CEDC supports Russias vodka crackdown

CEDC supports Russia's vodka crackdown

A minimum price on vodka in Russia is helping to flush out the country's illicit alcohol market and drive consumers towards big producers, the president and CEO of Central European Distribution Corp has said.

William Carey said that the Government's move has directly increased sales for Central European Distribution Corp (CEDC) in the first half of 2010. CEDC owns Russian Alcohol Group, one of Russia's leading vodka producers.

Russia's Government introduced a floor price on vodka of RUB89 (US$3) per half-litre back in January. It plans to raise this to RUB200 by 2013 in order to tackle excess drinking and curb illicit spirits sales.

"The overall vodka market has been positively impacted by strong Government controls that have been put in to reduce the grey market," said Carey in CEDCs half-year results statement yesterday (5 August).

Legal vodka sales rose by 1% in volume for the six months to the end of June, according to Russia's official statistics agency, Gosstat. This is despite an estimated fall in overall vodka consumption.

Unlicensed vodka accounted for more than a third of vodka produced in Russia prior to the minimum price law, according to estimates. Grey market vodka was available for as little as RUB40 per bottle.
 
"We expect the growth of the legal vodka market to come primarily from the value sector where people are shifting from the grey market," said Carey. "But, as real wage inflation continues its positive trends, we expect mainstream/sub-premium sectors to benefit medium term."

CEDCs main economy vodka brand, Yamskaya, is expected to increase volume sales by a quarter in 2010, to more than 3m nine-litre cases. The firm's Russian vodka sales rose by 7.5% in volume in the three months to the end of June, compared to the same period of last year, helping to offset decline in Poland.

Other vodka producers have also backed the Russian Government's minimum pricing strategy. Premium vodka producer Russian Standard said recently that the Government's actions were "absolutely correct".

However, for CEDC, it remains unclear whether enough consumers are shifting from illicit to legal vodka to offset price erosion on the firm's brands. The group cut costs in order to protect profit margins in the second quarter.

"The bulk of the growth in demand for our vodka portfolio is still coming from a lower price point as compared to the second quarter 2009," said Carey. "But, pricing seems to have stabilised and gross margins remain above 50%."

Parliament and Green Mark are two of CEDCs flagship vodkas in Russia. The country accounts for three quarters of the US-based firm's annual earnings.

Higher charges caused CEDC to drop into the red for the first half of 2010, despite a strong rise in sales.