Last month, Poland's President handed responsibility of the true ownership of the international distribution rights of Poland's classic vodkas to the country's Constitutional Tribunal. Ian Wisniewski assesses the implications for Agros/Pernod Ricard and other foreign investors.

While vodka is established as the world's most fashionable spirit, it is also one of the most controversial, with significant legal disputes regarding the ownership of trademarks currently on-going in vodka's homelands of Poland and Russia.

French multi-national Groupe Pernod Ricard (GPR) thought it had gained the export rights to classic Polish vodka brands, including Wyborowa and Zubrowka, after acquiring a controlling interest in Agros.

Privatised in 1993, Agros was originally established as the import/export monopoly by the communist regime, which registered the trademarks for classic Polish vodka brands in various export markets, principally the US and Europe.

However, these export rights had long been disputed by the Polmos distilleries which produce the vodka brands, and which own the rights to the domestic market. They claim it is unconstitutional for the Polmos distilleries to forfeit their export rights to Agros.

The Polmos challenge reached a peak recently when the Polish parliament voted that the export rights to the classic vodka brands should be returned to the individual distilleries which produce them.

This bill went before the Polish President, Aleksander Kwasniewski, for final approval or veto late last month. His decision, announced 25 July, was to refer the case to the Tribunat Konstitucyjny (Constitutional Tribunal) for the final decision. Currently no date has been set for what will be an internal hearing, nor for the tribunal's final decision.

The appeal of Polish vodka for GPR is obvious. With a portfolio strong in local markets as well as global brands, including anis/pastis (Ricard, Pernod) rum (Havana Club), Scotch (Edradour, Aberlour), Irish whiskies (Jameson) there is no global contender in the vodka sector.

It was last April that GPR announced a joint venture agreement with the Polish company Tiga, which gave Pernod Ricard a 34% stake in Agros Holding SA and more significantly 74% of the voting rights. At the time, GPR said that this would enable Agros to find new opportunities in the world market, particularly Western Europe, given Poland's eventual membership of the European Union. GPR also said that it would help the company to finance potential acquisitions in the spirits production and distribution sector in Poland.

With the on-going privatisation of the 25 Polmos distilleries (the first phase of a privatisation timetable was inaugurated last June) there are strategically important acquisitions for GPR to consider.

Polmos distilleries (each named after the city in which they are located) have been evolving since 1991 when they were granted 'autonomous status' while remaining state-owned. They each produced all the classic brands such as Wyborowa and Zubrowka on the basis of a 'no fee' licence, with bottles stipulating the individual distillery.

Retail prices for these brands were set by the Ministry of Finance. Moreover, distilleries were also allowed to develop a portfolio of wholly-owned brands (in all categories), for which they set the retail prices, and to which they owned the domestic and export rights. As these brands tended to be premium and super-premium, with added value packaging, they were more profitable than the classic brands. The result was a saturated domestic market, with the number of brands reaching a peak in the mid 1990s of 1,000. The number has now stabilised to around 800.

Among distilleries reaping the benefits of their own portfolio, particularly in key export markets such as the US, are Siedlce with the Chopin brand, Zyrardow with Belveder, Zielona Gora with Krolewska, and Poznan with its premium range of clear and flavoured styles.

Preparing the Polmos distilleries for privatisation was crucial, as some were seriously under-producing while others faced financial problems due to a lack of investment.

An essential prerequisite for privatisation was dividing up ownership of the classic vodkas, so that the distillation rights to each brand were assigned to a single distillery, which simultaneously gained exclusive domestic market rights to the brand. This was decided on the basis of an auction held last July, which resulted in Polmos Poznan acquiring Wyborowa; Zielona Gora buying Luksusowa; Bialystok acquiring Zubrowka; Wroclaw claiming Krakus; Szczecin acquiring Starka; while Bielsko-Biala received Extra Zytnia.

Each distillery assumed exclusive production rights for these brands on 3 August 2000. Even if the Polmos distilleries do not gain the export rights to the classic brands they produce, many of them have ultra-modern production capabilities, and would be an ideal investment for multinationals in order to produce or bottle international brands locally.

A significant incentive is that tariffs are so steep that imported brands are necessarily priced at such a premium that they can only target a minority of the population.

International vodka brands already being produced under licence in Poland include Bols (owned by Unicom), Eristoff (Bacardi Martini), Kron (Seagram), Maximus (Finlandia/Allied Domecq) and Smirnoff Red (UDV/Guinness). This could potentially lead to a shareholding in the respective distilleries which produce them, and more local production or bottling being considered.

However, while multinational ownership could boost productivity and investment in the Polmos distilleries, this could also see various niche vodka brands, particularly specialist styles such as aged vodkas, being discounted on the basis of limited sales and profitability.

While the Polish vodka market is the world's second largest (after Russia) at around 35m-40m cases per year, consumption trends indicate that Poles are developing a wider drinking repertoire. Average annual per capita consumption of alcohol sees vodka at around 6.5 litres, beer at 50 litres and wine at 15.5 litres. While vodka is impressive, there has been a slow but steady decline since the 1990s, and even from the 1997 total of eight litres per person

Meanwhile, if GPR retains the export rights to Wyborowa and Zubrowka, then acquiring a stake in Polmos Poznan and Bialystok, which produce these brands would be an obvious consideration, in order to control production, while also adding the domestic market rights to the portfolio. In fact, Polmos Poznan is among the first phase of distilleries to be privatised. The Polish Treasury is offering 15% of the shareholding to the distillery's existing employees, while inviting individual bids for a minimum of 51% of the shareholding to be submitted by an initial deadline of 8 September 2000.

Clearly, whether the Constitutional Tribunal reaches a decision by the end, and whether Poznan and the other Polmos distilleries are awarded the export rights to the classic brands, will make a significant difference in the value and interest which they attract from multinationals. Similarly, until the dispute over the trademarks is resolved, the privatisation process is unlikely to realise the full investment potential of each distillery.

And if GPR were to lose the export rights, what could happen? It could certainly be a negative signal to any potential investor in Poland. And could see GPR requesting a giant refund.