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The Russian market thaws
Meininger’s Wine Business International issue 3 June 2009

Eleonora Scholes argues that the worst may be over for the Russian wine market — but the shake up from the financial crisis may have altered its shape.

The Russian wine market is continuing to feel the effects of the current financial and economic downturn and is likely to do so for some time yet. However, the first signs have emerged to indicate that the worst may be over. Latest figures published by TsIFRRA (the Russian Research Agency for Federal and Regional Alcohol Markets) reveal that the wine market appears to be heading towards stability.

Russia was one of the last economies to be hit by the crisis. Whilst many global markets were under pressure as early as summer last year, Russian economic activity turned negative only starting from the fourth quarter of 2008. Local wine production, still largely industrial in nature and catering for entry level products, followed the timing of the general downturn. Its consolidated output for January-October 2008 increased compared to the same period in 2007, but then suffered a progressive decline in the final quarter.

Wine imports, however, couldn’t change swiftly, due to the extended time scales connected with transportation and logistics. In Russia, at least two months are needed for wines to be shipped and cleared, before appearing on retail shelves. Orders for late autumn sales had been confirmed well before Russian stock markets plummeted. The financial turmoil in October-November put on hold quite a number commercial transactions between Russian importers and foreign producers, especially in cases where the former heavily relied on credit support. Regional distributors with fledgling import divisions quickly opted out of foreign operations, while many established import businesses were forced to review shipment schedules for early 2009, drastically cutting volumes or cancelling orders until spring 2009.

General import statistics for 2008 closed positively, but on detailed inspection one sees a dramatic drop between October and December. Sparkling wine took the hardest blow — in December imports contracted to -27% against the same month in 2007, whereas as recently as October they were showing a healthy increase of 233%. Nonetheless, annual figures for Russia were better than in many other countries — year-on-year imports of sparkling wine gained 62%, and still wines had a growth of 3%.

In the winter months of this year the Russian wine market appeared more frozen than the country’s landscapes. A traditionally quiet period, it was further weakened for importers by tough financial conditions with bank interest rates at 20%, and for consumers by shrinking disposable incomes and the general insecurity. Imports of still wines hit the bottom in January, showing a loss of -44% versus January 2008, whilst sparkling wines plummeted in February, down -58% year-on-year.

Local wine production was also negative, with the notable exception of wines in the premium price segment which retail in Russia for over 250 roubles (5,50 euros). They actually enjoyed a rising output December through February.

Although an objective conclusion can be drawn only after statistics for the second quarter are published, March figures provide grounds for cautious optimism. They are a mixed bag, but they have certainly improved from the winter in almost all categories. The fall in Russian bottled table wines slowed from -18,4% in February to -6,9% in March, and sparkling wines — from -10,2% to -5% versus the same months in 2008. It is worth remembering that Russian bottled products (made of Russian grown grapes or imported grape concentrate and must) still have the largest share, with over two thirds of the total wine market.

March imports were also on the rise. Still wines climbed from -29% in February to -8,9% in March, while sparkling wines bounced back and gained 8,2% more in volume in March 2009 than a year before. However, the encouraging March trend couldn’t reverse negative consolidated figures for the first quarter. Imports of still wines were down by -23,4%, and of sparkling by -35% compared to the January-March 2008 period. Local production for table and sparkling wines shrank by around -14%, whilst premium Russian bottled wines bucked the trend with an increase of 17,2%.

Bulgaria, France, Moldova, Spain and Germany led the wine import charts by volume in 2008. This year is posing new challenges, and we are likely to see new power struggles. Bulgaria which was a major supplier of entry level wines in the past couple of years is rapidly losing the market share. Its wines are being substituted by those from Moldova — and it is quite possible that by the end of the year Moldova will regain the title of the largest wine exporter to Russia. France in the first quarter had about the same slice of the market as Bulgaria, but it is also losing ground in favour of its European neighbours: Germany, Spain and Italy. The share of New World countries remains small, with Chile gaining a few extra percentage points and Argentina losing them in January-March.

As the financial and economic situation remains uncertain, it is pointless to make any short term forecasts. One only hopes that the Russian market will ride out the storm, and that the situation can at least stabilise in the next few months.