Comment - Tariko Looks to Raise the Standard with CEDC Takeover
By Chris Mercer | 11 June 2013
Russian Standard took full control of CEDC last week
Russian Standard is now the world's second largest vodka producer after finally getting full control of Central European Distribution Corp (CEDC). But how will it handle the troubled group and where will in benefit? Chris Mercer investigates.
Russian Standard's deal to rehabilitate a battered and bruised Central European Distribution Corp (CEDC) will make it one of the most interesting spirits companies to watch over the next few years.
It's taken around 18 months for Russian Standard to envelope CEDC in its entirety, after acquiring its first 9.9% stake in the beleaguered vodka producer and distributor towards the end of 2011.
That is an uncharacteristic show of restraint for a company which commonly resembles the fierce ambition of its founder, owner and chairman, Roustam Tariko. Between 1998 and 2005, he took Russian Standard vodka from flip-chart drawing to 1m annual case sales.
While Tariko may have been content to bide his time with CEDC, he has not blinked at any opportunity to capitalise on his rival's financial woes - and there were many. The eventual takeover of a collapsed CEDC, completed last week, cements Russian Standard's position as a key player to watch both in Eastern Europe and important vodka markets further afield.
Russian Standard was already seeking to expand in Eastern Europe when the CEDC opportunity came along, and had held on-off talks with the owners Nemiroff earlier in 2011.
CEDC is potentially a better deal, because it provides Russian Standard with a bigger spread of vodka brands and a better distribution reach, despite the challenges associated with handling CEDC's creditors and turning the business around after its bankruptcy filing in April.
So, what now?
Russian Standard said the deal makes it the world's second largest vodka producer by volume, with 34m annual case sales; to which the obvious riposte is that a lot of this vodka is being sold in the wrong place. Vodka consumption is waning in the spirit's heartland of Central & Eastern Europe (CEE), as a result of regulation and generational changes in drinking habits.
Standalone Russian Standard already has a relatively international business mix among its regional peers, with just over half of its volume sales generated outside of the CEE zone, according to Sanford Bernstein analysts. The Russian Standard brand hit 2.9m global case sales last year, up from 2.6m in 2011, company figures show.
However, CEDC is almost exclusively reliant on CEE for its volumes. There is much work to do, then, if Russian Standard is to create solid export markets for its acquired brands, which include Russian vodkas Green Mark and Parliament, as well as Polish bison grass-flavoured Zubrowka.
It believes consumers will respond well to marketing cues around authenticity, a buzz-word in any game of drinks publicity bingo. As the ink dried on the CEDC deal completion, Russian Standard announced it would launch Green Mark in the fiercely competitive US vodka market, with an "aggressive" off-trade marketing campaign.
Initial feedback suggests the brand is enjoying early success in the UK, although it only debuted in the market last summer.
"I do think there is an opportunity to push a more authentic vodka to Western consumers," Jonny Forsyth, global drinks analyst at market research group Mintel, told just-drinks.
"Vodka has become all about ultra-premium frills and extreme flavours, and so a more 'stripped down', authentic product would definitely be attractive to some. However, I don't think they're a serious threat to Smirnoff."
In terms of price, the inclusion of CEDC brands gives Russian Standard a decent spread. Green Mark will weigh-in at a suggested US$12.99 per 75cl bottle in the US, likely to place it in direct competition with Polish brand Sobieski. Zubrowka, known simply as 'Zu' in the US, will retail at $24.99 for 75cl and distribution will be switched from Remy Cointreau to Russian Standard's own subsidiary.
Experience suggests that success can come quickly in the US vodka sector. But, securing a decent profit margin and holding on to that success are much harder, especially because bright, new, shiny vodka brands are liable to spring up with little forewarning.
In the UK, distribution of Green Mark and Zubrowka look set to remain with William Grant & Sons' First Drinks Brands for now, even though Russian Standard vodka is handled by Whyte & Mackay - following a split from First Drinks at the end of 2011.
First Drinks' MD, Chris Mason, told just-drinks: "We have an excellent working relationship and alliance with CEDC and have enjoyed excellent relationships with Russian Standard in the past. Our priority is to continue to invest and build our portfolio of premium, authentic vodka brands for CEDC in the UK."
A spokesperson for Russian Standard said: "There are no plans to change distributors in the UK. We always work with partners on the optimal route to market."
For speculators out there, it also just possible that Tariko is more amenable to working with Grant's now that the group's distribution deal for his old adversary, Stolichnaya, is coming to an end in the US. Still, it would be unusual to maintain two separate distributors in one market over the longer-term.
Closer to home, Russian Standard's full takeover of CEDC's business offers distribution opportunities. “I think the main advantages of the deal are that it now gives them superior distribution in Eastern European markets such as Poland and Hungary,” said Mintel's Forsyth.
Alongside distribution of its own portfolio, which also includes Italian sparkling wine Gancia, Russian Standard inherits CEDC contracts for a range of brands, including Rémy Martin, Jägermeister, Grant’s, Campari and Jim Beam, as well as Carlo Rossi and Concha y Toro wine.
There are, of course, quite a few issues to sort out, including a reorganisation plan for CEDC approved by a US bankruptcy court last week. Prior to the approval of that plan, Martin Sværdborg, a corporate bond analyst at Jyske Bank who covered CEDC up to the end of April this year, said there was particular concern about the firm's Russian unit.
Tariko has been quoted as saying that the spirits industry consolidation process is just beginning in the CEE region.
He will want to patch-up CEDC first, but don't be surprised to see Russian Standard scouting for more deals in the area in the near and medium-term. After all, Tariko has his own bank.
While overall white spirits sales appear to have regained some momentum, the diverging fortunes of different categories and the comparatively subdued forecast volume gains across the board underline the importance of innovation and geographic expansion. With micro-distillers already leaving their mark on vodka and English gin and hence providing dynamism and edginess to the categories, Dutch gin remains less and less relevant to aspiring drinkers in its core markets.
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Comment - Tariko Looks to Raise the Standard with CEDC Takeover