The Russian wine market remains, largely due to the lack of hard data and the age old stereotype of Russians drinking nothing but vodka, a curiosity to many observers. Stereotypes aside, though, the Australian wine industry is finding new customers for quality wines in Russia, with the value of wine exports increasing by more than 40% in 2007.
Russia’s relatively stable economy over the past few years has lead the way to a new food and beverage consumption reality with higher disposable incomes reversing the trends and leading to a better appreciation of wine.
Although thirty years ago Russians were drinking up to 17 litres of wine per head each year, Gorbachev’s anti-alcohol campaign of 1985 and the ensuing economic turmoil – which caused a sharp drop in personal income – nearly annihilated the wine market. By the mid 1990s wine consumption had plummeted to 2.5 litres, and because vodka and spirits were seen as ‘better value’ alcoholic drinks, their popularity soared.
A slow recovery of the wine market began as the nation recovered after the 1998 economic crisis, and currently wine is the fastest growing segment of the Russian alcohol market, estimated at 730 million litres.
The biggest success story in this competitive Russian market, is that of imported wines sold in bottles. With the exception of a short period following Russia’s economic crisis in 1998, this segment has over the past 15 years enjoyed dynamic growth in terms of both volume and value.
To Russia with love
Australia’s wine sales to Europe’s largest emerging market grew to A$6.28 million in 2007, up from A$4.36 million in 2006.
Austrade’s Moscow-based senior trade commissioner, Dan Tebbutt, said the success of wine in Russia reflected strong overall growth in merchandise exports to an emerging economic powerhouse.
“In 2007 Australia’s exports to Russia grew by 35.9% to A$658 million. Russia’s US$1 trillion economy is now the ninth largest in world, and its retail market the eighth largest. Russia is a country of 140 million people where social drinking is an accepted part of the culture. It has an affluent consumer segment ready to spend and a growing middle class.”
94% of alcohol sold in Russia is through off-premise trade and 6% of alcohol is bought on-premise in restaurants and bars. However, with the growing hospitality industry, on-premise sales are expanding rapidly, especially in Moscow and St Petersburg, where there is a higher concentration of population with disposable income.
In addition to this, wine popularity is being fuelled by a growing awareness of health consciousness, including the benefits of wine, and an escalating interest in Western culture.
According to Tebbutt “that’s great news for wine producers, and we’ve seen labels such as d’Arenberg, Wirra Wirra and Fox Creek establish a foothold, as well as prominent Australian industry names such as Yalumba and Penfolds.”
The value of premium wine exports from South Australia to Russia jumped by almost 130% over 2006 figures, with the state’s wine producers contributing 60% of total export value.
Australian Wine and Brandy Corporation’s Regional Manager for Continental Europe Marco Tiggelman said the price point achieved was the most promising feature of recent success in Russia.
“The value of South Australian wine sold was AU$6.29 a litre, well ahead of the average for Australian wine exports overall, giving Russia the second highest average unit price in our top 20 wine markets,” Tiggelman said.
“The AWBC believes the wine industry’s export future lies in improved margins, not necessarily greater volume, so this is an excellent beachhead position in a priority market,” he said.
“The success in Russia is the result of forward-looking wine companies, Wine Australia’s strategic push to develop key emerging markets, and the support of partner organisations including the South Australian Government and Austrade.”
One example of a company building a presence in the new Russia is Two Hands, a premium winery based in the Barossa Valley in South Australia. The label formed an alliance last year with Moscow’s Simple Wine, a distributor specialising in rare, expensive and elite wines. The first shipment of Two Hands red arrived in Moscow early this year.
Two Hands’ sales and marketing director, Andrew Tierney, is optimistic that the company’s efforts to develop a presence in Russia will yield long-term benefits.
“Initially our distribution partner focused on Moscow and so far we have been encouraged by strong early sales. The next step will be to build on our success in the capital to reach consumers in other parts of the country,” Tierney explained.
Two Hands has received support from the Export Market Development Grant (EMDG) scheme in the past, and also achieved success in the US, New Zealand, Asia, Canada, the UK and other EU markets.
Boutique McLaren Vale winery Fox Creek have been selling into Russia for four years. Fox Creek general manager, Paul Rogers, said success in Russia was the result of deliberate strategy to target emerging markets.
“Out of the 20 countries we export to, Russia is now our largest market – and one that still offers a lot of room for growth. We shipped over a thousand cases in 2007, with another shipment of 500 already dispatched this year,” Rogers proudly explained.
“Austrade helped us maintain our momentum by working with our distributor to organise tastings of Fox Creek Wines in Moscow last year. Fox Creek Wines have even made it as far as Turkmenistan, where our bottles were presented at official meetings during the first Australian trade delegation there.”
In 2006-07, Austrade assisted 112 companies make deals in Russia worth AU$694 million. Twenty-one of these companies were new or irregular exporters.
Rushing into Russia
Russian consumers drink 70% red wine; white wine takes about a quarter of the market, and the rest going to rosé. Russians opt for off-dry or semi-sweet flavours, even in red wines. Dry wines play an important role only in the premium and ultra-premium categories, reflecting the more sophisticated drinking culture of this wealthier consumer group.
A recent study of wine sales in Russia done by the Business Analytics research agency revealed that over 50% of all sales come from the lowest segment of the market, below 100 roubles or AU$4.50. The niche of premium and ultra-premium products remains small as well, at only 7% of the total market. Although a country with a population of 143 million, the actual income per capita is low, with the average Russian earning only US$2,610USD (AU$2,788) per year according to the World Bank.
The situation, however, is different in Moscow, St Petersburg and other key cities. Drinkers there, with much higher disposable incomes, spend more on fine wines. Moscow and St. Petersburg have the highest concentration of premium wines in their markets, reflecting the purchasing habits of a new class of wealthy consumers – and as long as world oil prices remain high, the Russian fine wine market will continue to grow.
Until 2006 Moldova was the absolute market leader in Russian wine imports and supplied as much as 70% of all bottled wine. Cheap production, historic ties and favourable economic conditions have long made Moldova the prime source for the lower end of the Russian wine market. After the ban on Moldovan wines, in 2006, allegedly for health reasons, other countries have jumped at the opportunity to fill the void.
There are however, limitations to remember, including complex customs duties, transportation and certification costs as well as margins at the various levels of the supply chain. The ex-cellar price plus transportation costs must be declared at customs, where 20% import duty, varying excise and 18% value added taxes are paid. Furthermore, each label must be certified to comply with Russian wine regulations. An importer must also possess a valid license that allows him to import alcohol. A single license costs up to 100,000 roubles (AU$4,550) and a general license – 1.5 million roubles (AU$68,300).
Importers’ margins are generally dictated by the type of wine being sold. Products for the low end of the market generally have a higher turnover, and thus the margins stay lower at 10-30%. Wholesalers add another 10% to importer’s price. The pricing for premium wines is, however, different. The importer’s mark-up is generally 25-35%, sometimes up to 50%. Shops add another 50%, while a restaurant can multiply the wholesale price by 2 to 3 for expensive bottles, and up to 6 for entry level wines.
As explained by the international alcohol competition Vinnaya Karta’s Eleonora Scholes, “Russia is an exciting market, but it must be approached with caution. The reality is complex and it is only in a handful of population centres that wine sales register beyond the insignificant.
“Just to get wine into the country requires navigating a mind-boggling system of customs regulations that seems designed to deter even the most dedicated exporter. Only those with deep reserves of patience, commitment and financial resources will succeed long term in building their business in Russia. On the brighter side, the expanding middle classes are developing an interest in wine, leading to growth in sales and consumption.”
Geography of import and consumption is changing fast. Share of import of former socialist countries, like Georgia, Moldavia, and Ukraine, in volume terms went from 88.7% in 2000, down to 39% in the first quarter of 2007. Share of Old World countries, like France, Spain, Germany, Italy, Cyprus, and Portugal, increased from 9.9% in 2000 to 48% in the first quarter of 2007. Share of New World countries – Chile, Argentina, USA, Australia, and South Africa – during the same period increased from 0.98 to 12.6%.
Although there is certainly a chance that consumption habit would make consumers welcome return of familiar wines, the New World is jumping at the opportunities that the largest country in the world presents.
New Zealand’s Marlborough based winery Saint Clair Family Estate has recently sent its first shipment Russia.
Saint Clair’s MD, Neal Ibbotson, said, “We are very excited to be able to share our passion with a country that is only just beginning to explore the varieties of wine available. The wines that enter the market now, in its growth phase, will have an impact on the popularity of wine in the future, and we are delighted to be part of this unique opportunity.”