Anyone visiting a Moscow restaurant in 2013 would have found a wine list full of Pinot Grigios and Chiantis marked up by 300%, along with some super Tuscans and Premier Cru at the high end. Then came the shock of 2014, when the ruble collapsed following the Russian-Ukraine conflict and a drop in the oil price. In January 2014, one dollar could buy 32.65 rubles; in December that year, it was 67.78.
In order for wine businesses to survive, they had to adapt by offering wines of better value. In the years since 2014, there has been a dramatic increase in the number of smart wine bars offering good value and interesting wines – places where you can buy Timorasso and Lemberger by the glass – while some are offering Burgundy Crus sourced directly from the producer. By 2017, the situation had stabilised and there was limited growth in 2018.
The future is still gloomy, despite the state-owned Sberbank forecasting that Russian GDP growth for 2019-2010 will be 1.4% to 2%. Two factors will limit Russian purchasing power, the first being inflation which is expected to remain high at 4% to 5% (it was 3.9% in 2018). The second is the VAT increase to 20% from 18% that came into force on 1 January 2019.
Nevertheless, wine imports to Russia rose in the first half of 2018, with European producers reporting that Russia is an increasingly important market for them. Paul Kiefer, export director for Austria’s Mayer am Pfarrplatz, says Russia can be a great market to work with. He recalls that the CEO of Centrobalt, a Saint Petersburg distributor, “tasted our wine by accident” during a ski holiday in Austria. “The first contact happened at ProWein and after a one-year negotiation we signed the contract,” Kiefer says. “After five years, Russia is our second biggest export market after the US. At the beginning we had no experience with this market, which is why our expectation was quite low.”
Market structure
Russia, with its 144m people, should be the third biggest retail market in Europe. However, average monthly income is low at just P_ 31,475 ($475), while purchasing power and retail turnover are also lower than in the EU. The average Russian citizen drinks 7.3 litres per head per year, at an average cost of P_ 300 per bottle of wine, according to Russia’s Federal Services for State Statistics, RosStat. The biggest change in the wine market recently has been the loss of market share by traditional distributors, as retail chains turn to direct importing. Of the top ten importers, three companies – Polini Import, Logistic Trade and PriorImpex – are “technical” importers which organise logistics and customs clearance for retailers, while Aromatniy Mir and Tander are retailers. The reason for direct import growth is quite clear; after the currency collapse, retailers had to cut margins wherever possible, including cutting out middlemen. This has left traditional importers looking for alternative channels, including developing their HoReCa presence, their own wine shops (SimpleWine by Simple, WineLab by Beluga, Vinissimo by Marin Express etc) and direct-to-customer sales.
Anatoly Korneev, vice-president of Simple, believes that finding the proper business model is essential for distributors. He notes that wine imports have only just recovered to 2013 levels and that distributors are evolving either into small, specialist companies or into big players with wide portfolios, brand power, knowledge and infrastructure. “On the other hand, in three years the market share of middle-size companies will decrease significantly. Retail is developing its own importing – even restaurant chains are following this trend. Next year the VAT increase and stamp-by-stamp tracking would make the situation for middle-size importers even harder.”
For Igor Zverev, marketing director of major Russian distributor Alianta Group, some regions clearly have better growth potential than others. “Comparing 2017 customs statistics to the previous years, one clearly sees that the New World countries came back to their pre-crisis positions, while France could not. Nowadays, consumers are more sensitive to the price-quality ratio. Even in France, classical categories are decreasing and we see growth of newcomers such as Languedoc and, of course, Provence which follows the world trend for rosé wines. From the New World countries, the comparatively successful ones are Australia, Argentina, South Africa and New Zealand while Chile’s share is still falling, especially at the mass market end.”
Given these market changes, what’s the best way for a new brand to enter the market? The answer seems to be collaboration with regional distributors, or working directly with retailers or HoReCa chains. Simple’s Korneev supports this point of view, however, he says the main growth in direct imports happened in 2014 to 2015, and retailers’ portfolios are “saturated” at the moment. But while there has been a moderate consolidation of the retail market, Russia is not yet dominated by a handful of big players. The seven biggest retailers – Magnit, X5 Retail Group, Lenta, Auchan, Dixy, O’Key and Metro Cash and Carry – have 44% of the market between them, which means there are still opportunities for producers to make direct contracts with other retailers.
As Kiefer of Mayer am Pfarrplatz says: “Wine in general is now very trendy in Russia and the mutually beneficial relationship between Austria and Russia helps to develop the products. Notwithstanding the embargo, we witnessed sustainable growth.” He says the winery sells two different products, one entry level and one high end, and it helps that many Russians go sightseeing and skiing in Austria, where they are introduced to local wines.
However, if a producer wants to be present in key regions and top restaurants, going direct to a retail chain will not help. “In most cases a national importer is easier to handle,” says Kiefer, adding that in Russia it’s easier to work with one partner. “The country is so big you need someone who has connections and knows the market in the different regions. It’s so difficult travelling there without a local host from a company,” because of barriers such as documentation and bureaucracy. “The benefit of working with smaller companies is maybe the price point. You are more independent and you are not so controlled by one company.” If you don’t need to build a brand in Russia, he says it may be better to work with one chain or a smaller importer.
What are Russians drinking?
A summary of what sommeliers of Moscow and Saint Petersburg want would be: “wines of the same quality at a lower price”, and “the freakier the better”.
“External economic factors such as sanctions against Russian companies and banks are exerting downward pressure on the national currency,” says Vladislav Volkov, the CEO of Vinoterra. “These aspects make imported wines more expensive to the final customer. Consumers are looking for quality for [a] lower price. These factors bring new regions and even new wine styles to the market.”
Korneev adds there is an unfortunate loss of interest in Russian wines, which were briefly trendy after international sanctions made local wines more attractive both for their price and their patriotic cachet. Between 2014 and 2016, 70% of wines consumed were produced in Russia but by 2017, the share had fallen to 60%. “Local winemakers had a brilliant chance in 2014 and 2015, when Russian wine became more competitive due to the fall of the national currency. Unfortunately, this [opportunity] was not fully taken.”
Korneev says the next trend he’s seeing is the rise of new appellations, as customers return to international wines, but find their usual favourites are now more expensive. “The search and even rediscovery of new appellations has started. Crus de Beaujolais triumphally returned to Moscow, where they had been forgotten during years of the oil money shower.”
Russian consumers have also divided into two distinct categories. “The first are label drinkers,” says Vlada Lesnichenko, wine promoter and director of the Russian Wine Awards. “Their choice is primarily driven by the label in the enlarged sense of the word, from super Tuscans with ‘aia’ suffixes, to basic Chiantis and Pinot Grigios.” The second type of drinker heads for Cru de Beaujolais, Grosses Gewächs Rieslings, Cru de Muscadet and Vinho Verde. These drinkers are a minority, but are causing national importers to rethink their portfolios, in search of “Chenins by Jacky Blot and musical Champagne performed on pure Pinot Meunier by Michel Loriot”.
Even if the wine freaks are few in number, their tastes have changed the rules, even on the wine shelves of “DA!”, a hard discounter launched in 2015, which now has 67 stores and where Rieslings outnumber Pinot Grigios four to three. “There is a tectonic upheaval from heavy high-alcohol wines to subtle and elegant ones, from south regions to northern ones, even if we talk about high-altitude Riojas Garnachas or Nerellos from Etna,” says Lesnichenko, along with a shift from “international varieties to autochthones, from familiar regions to known-only-to-enthusiasts, from new barriques to old fudres, from négociants’ Grandes Marques to petit récoltants, from overpriced Provence rosés to orange wines of Friuli, Slovenia and Austria.”
Volkov agrees that the new breed of wine enthusiasts is changing the game rules: “The new generation of wine drinkers has a wider area of thought and they are not tied down to international brands or traditional regions. Due to their flexibility and curiosity they discover new regions such as Jura, Galicia, Vinho Verde and Loire Valley and new styles of wine such as pét-nats and natural ones.”
While Russia is an increasingly attractive market for wine producers, there are several steps to go through before attempting to enter, because of both legislative requirements and the increasingly competitive environment.
“One should make noise around [a] specific category and lay groundwork for the new brand,” says Lesnichenko. “Key sommeliers and influencers should thirst for the new wine. Creating this thirst inquire both wine producers and those who sell in to the final customers. It is the art, it is the marketing, but it is the necessary condition for not wasting time and marketing budgets.”
Eldar Pateev, category manager of the “DA!” retail chain, says doing the sums is extremely important. “First of all the exporter should have a clear view what will be the price of his or her wine on the Russian market,” he says. “Otherwise they could face stuck sales just because their wine could be overpriced on the local market and be too expensive for the customer. Comparative price analysis and price positioning is a must.”
To illustrate with an example: three similar brands from one cooperative in Priorat are distributed by the three companies. One is a national importer, one a regional distributor and one a retail chain. While the wines are similar, the national price is RUR1,773.00, the local price is RUR1,348 and the retail price is RUR690. Each distribution choice has its pros and cons. A national distributor might get a listing in restaurants from Moscow to Vladivostok, but sales volumes are unlikely to be high due to a high importer margin and price positioning. On the other hand, a direct contract with the retail chain would involve significant volume, but in this case, the brand would be presented only on supermarket shelves and not in the wine lists. Choosing the proper partner means choosing a partner’s distribution channels and should follow the winery’s sales strategy.
Pateev goes on to say there must be a need that a specific product should meet. “And if it does, where and at what price should it be available for its customer? The mass market requires the four simple Ps of marketing [price, product, promotion and place]; place and price should not be ignored. The third point is that new products and new brands should be promoted – an initial try would not take place in the absence of promotions. Quite the opposite.” He says that “DA!” is trialling techniques to increase the consumption of new wine brands, from adding a food and wine matching guide to catalogues, to testing the best placement in stores.
Korneev emphasises that there are limited opportunities to market wine in Russia because of laws around alcohol and promotion. “There are no legal opportunities for alcohol advertisements. Not in the media, not in the internet or outdoors, except at point of sale.” He adds internet sales of alcohol were expected to be legalised on 1 January 2019, but draft legislation was criticised by the Ministry of Health. “It is most likely that legalisation will happen not earlier than 2020,” he says. “Consequently, for mass market channels, below-the-line mechanics such as merchandising and price reduction would be the most important ones [for marketing]. Above-the-line is almost impossible because there is no media where promotions can be placed, with rare exceptions such as Simple Wine news magazine.”
Overall, entering the Russian wine market is not as easy today as it was five years ago, and the first attempts are unlikely to produce instant results. However, there are opportunities for small and medium sized producers to collaborate with local distributors and retailers. As for big brands, this is a good time to get into the market at a cheaper price and gain market share. Companies that can get established now will be in a good position once the market recovers.
