Russia alcomarket

Russian spirits market 2013: new growth drivers needed to uncover hidden opportunities

Stas Marketing Group Opinion 2013

Page § 2

397348363355360

335327325298

252217

2006

197

2005

218

2004

221

2003

216

2010

158

2009

166

2008

177

2007

185

-38%

2012E

137

2011

136

2002

211

Volume, mn dal

Value, bn RUR

113105

918582

6249

38332822

2010

11

2009

11

2008

11

2007

9

2006

8

2005

7

2004

6

2003

6

2002

5

+3%

2012E

12 12

2011

Russian vodka market dynamics

Russian brandy and cognac market dynamics

Brand launches

Distributors development

Aggressive Promotion via

media channels

Resorting to fraud

Source: Russian Federal Statistics Service, Stas Marketing analysis

Four major factors have been driving Russian spirits market growth during last decade

§  Vodka: ZURABLI, FIVE LAKES, ZELENAYA MARKA, BELENKAYA, PUTUNKA, etc.

§  Brandy: STARIY GOROD, TROFEYNIY, KOMANDIRSKY, STARIY KOENIGSBERG, etc.

§  Active growth aligned with development of independent retail Exclusive brand teams paid by brand owners and working together with distributors sales force

§  Illegal schemes of writing off and reselling excise stamps to other companies

§  Illegal excise optimization schemes through using complicated factoring operations

§  New marketing channels §  Partial ban of alco advertising

stimulated creativity inside the industry

Series of unfavorable events devalue the market growth drivers

Reinforcement of alcohol market regulation

Excise tax increase and minimum retail price imposition

Re-licensing of distributors in 2011-2012

Banning of alcohol advertising in majority of media channels

Changes in consumers’ preferences

Source: Stas Marketing analysis

Brand launches

Distributors development

Aggressive Promotion via

media channels

Resorting to fraud

Basic growth drivers of Russian spirits market don’t work anymore

§  2009: Federal Alcohol Market Control Agency established as a body within Government

§  Up to half of distributors have lost their licenses and businesses in 2011-2012

§  New vodka brands cannot be successfully launched without aggressive advertising support

§  Middle class consumers slowly moving toward consumption of other products

§  Shelf space is limited – no chance for new brands to be placed on shelf

§  Distributors became unreliable partners with high risk of license annulation

§  Only in-store marketing and viral marketing are still available for spirits marketers in Russia

§  Illegal schemes are no less available for companies without special support and contacts in regulation authorities

§  170 RUR for 0,5l vodka, 280 RUR for 0,5l cognac, 250 RUR for 0,5l bandy from 01.01.13

§  New edition of advertising law place the total ban on all advertising activities except in-store and horeca promotion

§  Growth in consumption of non-traditional premium spirits

Page § 3

Russian spirits market regulation is becoming more and more restrictive

Sphere of regulation Possible alternatives of regulation measures

Price regulation Minimum retail price for vodka, cognac and brandy

Tax regulation

Product labeling

Production regulation

Sales and consumption restrictions

Drinking age limits

Time restrictions for sales

Advertising restriction

Loss-making sales are not permitted

Excise tax and special tax for alcohol sales (differ in categories)

Annual excise tax increase for alcoholic drinks with pure alcohol content>9%

Obligatory marking the product with excise label

Production site is to be licensed

Point of sales are to be licensed Consumption place are limited

State monopoly for retail sales of alcoholic drinks

Low-alcohol content drinks allowed from 18 years old

Any drinks allowed from 18

Drinks sales are limited within daytime

Full ban of advertising of drinks with alcohol content

Spirits advertising is banned. Wine and beer advertising is limited

No

Special tax

No

State monopoly (before 1994) No

No

Spirits allowed from 20/21 years old

No Drinks sales are limited to certain days of the week

Source: Stas Marketing analysis Page § 4

Weakness

Opportunities

Strategic alternatives

Strengths

Threats

EXTERNAL FACTORS INTERNAL FACTORS

§  Share of heavy drinkers goes down (Т1) §  Restrictive, even repressive state policy (T2) §  Product names line COGNAC is in the risk area

(T3) §  Market consolidation, high risk of aggressive

acquisition (T4)

§  Wide coverage of channels and regions(S1) §  Own production capacities (S2)

§  High level of quality control (S3) §  Successful brands of previous decade(S4)

§  Focus on low price segments (W1) §  Poor portfolio and cost management(W2)

§  Periodic Out-of-stock (W3) §  Sales team motivation schemes conflict

with business objectives and needs (W4)

§  Consumers income growth, switch to premium brands (O1)

§  Modern Trade and HoReCa upgrowth (O2) §  Changes in consumers’ preferences (O3) §  A lot of production capacity is available (O4)

Strategic alternatives for independent spirits company in Russia lies on the crossroad of internal and external development factors

SWOT-analysis of an «typical company» in spirits market (based on more than 50 projects in alcohol industry


Five strategic alternatives which can activate new growth drivers are developed based on SWOT-analysis of an «averaged company»

Export markets entrance

T4

S1 S2 S3 S4

STRENGTHS (S)

O1

O2

W1 W2 W3 W4

O3

O4

T1

T2

T3

WEAKNESSES (W)

Operating processes optimization

Focusing on private label production for third-party

companies

Focusing on premium market segment

OPP

ORT

UN

ITIE

S (O

) TH

REAT

S (T

)

Minimum risk strategy

Transferring production of own brand to the third-

party production facilities


PnL structure before 2012 *

PnL structure after 2012 *

Company with large sales volume/ value but low operating income

Focus on operation efficiency may affect sales decrease but surely significant increase in

operating income

* Estimation based on financial data of market leaders and outsiders

3. Export markets entrance

1. Operating processes optimization

4. Focusing on private label production for third-party companies

5. Transferring production of own brand to the third-party production facilities

2. Focusing on premium market segment

0

5

10

15bn RUR

Operating income

1 (9%)

Expenses

14 (91%)

Выручка

15 (100%)

0

5

10

15bn RUR

Operating income

2 (24%)

Expenses

7 (76%)

Выручка

9 (100%)

Only companies which increase it’s operating effieciency will have an ability to stay and earn in changing spirits market

Operating income increasing strategies


Distribution and logistics optimization

Sales teams incentive schemes optimization

Operating processes optimization strategy assumes following solutions in distribution, logistics and sales teams incentive schemes

§  Logistics strategy should be reengineered in order to avoid out-of-stock situations, especially in peak seasons

§  Client base optimization and clients regrouping allow reshaping commercial terms and conducting focused trade marketing activities

§  Sales team incentive scheme should be build to increase sales, reduce client debt and stimulate distribution

§  Wider use of non-monetary incentives.

§  Wider use of period / target motivation

Source: Stas Marketing methodology Page § 8

§  Regular cutting range tail (products generating less than 10% of total sales)

§  Uncovering new margin drivers and loss generators through deeper analysis of value chain

§  Implementing cost monitoring

Category management and costs reduction

Trade stock optimization

Operating processes optimization strategy assumes following solutions in category management, costs reduction and trade stock optimization

§  Reducing loans and interest payments through minimizing low-demand products stocks and production

§  Reducing warehousing and transportation costs

§  Increasing product turnover


More risky strategies are focusing on premium market segment, export market entrance and changes in production policy

Focusing on premium market segments Export market entrance

Private labels bottling for retail chains Outsourcing production

In the lack of advertising possibilities and growing appetite of retail bottling private labels might be a good opportunities for the companies with modern high-productive capacities

Focus on premium market with emphasis on modern trade and HORECA

§  Seeding and growing own premium brands

§  Regular valuation and acquisition of promising but yet small premium brands

§  Understanding priority markets

§  RTM (Routes-to-Market ) development for faster entrance in foreign markets

Middle class consumer is looking for new products as an alternative to old-fashioned vodka

§  Outsourcing own brand bottling abroad

§  Launching the brands looking similar to famous imported premium brands


For more info please contact

Page § 11

Andrei Stas Stas Marketing / Managing Partner [email protected] Kirill Safronov Stas Marketing / Senior Associate [email protected] STAS MARKETING – MOSCOW +7 499 504 1653 (t) +7 499 504 1654 (f) www.stasmarketing.com [email protected]

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