Now that Nemiroff has gained a solid foothold on the Russian vodka market, the Ukrainian vodka company hopes to repeat its success on the highly competitive market for flavored alcoholic beverages.

Anastasia Matveeva

Nemiroff came to the hyper-saturated Russian vodka market with a bang. Everyone seems to have noticed the announcements of televised boxing matches with a little pepper banging a gong, even if they were not interested in the fights themselves. Company president Yakov Gribov calls this tactic “an attack on the consumer” and “loyalty promotion.” The attack proved successful and the Ukrainian company won a firm place in the heart of many Russian vodka lovers. Recently, Nemiroff announced plans to take on the Russian market for low-proof flavored alcoholic beverage and celebrated the opening of its newly built factory.
Nemiroff’s appearance on the flavored alcoholic beverage market promises to be even more intriguing than its vodka beginnings. The market is not only highly competitive; there are good reasons to believe that it has passed its prime, about to stagnate or even decline. Nonetheless, the new Nemiroff factory was built so that in the near future yet another production line could be put into operation. If so, the factory’s total capacity would reach 6.6 million dl a year, or around 15% of the entire Russian market (39-45 dl, or more than $600 million).

A tough market

It’s no small task for newcomers to break into the flavored alcoholic beverage market. The market is not that large, exponentially smaller than the beer market despite the fact that people drink both beverages for the same reasons. However, few market players foresee flavored alcoholic beverage replacing beer and achieving the same size market anytime soon. “It’s too early to talk about flavored alcoholic beverages competing directly with beer,” believes Vyacheslav Merkulov, Sales Director at Ochakovo. “Sure, more and more women are choosing them over beer, but men are not about to give up beer in favor of flavored alcoholic beverages.” At the same time, the market has already been divided up. “At present the market situation is fairly stable. Eight producers control 80% of the market. It won’t be easy to change this,” notes Merkulov. “It will be very hard for a new company to enter the market painlessly,” agrees Karen Vartanian, Marketing and Sales Director at Borodino.
Moreover, the flavored alcoholic beverage market is constantly attracting new players. In spite of all its drawbacks, it is still seductive for a variety of reasons. For instance, according to Igor Bulasov, Director of the Wholesale Trading Information System Project, “Flavored alcoholic beverages are a great opportunity to advertise other alcoholic beverages. Especially when advertising is off limits. It kills two birds with one stone: when you’re young you drink Stolichnaya Ice, but when you get older you move to Stoli. In other words, companies are raising a new crop of consumers.” Merkulov in turn notes that “It can also make sense for companies that do not produce alcohol to enter the flavored alcoholic beverage market in order to diversify and stabilize their business. For this reason, we expect more and more non-core competitors.”
Finally, even a strong lead on other markets does not guarantee success in flavored alcoholic beverages. Market players remember with glee how a certain international soft drink producer’s product languished on the shelves between Okakovo’s Gin and Tonic, Happyland’s Kazanovaya, Borodino’s Screwdriver, and other drinks from Bravo and Sinebryukhovy. They also recall the fear they felt when one of Russia’s biggest alcohol manufacturers decided to try the market two years ago. Yet the distillers had no luck and even the fool-proof approach of promoting the new drinks by referring to their main product didn’t help.
In other words, the Russian flavored alcoholic beverage market has its own special rules. It is dominated by companies who are pros at maintaining their position. However, the market’s stiff competition is the least of Yakov Gribov’s worries. He believes that “We will get our share if we’re not too late.”

Fashion-conscious or health-conscious?

Nemiroff’s president had something particular in mind when spoke of running late. The company’s market debut comes at a time when according to Nemiroff’s marketing experts, it could see a turn for the worse in growth rates, as dramatic growth is replaced by stagnation. After the 1998 Crisis and up until 2003, the market was expanding by 40-50% a year. Nemiroff was not able to seize the day due to disagreements among its directors. According to Gribov, they were ethical in nature. The director of the distillery, Nemiroff’s partner and supplier, Stepan Glus, who developed the recipes for some of Nemiroff’s popular flavored vodkas, was concerned that because flavored alcoholic beverages fall into a lower price category, the company would be predominantly targeting teenagers.
While the company was searching for a compromise, there were signs that trouble was brewing on other markets that developed prior to Russia’s (the product has been available in Western Europe for the past fifteen years). Growth rates declined rapidly. In the US, consumption volumes fell and producers in the UK were barely keeping afloat. According to Gribov, this testifies to the fact that consumer interest in flavored alcoholic beverages was to a large extent based on a passing fashion.
The Russian market is also not nearly as rosy as it once was. According to Business Analytica forecasts, the market in 2004 will only expand by 14% versus last year’s 40%. While many companies acknowledge this decline, few are willing to buy the most pessimistic scenario that the market will decline and collapse. For instance, Karen Vartanian believes that the success of a mixed drink in Russia depends on several long-term factors: “There are social and psychological reasons. A new generation with a new way of drinking has joined the ranks of active consumers. Russian producers had to confront this problem a few years ago, as young people are concerned with their health and don’t want to drink hard liquor. Thus, the market is growing because more and more people believe that lower-proof drinks are less harmful to their health.” Vartanian is furthermore convinced that “even though flavored alcoholic beverage lag far behind beer in terms of market volume, their growth rates are substantially higher. As a result, the market is developing more quickly and will seriously challenge beer in the foreseeable future. With time, it could even put the squeeze on hard liquor.”
Merkulov believes that 14% is substantial growth. Moreover, growth is slowing in Moscow and St. Petersburg, where the market is nearly saturated. In Russia’s regions, however, Merkulov believes, “low-proof drinks are just starting to gain popularity.” Only Olga Kurbatova, President of Happyland, the leader on the Russian market, shares Nemiroff’s concerns: “I think that Nemiroff understands the situation well and I agree that flavored alcoholic beverages are somewhat of a fad. The market will definitely stagnate.”

At a premium

If the Russian market can avoid the worse case scenario, Nemiroff plans to win just as firm a spot on this market as it did with vodka. At the moment, specialists believe that two factors can guarantee a company’s market position: brand and distribution. This is exactly how Nemiroff expanded on the vodka market.
The key decision to position products in the premium, brand-name segment defined Nemiroff’s success on the Russian vodka market. It immediately gave the Ukrainian company an advantage over its competitors, most of which fight for a piece of the mass market. The current situation on the flavored alcoholic beverage market means this strategy could be successfully repeated. Companies and market analysts alike have noted a change in consumer preferences and growth trends in higher-priced segments.
The decision to go premium also helped resolve the conflict between those for and against flavored alcoholic beverages at Nemiroff. To put the new products in the premium segment, the company has decided to use only pure fruit juices with no artificial ingredients and sell the product in glass bottles. As a result, Nemiroff drinks will be practically the most expensive of their kind and aimed at a fairly well-off and therefore older consumer. This solved the underage drinking dilemma.
According to Vyacheslav Merkulov, “as Nemiroff flavored alcoholic beverages are in the premium segment, their prospects look fairly good.” In early August, however, Beverages and Trading LLC, makers of the popular Barcardi Breezers, announced that it, too, would enter the market in hopes of grabbing a 60% share. Market veterans have also taken note that consumers are gravitating toward premium drinks and have started to respond. Olga Kurbatova believes, however, that the changing market structure will first and foremost wipe petty players off the market, those focusing solely on price. This will give other companies more room to maneuver. A recent market debut proves this point: a large Russian food producer, known for its canned meat, began to make cheap drinks that seemed about to threaten the entire market. However, this never happened, as the canned food company could not make a single market player budge with its price games. The flavored alcoholic beverage market is now all about brand.
Merkulov notes that “While regional consumers look more at price when choosing a drink, brands with unusual positioning and strong advertising are most popular in Moscow and St. Petersburg. Price is secondary. Consumers are willing not only to pay for the drink, but also for the drink’s image. It’s hard for a product to win a strong market position without a large promotional budget.”

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