Bootleg Vodka Crackdown May Lift Legit Brands
(Bloomberg) — Russian President Dmitry Medvedev's crackdown on illegally produced vodka may help the country's two biggest distillers, OAO Synergy (SYNG:RU) and Russian Alcohol Group, sell more of their most popular brands.
Medvedev is fighting the world's highest per-capita alcohol consumption by targeting the production and availability of bootlegged vodka and imposing minimum prices on store shelves. The measures will probably nudge more drinkers toward the mid- priced vodkas produced by Synergy and closely held Russian Alcohol Group, according to analysts.
"The whole push is about reducing alcohol consumption, but it could spur a flight to quality brands that will benefit these local distillers," said Simon Hales, an analyst at Evolution Securities Ltd. in London. "If people suddenly can't buy the illegal stuff for half the price, they'll naturally trade up."
The president has his work cut out for him—the black market accounts for about half the country's 2.4 billion liters of annual vodka consumption. His reforms may help the value of Russia's vodka market rise 13 percent to 549.3 billion rubles ($18.5 billion) in 2010, while sales of illegal brands will probably fall 26 percent to 101.3 billion rubles, investment bank Renaissance Capital estimates.
Price ControlsThe government has set a minimum retail price of 89 rubles per half-liter bottle of vodka starting Jan. 1, almost double the average price of illegal brands, which can be readily bought in stores. Russian Alcohol's Yamskaya costs 100 rubles for the same-sized bottle, while Synergy's Belenkaya sells for about 135 rubles.
"The minimum price is one of the set of measures that should help get rid of illegal vodka on store shelves," said Alexander Korovka, spokesman for Russian Alcohol, co-owned by Poland's Central European Distribution Corp. (CEDC) and Lion Capital LLP. "People won't want to drink unknown products. The demand for mid-level brands will rise."
Medvedev is trying to succeed where former Soviet leader Mikhail Gorbachev could not. Gorbachev in May 1985 introduced a partial prohibition of alcohol in the country to curb abuse, raising prices and restricting sales by time and location. While official consumption dropped, the measures backfired as black- market production filled the void left by legitimate channels.
Gorbachev's Crackdown"Gorbachev's anti-alcohol campaign in the 1980s was the last serious crackdown on the industry," said Victor Dima, an analyst at Otkritie brokerage in Moscow. "Bottles disappeared from store shelves, vineyards were getting destroyed, and as a result, people started making and drinking surrogates."
More than 23,000 people die annually from alcohol poisoning in Russia, with 75,000 dying from "excessive drinking," according to the country's Alcohol Market Regulation Federal Service. While some distillers sell vodka on the black market to avoid paying excise, more unscrupulous producers sell liquor laced with anything from anti-freeze to lighter fuel and cheap perfume.
The government aims to cut pure alcohol consumption to as low as 5 liters per person a year by 2020 from 18 liters now.
Russian prosecutors confiscated about 1 million vodka bottles and are investigating two distillers in the republic of North Osetia-Alania, the Interior Ministry's Investigative Committee press service said in an e-mailed statement. The two vodka makers have been illegally selling part of the liquor they produce to avoid paying excise taxes, the ministry said.
'Big Winners'If Medvedev's reforms succeed in limiting the reach of the bootleggers, Russian Alcohol's market-leading Yamskaya brand and Synergy's Belenkaya, which dominate the mid-priced category, will be the first to benefit, according to analysts. Synergy's revenue may rise 24 percent next year to 23.5 billion rubles, almost twice the pace of this year's forecasted growth, estimates Renaissance, which recommends buying the stock.
"Vodkas in this category were already the fastest growing in Russia, and this is likely to further boost growth," said Trevor Stirling, an analyst at Sanford C. Bernstein in London. The "big winners" will be Synergy and CEDC, which also sells the Parliament vodka brand through its local unit, he added.
CEDC's market value on Nasdaq has risen 44 percent this year to $1.9 billion. Synergy's shares more than quadrupled in the period to give it a value of almost 11 billion rubles.
Minimum vodka pricing may also accelerate a switch by Russian consumers to beer from cheap spirits, according to Evolution's Hales. That would benefit brewers including Carlsberg A/S (CABJY) and Anheuser-Busch InBev NV (BUD), whose volumes have plunged in Russia this year and face a tripled excise tax starting Jan. 1.
Beer Benefit"Widening the price difference between vodka and beer will certainly be a benefit to a beer industry already under pressure," said Hales. The government's coffers will also benefit from the switch to beer or legitimate vodka brands as "consumers enter the taxable market," he added.
"The government's step is right and we fully support it," Alexander Mechetin, chief executive officer of Synergy, said in an interview. "Russia's legal vodka market has fallen 15 percent this year. Next year, with the help of this minimum price and other measures, the market should rise."
The probable boost to sales at Synergy and its rival may "provide extra funds which they could invest in marketing some of their brands abroad," said Natalia Smirnova, an analyst at UniCredit SpA in Moscow. Synergy in September began exporting its premium Beluga brand to the U.S. and some countries in the Middle East. The distiller expects Beluga's U.S. sales to exceed Russian revenue in five years, Mechetin said in 2008.
Overseas ExpansionSelling abroad is more profitable, said Russian Alcohol's Korovka, adding that Russian Alcohol plans to enter the U.S. next year and aims to sell in Latin America. A bottle of the company's more expensive Green Mark brand, which sells for 140 rubles in Moscow, retails for the sterling equivalent of 496 rubles in U.K. liquor stores.
According to Synergy's Mechetin, the announced measures "won't be enough" to tackle the scale of bootlegged production. Changes to excise tax policy and regulating licenses for vodka transportation, which are under consideration by the government, are also required, he added.
"I'm very skeptical about how effective a campaign this can be when it is against what is almost a national pastime," said Walter Connor, a post-Soviet politics expert at Boston University. "An awful lot of people will pay whatever the price is or turn to home distilling. Changing a culture without the majority of people on your side is a very long haul."
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