Comment - Soft Drinks & Water - Russia in Turmoil
Soft drinks companies are not immune from the troubles facing Russia's drinks market
Ray Rowlands of Drinksinfo Ltd takes a look at the changing face of the Russian beverage market and reviews the impact of the current economic and political situation on the country’s demand for soft drinks.
Whilst vodka still remains Russia's national favourite, the structure of the country’s beverage market is going through a re-alignment. This is largely being brought about by legislation introduced to reduce excessive alcohol consumption.
Rules introduced in January last year, for instance, forbid the sale of any alcoholic drinks across Russia between the hours of 2300 and 0800. Additional restrictions have decimated the number of sales points and virtually banished beer and spirit advertising. Excise rates are also subject to regular upwards revisions. As a result, alcoholic drinks have suffered serious volume contractions. In 2013, the beer market shrank by over 10% whilst vodka intake was reported to be down 7%.
As Russia accounts for around 40% of Eastern Europe’s total alcoholic drinks consumption, the knock-on effect for the region as a whole has been considerable.
This turn of events should have been extremely beneficial for bottled water suppliers and other soft drinks companies able to fill the vacuum in consumer beverage spending. However, the non-alcoholic beverage market faces difficulties of its own. The near stagnation of the Russian economy last year was accompanied by a decline in real disposable incomes. This impacted adversely on consumer demand, whilst the Summer weather failed to encourage soft drinks consumption. As a result, volume growth for the year was uninspiring.
That said, consumption did stay positive, despite growing health warnings and media debate. This failed to drive growth in low calorie products, however, due to Russian consumer scepticism towards artificial sweeteners.
Meanwhile, the bottled water category presented a very mediocre performance. The low quality of tap water had been a strong motivating factor in buying bottled water but, faced with constrained household budgets, boiled tap water proved a popular, inexpensive solution. Energy drinks and iced tea remained more positive than most categories, but even their rate of progression was well down on 2012.
All in all, 2013 was a dull year for soft drinks in Russia, though a considerably brighter one than for alcoholic beverages.
Unfortunately, the opening months of this year carried on in the same vein as 2013. The value of the Rouble hit a five-year low in international markets in quarter one, with a new element entering the crisis mix, in the form of the fractured relationship between Russia and Western Europe over Ukraine. This led to sanctions by both sides and, ultimately, further hardship for the Russian people.
Meanwhile, beer and spirit sales have fallen further as the year has progressed, though the FIFA World Cup provided a short-term respite. Carlsberg has reported that the Russian beer market contracted by 6% to 7% in the first half of the year, with the fall in spirits being tempered by a shift towards illegal and home-made vodka. This diminished the impact of anti-alcohol measures but provided some comfort to the financially-constrained populace.
To date, there has been no complementary increase in soft drinks sales. Progress remains hampered by restricted consumer purchasing-power. Producers fear total economic stagnation or even recession as the country continues to flounder and the Ukrainian emergency worsens.
Most soft drink categories have continued to suffer. Coca-Cola, the largest operator in the Russian market, saw its second-quarter unit case sales in the country slide by 5%. This was the first decline in eleven quarters. In June, the company also closed down two of its Nidan factories due to a diminishing market for juice drinks in Russia. Other multi-nationals, such as Nestle, PepsiCo and Unilever, are also understood to be feeling the strain placed on the soft drinks market.
Of cold comfort could be the fact that the consumption of legitimate alcoholic beverages is falling a lot faster than that of soft drinks. As a result, the balance is gradually moving in favour of the latter.
However, even this development may be short-lived. As the sanctions campaign intensifies, a proposal from Russia's Communist Party to introduce a tax on sugary drinks - ranging from $0.10 to $0.28 per litre, depending on sugar content - offers yet another headache.
While bottled water will be unaffected, this could seriously affect Russian consumer demand for soft drinks such as soda, juice drinks and iced tea.
If implemented, such a measure would not only squeeze soft drinks demand but also see additional market restructuring. With the dairy market hampered by low raw milk supplies, the main beneficiaries of such a situation are likely to be inexpensive hot drinks. Tea and coffee already represent around half of the country’s commercial beverages market and could well benefit further from the mounting array of anti-alcohol legislation and potential levy on sugary drinks.
Carlsberg's CFO has said the company is "a little more negative" on Russia's consumers after continued problems in the country forced a full-year forecast downgrade....
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