Page 7 - bne magazine November 2021_20211104 uzbekistan risding

bne November 2021 Companies & Markets I 7
Alcohol market
Russia is a top ten global alcohol producer and has one of the highest vodka consumption levels globally: 3.5 litres per capita in 2020 of pure alcohol. But the shape of the market is also rapidly changing; the category was hit more than any other retail segment, contracting from 45% of total alcohol consumption to 36%.
But Russians still love to drink and alcohol remains the fourth largest spending category for Russian consumers, accounting for 7% of the total shopping basket by value in 2020.
To keep a lid on boozing the regulation of the alcohol sector
in Russia has been tightened in the last ten years, specifically in higher excises and minimum retail prices, state control
of production and retailing, and a downsized promotion mechanism. That has lead to a per capita consumption fall for pure alcohol of 35% over the last ten years, although 2020’s 10 litres per capita places the country in the top ten in the world
The Russian authorities have always been battling against alcoholism. Mikhail Gorbachev famously tried to ban vodka when he was Party Secretary, which only led to the workers drinking perfume instead, for its alcohol content. Russian President Vladimir Putin’s campaign – Putin doesn't drink – has been more effective.
In 2011 the state rolled out a two-pronged attack that increased the price of hard liquor considerably and simply banned alcohol sales at night, particularly from the ubiquitous street corner kiosks. The ban has been strictly enforced and it really is impossible to buy booze after the sun goes down.
“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 increase 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 RUB243 ($3.39) 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,” VTBC reports. “But now the regulatory framework is stable and excises have been set until 2024F at annual inflation of 4%... The vodka market in Russia has passed the most turbulent times, in our view, and is now reaching
Largest producers, 2020
Source: Euromonitor, VTB Capital Research
maturity stage with deep supervision by the state via production and retail controlling systems (introduced from 2016).”
While vodka sales are falling, wine sales are one of the fastest growing on the Russian alcohol market, fuelled by growing consumer preference as well state aid to the flourishing domestic business. Although the stereotype has Russia as
a frozen waste permanently covered in snow, its southern regions are semi-tropical and have been producing high quality wines for hundreds of years.
Per capita wine consumption topped 7.3 litres in 2019, making Russia the seventh largest wine market in the world, although consumption is still at a low level – below even the 10 litres in the US, let alone the 28 litres for Western Europe. Growing volumes were covered by increased imports, which reached 63mn dals in 2019 and accounted for 58% of total, VTBC reports.
The domestic production can’t keep up with demand and there is a built in prejudice for foreign wines as well as the leading Russian brands are not well established. Most of the growth
in wine drinking is covered by imports: last year, the leading importers of $1.1bn worth of wine were Italy (29%), Spain (17%), Georgia (12%) and France (11%).
The state has been trying to promote domestic production but the vineyard area in Russia has been stagnating while the share of the domestic production declined from 53% in 2015 to 45% last year.
“In 2020, the wine market in Russia faced a number of difficulties. From June 2020, the new Wine Law banned the production of wine in Russia from imported bulk products. This had previously accounted for 10% of supply in 2019. Additionally, ruble depreciation of 15% vs. the euro lowered the wine-purchasing power of consumers. Furthermore, the pandemic limited on-trade consumption (it's illegal to sell alcohol online), while adverse weather hit the Russian grape harvest. As a result, total wine consumption declined 10% y/y to 97mn dals in 2020, the lowest level in the last five years, and a favourable base for recovery,” VTBC reports.
Nevertheless the new government regulations have created favourable conditions for increasing domestic production and analysts are expecting the sector to bounce back from its 2020 misadventure.
There are now tax benefits for vineyards and the use of local grapes, as well as the reimbursement of investments and marketing costs for producers. The Ministry of Agriculture targets the vineyard area to expand 30% to 125k ha by 2025.
“We expect the local supply of grapes and wine growth to increase 40% to 60mn dals by 2025F on improving efficiency. As a result, we forecast the share of domestically produced wine to rise from the current 45% of the market to 50%. We expect total wine consumption to increase with a 5% CAGR in our model in 2021-25F to 125mn dals, reflecting 7% for local production and flattish imports,” VTBC said.
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