Before the onset of the Russia-Ukraine war on February 24, 2022, Russia's drinks sector was one of the fastest-growing segments in the country's food and beverage market, boasting annual growth rates of up to 15% in some categories.
However, the conflict has brought significant challenges to the industry, curtailing growth and introducing a host of new obstacles.
Export Ban and Sanctions
One of the most significant setbacks for Russian drink producers has been the imposition of a ban on exporting Russian beverages, particularly spirits, to Western markets. This ban was part of the EU's fifth package of sanctions against Russia. Many Russian firms had previously increased their exports to the EU, UK, and US markets. While some exports continue, producers face the possibility of further suspensions as sanctions intensify.
Corporate Bans and Market Adjustments
In addition to governmental sanctions, some Western companies, former partners of Russian firms, have initiated their own bans on non-sanctioned Russian drink producers. Sergei Lebedev, General Director of Alcohol Siberian Group, one of Russia's leading spirits producers, has indicated that the company is preparing for a complete ban on deliveries to Western markets. Lebedev highlighted that exports are generally more profitable than domestic sales and are crucial for brand image and presence in Duty-Free channels at major airports.
Shift to Alternative Markets
Before the war, the EU market saw significant sales volumes in Germany, the Baltic states, the UK, the US, and France. Due to current restrictions, many producers have shifted their focus to alternative markets in Asia and Latin America. However, these markets have lower consumption rates and procurement prices compared to Western markets.
Domestic Market and Financial Struggles
To compensate for export losses, producers are increasing supplies to the domestic market. However, they face challenges, such as high loan costs and supply chain issues. The high debt load in the industry and a sharp increase in the key rate by the Russian Central Bank have exacerbated these problems, with loan costs doubling in the past two years.
Packaging and Component Shortages
Another significant issue is the shortage of packaging and other production components. Traditionally, much of this was imported from Finland, which has joined the sanctions regime against Russia. Although some producers have switched to Chinese suppliers, they now face transaction issues due to sanctions, as seen with the suspension of transactions by Zhejiang Chouzhou Commercial Bank.
Rising Prices
In response to these challenges, Russian drink producers have increased their prices. The Ministry of Economy reported a price growth of 20%-50% last year, and this trend continues. This price increase is driven by rising excise taxes, production costs, and logistics. Despite these hikes, analysts believe that while sales might not drop sharply, consumers may switch to more affordable domestic brands.
Impact on Specific Drink Segments
The war has led to a significant reduction in imports from Western countries, affecting the availability of certain spirits. Vodka remains the most popular spirit in Russia, accounting for 39% of sales. However, the whiskey market has suffered greatly, with a 70% decline due to the exit of Irish, Scottish, and US producers. Premium spirits continue to enter the market through parallel imports, albeit at significantly higher prices.
Cognac and Rum
The cognac market has fared better, thanks to a substantial supply from Armenian producers, notably the Ararat brand. Additionally, there is an increased interest in rum from Latin American countries and Cuba, reflecting growing demand in Russia.
Future Prospects
Despite these challenges, some Russian drink manufacturers and distributors are expanding their production portfolios. These new products are expected to be more affordable than Western imports, potentially stabilizing the market and meeting domestic demand.
In conclusion, the Russia-Ukraine war has profoundly impacted the Russian drinks sector, with significant shifts in export markets, rising costs, and changing consumer preferences. The industry faces a difficult road ahead but continues to adapt to the evolving landscape.
Source: The Drinks Business