By John Helmer in Moscow
Russia’s anti-trust buster, the Federal Antimonopoly Service (FAS), has established a record of making much ado about little; and of regulating only those corners of the Russian market where no oligarch-sized interest is threatened – unless the threat is pre-authorized by the Kremlin’s running orders. But this week the agency announced there is one Russian trust it feels on safe ground challenging — Russia’s wine importers.
If they are about to be busted, this could be a regime-change for the way Russians have been obliged to get drunk since the combination of Gorbachev temperance, and Yeltsin rouble-crash caused vodka bingeing to replace most forms of civilized tippling.
According to the official press release of January 22, the FAS “has started researching the structure of the market of imported bottled grape wine and the conditions for product movement from the importers to the end consumer. An analysis of customs operations for wine supply shows that Russia imports wine from 35 countries through the world. More that 75% of the wine are supplied from the countries outside the «near abroad» (CIS), with 40% imported from three European counties – France, Italy and Spain. FAS Russia carried out a poll among the main importers of alcohol products, specializing in supplying the most popular wines in the Russian market, which was focused on their foreign economic activities and cooperation with retail trade chains. Currently FAS Russia is analyzing the information and will continue studying the market.”
In asides to the press, the FAS head, Igor Artemyev has publicly complained that a bottle of wine costing €5 in France may end up priced at the equivalent of €150 in Moscow. He was speaking of the difference between vineyard or wineshop prices in France and fancy restaurant prices in Russia, so the restaurant markup was included. But if he had complained that a €5 bottle ends up retailing for €50, there would be no exaggeration. The tenfold jump in price, Artemyev is forecasting, before the study results are actually compiled, is caused by price rigging by a a “highly concentrated” cartel of importers. “We want to analyze this market with a view to seeing whether there are cartel agreements and exclusive contracts. We believe that importation [of wine] can be much cheaper, ” Artemyev was quoted by a local wire service. “Apparently, in this market a cartel arrangement operates, along with the primitive elements of monopoly.”
Artemyev has delegated to Teimuraz Haritonashvili the job of overseeing the analytical job of busting the Bacchus trust. He is as silent as his boss has been talkative. Asked if the FAS is targeting the wine importers for price rigging and excessive mark-ups, the FAS spokesman, Maria Chernova, declined to respond. Well-known wine retailers in Moscow have lost their voices entirely.
Vadim Drobiz, who works for the Center for Research on Federal and Regional Markets for Alcohol (TsIFFRA), reports that he does not believe there is a cartel driving up the price of wine tenfold or more, before it gets to Russian mouths. He calculates that the wine import chain, including the importer, distributor, and retailer, accounts for about 25% of the price differential. That leaves transport, taxes, and a large unknown still to be accounted for. But Drobiz concedes that Artemyev is correct – there is a high degree of concentration in the supply and trade chain. He reports that about 80% of the imported wine is sold by 15 vendors; of these he estimates that Luding holds a market share of 19%, Moreau-Import 10%; and ILS, 8%.
According to Drobiz, “the wine market is very diverse, and FAS is incorrect in their claim that all the importers raise prices too much. There is a segment of rather cheap wines, and a segment of elite wines, where approaches are totally different. Price formation of elite wines is based on myths and legends — it is never real. Restaurants, for example, raise the prices of their wine up to 500% compared to that sold in retail shops. But these wines are meant to be costly; they are meant for the rich, and the rich are ready to buy at those prices. But the rich are only 5% of the population. First of all, we should speak about the market of cheap imported wine, which costs Rb140 to Rb170 a bottle. In this segment, the importer keeps no more than 20% of the cost price as his profit, and the distributor adds another 20%. If the importer is also the distributor, they add over 20%. If the chain is longer, the percent is higher. Let FAS investigate the matter, but the officials themselves are to blame for price growth.
Moscow wine writer Charles Borden reported recently that the mark-ups are made possible by collusion among importers, which ought to be illegal, according to the FAS criteria. “The high prices of Moscow wines are due to high markups along the entire distribution chain, from importer to retailer or to restaurant. They don’t come from high customs or shipping costs, since these are no higher than in many other European countries and the Russian VAT is less than many. Besides a hefty importer mark-up, supermarkets add 25% or more and it is standard for restaurants to triple the wholesale price.”
Borden adds: “Wine importers control the selection of wines on Moscow shelves – they make arrangements with various wine producers to import wines”. But he notes that it is controlling margin that dictates their selection, not wine quality or value for cost. “For many it appears price and buying terms drive the selection process.”
Alexander Brazhko, vice-president of the Winemakers Union of Russia, told Agriprods.com there’s no Bacchus trust. “It would be incorrect to claim that all the importing companies are in collusion to raise wine prices,” he said. “First, excessive profits would attract an unlimited number of entrepreneurs. Second, given the diversity of brands on the wine market, it would be very difficult for all the importers to collude and divide the profits. Third, with such excessive profits, the foreign wine exporters would sell their production in Russia on their own, without sharing the revenues with any Russian importer.”
|Russian wine marketers cite surveys suggesting that the fault for wine profiteering in Russia lies in the gullibility of a small group of Russian drinkers who have got more money than taste. According to the accepted survey data, Russian customers are ready to pay up to €5 for a bottle of wine. Only half of them can afford to pay more than €3 per bottle, and only 7% are able and willing to buy what the trade calls ‘premium’ wines – classed as more than €9 per bottle.|
Brazhko notes: “if a company is able to buy at a lower price and sell at a higher price, they aren’t to blame. On the other hand, if they break the law, then the government should apply the existing counter-collusion measures.” He told Agriprods.com that two well-known, foreign-owned hypermarkets “sometimes sell limited editions of wine, say, 100 bottles, at a price even lower than the cost of production, around €1. When you compare that to imported shipments of several hundred thousand bottles worth €10, it is difficult to put the blame on the importer for the higher price.”
“It would be difficult to make the importer lower the price of wine. This price is based on the cost of production. If Russia does not buy the wine at this or that price, the exporter will sell it elsewhere. Roughly speaking, it is competition that sets the prices and import volumes.
Currently, the Russian market enjoys a broad variety of wines, with a big selection according to price/quality ratio. Certainly, the variety is different across the country. In the Krasnodar Krai [a southwestern wine growing region], Russian wines occupy 70% to 80% of all the selection on offer. In Moscow it’s the opposite — only 20% to 30% of wines are Russian.”
“It isn’t easy to say whether we need a minimum price level for wine. Russian wines are more competitive thanks to their prices, which are lower than those of the imported wine. But if we set a minimum price, then we can lose our competitiveness. Foreign winemakers are usually state-backed, ours are not, so such a measure would harm our domestic companies. The question to ask here is what goal do we pursue? Do we want to protect the winemaker or to raise the price?”
On one point, the Winemakers Union agrees with everyone else in the trade. An investigation of wine pricing by FAS, they say, should not be a form of government temperance policy in disguise. “It is up to the government to decide whether it is, or it isn’t necessary to replace high-alcohol drinks with wine products. Such efforts should be connected with a certain goal. If you take beer for example, the latest statistics show consumption of 90 litres per capita a year.”
Russian alcohol consumption figures show that wine consumption among Russians is now running at between 5 and 7 liters per year on average. In the Soviet Union – which also counted big wine-growing cultures in Azerbaijan, Armenia, and Georgia — the average per capita wine consumption level was 21 litres per year. That was until Mikhail Gorbachev launched his national anti-alcohol campaign. One effect was to shift the consumption of alcohol from wine to vodka. Another was to slash the planting and harvesting of vineyards, especially in the non-Russian Caucasus. That inevitably drove wine prices up, and consumption statistics down – but not because drinkers thought much of Gorbachev and his policy. Wine consumption dropped steadily through the campaign, and it continued to decline until hitting a low point of just under 3 litres per capita in 1993. It has been recovering slowly since then.
There are a plethora of statistical reports indicating that with rising real incomes after the economic crisis of 1998, more Russians began to buy more wine. In February of 2009, one market survey claimed that by the start of 2008, roughly two-thirds of Russians were buying wine again, paying an estimated $2.8 billion per annum for an average of almost 15 litres of wine per person. This was the peak, however. The economic collapse which set in by the autumn of 2008 cut wine-drinking, as it cut the income to afford it. Wine consumption in 2009 is estimated to have slipped 30%, compared to the 2008 level.
Following in Gorbachev’s moral footsteps, President Dmitry Medvedev said last year that he wants to “stop the growing consumption of alcohol among young people. The habit of drinking with and without a reason may lead to heavy alcohol addiction in a rather short time. According to the data we have, one-third of young men and almost 20% of young women use such drinks daily or every other day…The sale of alcohol to people under the age of 18 is banned in Russia now as it has always been. It’s no secret that this requirement is often ignored, which it was not in Soviet times.” Prime Minister Vladimir Putin, speaking to students at a regional university on January 25, proposed a sobriety theory of his own: “crime has fallen significantly in Russia, and so have alcoholism and smoking among young people. This improvement is largely due to widespread sports and fitness programmes.”
But winemakers and traders say they worry that FAS has been ordered into action by Medvedev’s notion that, if the price of wine can be brought down, drinkers will be able to buy more of it — but get less drunk. One effect of last year’s crash has been that Russian wine drinkers have already swallowed their palates, and pride, and are buying more low-priced bottles from Ukraine, Moldova, Abkhazia, Armenia, as well as Serbia and Brazil. During last year, the Black Sea plonk producers expanded their shipments to supply more than half the Russian consumption of imported wine. France used to hold a 21% share of the market in value terms; it was down to 18% on March 31, and is still falling.
If the Bacchus-busters at the FAS have their way, the syndicates controlling the good wine from western Europe may have to accept big margin cuts, so that French wine will cost to Russians what Frenchmen think it is worth. And if they won’t accept, or if they wait for the second rise of the Russian wine-snob class, the Black Sea imports will continue to expand their share of the market. And that, the domestic winemakers are sure, will put their wine out of reach for the average Russian, and without the cachet to attract the snobs. This time, as during the Gorbachev time, a Kremlin order for sobriety, implemented by FAS analysts, seriously threatens the winegrowing regions of southwestern Russia and the northern Caucasus.