Blog: Olly WehringIf you can't beat 'em... buy 'em!

Olly Wehring | 1 March 2006

Characterised by power struggles, legal battles and the odd out-and-out gunfight, the Russian vodka industry is the source of some of the stranger tales to come from the modern drinks industry. My favourite is the one about how, at one point during the Communist era, the proceeds made from the Soviet vodka machine were set aside to single-handedly finance the might of the Red Army.

True or not, this tale demonstrates the sheer size of the industry and why the companies and personalities involved in the country’s vodka market continue to fight so hard for every advantage they can get.

It also shows why Diageo was happy to see the end to one of Russian vodka’s more significant tussles this week - the battle between its Smirnoff brand and the domestic giant Smirnov.

Diageo yesterday joined forces with A 1 Group, a subsidiary of the Russian conglomerate Alfa Group, to form a spirits joint venture, Diageo Distribution. Through the venture, the drinks giant has bought a majority stake in the Smirnov brand, which has seen sales leap more than fourfold in Russia in the last year.

There were as many as four Smirnov/Smirnoff brands on the Russian market at the turn of the century, each locked in a complex legal battle for control of the trademark and each claiming to be the true descendent of Piotr Arsenyevich Smirnov, who opened a distillery in Moscow in the 1860s and later became the official vodka supplier to the tsars.

Diageo’s deal with Alfa finally brings this chapter in Russia vodka’s colourful history to an end and Diageo will be all too happy to have buried the hatchet with such a favourable deal.

In Russia in the last half of 2005, Diageo saw net sales leap by 51% on the back of a 41% rise in volumes, albeit from a low base. The addition of Smirnov to the portfolio gives it the base to move even further forward quickly.

Andrew Morgan, president of Diageo’s European operations, said: “Combining this with Diageo’s expertise in spirits’ marketing means that this venture creates a strong foundation for our joint ambition to become the leading spirits business in this market.”

What remains unclear, is how two brands, for so long at loggerheads over trademark infringements, will be marketed together under the same portfolio.

“It is too soon to say what plans we have for the two brands,” was all a Diageo spokesperson could tell just-drinks. “Both have a significant Russian heritage. Once we get the Russian anti-monopoly regulatory clearance on the deal, we’ll develop a strategy that will allows us to take advantage of this Russian heritage.”

Churchill once said: “Russia is a riddle wrapped in a mystery inside an enigma.” Hopefully the situation with the country’s vodka industry will become clearer one day soon.


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