Page 14 - RusRPTNov21

production and retail, the introduction of minimum prices, a ban on night-time sales, and marketing limitations. As most of the regulatory risks have materialised, and the government has stated that 2021-24 excise rises will be in line with CPI (4% annually), we factor volumes in Russia being flattish, largely implying stable development conditions.
The market is undergoing a volume transformation with a mix redistribution between vodka and wine. The latter is the beneficiary of the changing preferences of a younger population, the promotional activities of modern and specialised retail formats, and rising domestic production driven by state subsidies. In the last ten years, retail sales of vodka have declined at a 5% blended rate, while wine has remained generally flat over the period, meaning its share in the overall consumption (based on pure alcohol) increased from 11% to 15%. Per capita consumption of wine was 6.6l in Russia last year, which is 17th largest globally, below the developed peers (10-45l per capita).
The share of imports in wine consumption has increased from 48% to 55% over the last five years. We consider the trend to be sustainable in the medium-term and expect the share of wine to add 3.5pp to 18% by 2025F.
For the same period, we see flattish vodka performance, leading to a 2.8pp lower contribution at 34%. In 2020, sales of brown spirits showed strong performance, based on Nielsen: rum was up by 22% YoY, followed by whiskey (+19% YoY). These trends were boosted by an increase in supply and marketing activity of these beverages, as well as growing global consumption during the lockdown.
The vodka market in Russia has passed the most turbulent times, in our view, and is now reaching maturity stage with deep supervision by the state via production and retail controlling systems (introduced from 2016). The segment saw tough regulatory changes, with excises surging at a 25% CAGR in 2011-14 and stabilised thereafter, overall increasing its contribution to the blended retail price by over 40% in the last ten years. A minimum retail price for vodka was introduced in 2009 and since then grew with 10% CAGR to RUB 243 per 0.5l bottle in 2021. Those measures have been vital for counterfeit production, which accounted for 27% of 2010 in retail sales and has been largely eliminated now. Since 2010, the consumption of vodka in Russia has declined 17% while its share in the overall intake (by pure alcohol) has slid from 45% to 36%, reflecting the most disappointing market sub-segment.
In the medium-term, we see a number of structural headwinds for vodka consumption, including growing health awareness, drinking preferences shifting toward wine and other spirts (gin, rum and whiskey), and the transfer to a new demographic cohort that does not tend to favour vodka.
14 RUSSIA Country Report November 2021 www.intellinews.com