDC will not pay more than $40 million-$50 million, which may sink the deal.
The situation will probably change after Russia enters the WTO. When it does, major chain retailers will enter the Russian market and foreign producers will work with them here as they do in the West. That, after all, is how they are used to doing business.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
