Russians are famous for drinking vodka, but it’s falling out of fashion as a vogue for healthy lifestyle choices sweeps the country. As vodka becomes a luxury product, alcohol manufacturers have to be inventive.

One of the winners from the change is Beluga Group, which is now the largest alcohol producer in Russia.

Beluga Group produces 13% of Russian vodka in addition to other spirits and wine. It also imports alcohol brands from abroad, which are in high demand in Russia, and sells in over 200,000 retail outlets.  In a report on the company, VTB Capital forecasts a compound annual growth (CAGR) of 20% for Beluga Group for the period 2021 to 2025.

“The group’s strategic objective is to double sales from RUB63bn ($880mn) in 2020 to RUB130bn by 2024, as per the management. The figure implies a sustainable CAGR of 20% and would imply one of the most rapid growth profiles in our consumer coverage,” VTB Capital (VTBC) said in a note.

Beluga Group’s brand portfolio is very diversified to meet the demands of a rapidly shifting alcohol market. It acquired retail chain Winelab in 2018, for example, and expects to see it become a key segment of the group’s business model as it plans to grow the proportion of its revenue generated by e-commerce from 3% to 10% in the next four years.

The retail segment is the main growth pillar for Beluga Group and the company guides for the store count to surge four-fold to 2,500 by 2024. As a result, retail advances with 33% CAGR in 2021-25 from a low base and delivers 85% of the total revenue uplift in next five years according to VTBC estimates.

Winelab will be all the more crucial to the group’s success given that wine is currently enjoying a surge in popularity in Russia. This is down to government incentives for domestic wine growers and changing consumer preferences. Wine is an emerging category, particularly trendy among young people as an alternative to the more traditional vodka. Beluga expects Winelab to expand four-fold by 2024, driving growth in the group.

Beluga’s vodka sales, meanwhile, are transitioning towards premium and export markets. This is in step with a wider pattern of decline in vodka drinking in Russia.

In 2000, Russians consumed a total of 215mn decilitres of vodka. Today, that figure is more than two and a half times lower. Vodka used to be sold with disposable metal lids on the assumption that the entire bottle would be consumed in one sitting, but that kind of binge drinking is now a thing of the past. The decline in vodka consumption has corresponded with increased life expectancy for Russians, which was just 65 years in 2005, is now 72.3, according to data from Gapminder.

 

Russia still has the highest vodka consumption level globally, but it now represents just 36% of alcohol consumed in the country, compared to 45% ten years ago.

Wine drinking, meanwhile, is up. This is partly down to government incentives for domestic production of wine, like tax breaks and reimbursing marketing costs for companies using local grapes. The shift is also down to a cultural change, though, as wine is in vogue among younger generations. It is now the only spirit, which is growing in popularity in Russia.

In fact, interest in alcohol in general dropped by 20% among young Russians in the ten years from 2008-2018, according to Russia Beyond. Alcohol continues to be the fourth largest spending category for Russian consumers, but it has taken a hit after President Vladimir Putin waged a 10-year campaign against alcohol abuse, which he described as a “national threat.” The introduction of higher taxes on alcohol, controls on promotion, and laws which restrict sales of alcohol at night have successfully lowered consumption of booze per capita by 35%, as has the promotion of healthy lifestyles, aimed at countering widespread binge drinking which is seen as a hangover from the Soviet Union.

The result is a radically shifting market, in which beer and wine have overtaken vodka and social drinking accounts for more consumption than binge drinking. Alcohol manufacturers and retailers will have to account for this shift, as well as the potential for further regulatory tightening, before toasting their own success.

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 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.