Email This Post - Print This Post Print This Post

sparkling_wine

By John Helmer, Moscow

Stealth warfare against the Russian economy may be encouraging capital outflows, but for Russians on the home front, glasses are still being raised with a growing volume of sparkling wine or champagne going down the hatch. Abrau-Durso, the only Russian winemaker listed on a public stock exchange, is also going up, and like the bubbles, defying threats from Washington.

Even if falling consumer incomes and worsening economic prospects threaten the rate of growth in Russian consumption, Russia is “still the most promising country in the world for the consumption of wine products,” declares Vadim Drobiz, director of the Centre for Research on Federal and Regional Markets for Alcohol (TsIFRRA) in Moscow. “This remains the fact even if the entire world is tired of wine, and economic crisis is pushing down on consumption. Seventy years ago, in France, Italy, Spain, Portugal, Argentina, and Chile annual wine consumption was between 120 and 150 litres per capita. Now they drink 40 litres. In principle, this decline will continue, as wine is replaced by beer and strong alcohol. In 1985 in Russia, we consumed 21 litres, but now 4.5. We’ve declined by almost five times over the 25 years. Although the figures have been even lower: in 1995 the consumption was 3 litres of wine per capita. So we are improving since then.”

A new report by IWSR, the London-based bible for wine and spirit marketers, has just reported that last year, despite an overall decline of 1.3% in Russian consumption of all wines, champagne drinking grew by 4.4%. Measured in thousands of 9-litre cases, the total wine volume consumed was 103.9 million. Champagne, which comprises just 0.1% of this aggregate, made 118,000. For this year, IWSR is forecasting Russian champagne consumption will grow another 5%. Other sparkling wine, of which 26 million cases were consumed in 2013 (2.2% less than in 2012) is forecast by IWSR to drop by another 2.7%. But again Abrau-Durso is the exception to the trend.

Champagne is, of course, a French import. Its recent and expected growth is not at the high end, where the Russian taste for Dom Perignon and Krug has been in retreat. Moet & Chandon, Billecart Salmon, Lanson, and Laurent Perrier have been gaining in their place. But their bottle and case numbers are small. Much bigger numbers have been consumed of the premium Russian sparkling wines – Victor Dravigny, Imperial Cuvee Alexander III, Russkoe Shampanskoe, and Abrau-Durso, all brands from Abrau-Durso’s vineyards west of Novorossiysk, in the Krasnodar region. With last year’s total sales of just over 2 million cases, Abrau-Durso’s sparkling wine is being consumed at a rate of nearly ten bottles to one of French.

abrau_dursoThe Russkoe Shampanskoe label, for example, was up 31.8% last year to 1.6 million cases. These include brut, semi-dry, and semi-sweet blends of pinot blanc, pinot noir, chardonnay, aligoté, and riesling; as well as semi-sweet sparkling red and rose.

The evidence, according to Helen Windle of IWSR, is that so long as the urban Russian middle class keeps growing, consumption of wine will follow. “Sales of Riedel glasses are said to be growing, a sign that consumers are becoming more serious about their wine consumption and making an occasion of drinking at home. Importers are working with the on-trade to educate waiters about wine and food pairing. Some consumers are seeking a healthier lifestyle. Responsible wine consumption is seen as healthier than spirits consumption.”

consumption
(Click to enlarge)

Price is also a significant determinant of sales and consumption. “RUB500 [$14] is a key price point for wines. Wines above this price are seen as premium and it is hard for consumers to go above this price point… Local production of sparkling wine dropped -16% in 2013 versus 2012. Prosecco is growing and becoming trendy, but asti is still the largest segment of Italian sparkling wines. Asti’s sweeter style is popular with the older generation and new wine drinkers. However, the younger wine drinkers (ca. 25-35 years of age) are experimenting with – and enjoying – drier styles. More consumers are enjoying sparkling wine with a meal, for which drier styles are often more suited. This helps to drive the trend for dry wines. Champagne sales are said to be growing in retail and the on-trade, as well as through businesses.”

For Drobiz, the social reality for Russian wine consumption is different, though the outcome is still sales growth for Russian producers. “There are many areas of Russia where the average salary is below 15 to 17 thousand rubles. We have 65 percent of the population which is poor or very poor. But the price of alcohol is either the same as in Europe, or several times more expensive than in Europe. So if we consider the minimum wage of Rb 5500, and the standart salary in the regions of around Rb 8000, then the price of alcohol in Russia is five to six times more expensive for our citizens than it is in the rest of Europe. So, some can drink a lot of good, expensive alcohol, but most cannot. According to the wine market reports, production of domestic wine is falling, and imports fall in line too. They probably peaked in 2011. But consumption isn’t falling.”

The difference between measured and real consumption, according to Drobiz, or between the Russian and European pattern of wine-drinking, according to Windle, is that low-income consumers avoid the government’s excise tax. “The growth of consumption,” says Drobiz, “comes from the large but illegal market of sparkling wine. This happens for the simple reason that the illegal production of sparkling wine is very profitable. Once excise tax per litre of a product exceeds 10 rubles, it becomes very profitable to avoid the tax.”

The IWSR report has compiled this table of the government’s plan to raise excise taxes for each of the main alcohol drinks though 2016:

excise_tax

As consumer income is squeezed, Windle reports “growth for wine will come from the lower-priced segment.”

Drobiz believes that a 10% increase in excise has relatively little impact on drinking preferences. But the much larger increases the federal government has scheduled to 2016 are driving Russians to switch towards still wine, and sparkling wine suppliers towards the black market. The biggest share of demand, Drobiz believes, is for sparkling wine of up to Rb200 ($6) per bottle. This favours domestic winemakers over the imports.

consumption_local_import
(Click to enlarge)

Alan Sokolov, director of the Association of Sparkling Wine Producers in Moscow, says he is expecting the volume of domestic production this year will grow. “Taking into account draft laws about tightening responsibility for the production and trafficking of illegal alcohol, the coming establishment of minimum retail prices for champagne, and other measures aimed at regulating the market, the decline in the production of sparkling wines will not just stop, but perhaps grow by 5% to the end of 2014.” At the same time, the decline of the ruble against the euro and higher customs duties are putting a brake on growth of imports of low-priced, foreign-made wines.

Pavel Titov (below left), who is chief executive of Abrau-Durso and a director of the company with his father, Boris Titov (right), the controlling shareholder, have announced plans to expand production of both low-priced and premium brand still wines this year. The two Titovs appear in UK company registration documents to have controlled Abrau-Durso through Solvalub Trading Ltd., a company registered on the Channel Island of Jersey.

titovs

Daria Domostroyeva, the public relations director of the company, says Abrau-Durso “annually lays down from 40 to 60 hectares of new vineyards. On average, we are increasing by 50 hectares per year.”

According to Titov junior, “our growth must have been conditioned by the fact that we have stopped competing in the segment of other Russian players where prices of 250 rubles or less per bottle compete. This strategy was chosen in 2008, and we are happy to have chosen it – the result was beyond our expectations.” He adds that he and his father are lobbying the government to fix a minimum price per bottle of sparkling wine “to fight counterfeit products, which account for 30% to 40% of the market. Any good faith producer will be in favour of setting a minimum price.”

Russian market shares of the leading sparkling wine producers have been dwindling for Abra-Durso’s competitors, according to figures provided by TsIFRRA. In 2012, it was running fourth behind Igristie Vina with 19% of production; DZIV, 10.6%; and MKSHV, 8.4%. Abrau-Durso’s market share that year was 7.2%. According to figures for the March quarter of 2014, Abrau-Durso now leads with 16.9%; DZIV, 15.3%; Igristie Vina, 12.5%; and MKSHV, 5.9%. If market share is calculated for shipments to customers, Abrau-Durso’s market share rises to 19.8%.

ONE-YEAR SHARE PRICE TRAJECTORY FOR ABRAU-DURSO

abrau_durso_1y
Source: http://www.bloomberg.com/

Since the accession to Russia of Crimea, Boris Titov has said he would consider the possibility of adding Crimean vineyards to the company’s production. During 2013 the volume of Ukrainian wine imported to Russia fell by 30% overall to 234,000 cases. Two of the wine labels – Sevastopol and Krim Selekt – came from Crimea.

According to Domostroyeva, there is currently no plan to acquire Crimean vineyards. “The fact is that in the Crimea there is a moratorium on privatization of land for 49 years. Therefore, acquisition is impossible before there is a decision on privatization. To buy something, it is necessary to have someone selling something, and for the time being the state does not sell.”

Leave a Reply