I sit down with Maxim Kashirin, one of the owners of fine wine importer and distributor Simple Wine Co and the owner of the Grand Cru wine boutiques in Moscow to talk about the structure and current performance of the Russian wine market.
«I’d say the overall structure of the wine trade in Russia is more similar to that of Japan. First, Russia imports virtually all of its wine, although it possesses its own production. Second, we have no historical preferences to wines from specific wine regions like some other countries. The rest of the system is fairly traditional: there are importers who have the right to sell wine to retailers or directly to final consumers and to the on-trade. If a company wants to sell wine in the regions then it has to look for a distributor.
Today there are no obstacles to the creation of a wine importing company: the importing license in Russia is missing, one just have to obtain a federal alcohol sale license. It is more complicated, but it is fair: we don’t need everybody to sell wines here. Afterwards it’s all very simple: put EGAIS computer system, hire personnel, choose the range of wines to import and negotiate with them. In that sense it’s a free market. The more serious problem is the financing of such a venture, bank loans are currently very hard to obtain. Starting importing alcohol is a difficult task for a newbie because a substantial start-up capital is needed. At the same time the newcomers like «to break the market». They don’t gain much just making the life for all the market players worse.
The taxes structure for imported wines in Russia is as follows: 18% VAT + very sparing excise tax (2,6 rubles per liter fot still wines) + duty. The thing is the wine duty is 20%. Throughout the world such a duty would be considered prohibitive and designed to protect local producers. I’d like to underline that there is nobody in Russia to protect. Those companies that do produce wines in Russia are able to supply their wines much cheaper than those who import wines, in this sense they will always have an advantage. On the other hand, strikingly, the import duty for bulk wine must is 5%! And this is exactly what kills our winemakers. It is the duty on bottled wine that should be lowered, while the bulk wine -higher. In my opinion the duty on bottled imported wines should be 5-10%, while the importing the must should be more expensive — 10-15%. Imported raw materials mustn’t hinder the development of our own winemaking. In fact it’s much easier to buy wine in bulk and bottle it in Russia under the Russian brand. Thus the real agriculture and viticulture is not supported at all, we deal with the decreasing employment, and people are not “tied” to earth which is bad.
The most influential people in the Russian wine trade are, paradoxically, the government officials. Only they can destroy all of the system with tremendous speed as it happened in 2006. In wine business there is no really influential people, even big players can’t noticeably influence the tastes of Russian consumers.
I think that wine importers are not able to manipulate Russian distributors. The market is open and no one forces anybody to work with each other. Therefore, we cannot tell anybody what they should do, we can just recommend, we can sometimes insist, but nothing more. Distributors can choose a partner importing company the way they want to.
What is still very difficult when talking about the Russian wine business is the relations with supermarkets and retail chains. Department stores still don’t understand how they should earn their money. «Entrance fees» for an importer to enter retail chains are incredibly high. Moreover, the mark-ups on wine are huge — from 60% to 100%. We are not able to influence this situation now and they don’t want to hear about the recommended shelf prices. The retail wine segment has still to be more regulated in order to achieve the civilized trade.
The main problem with supermarkets is their desire to obtain maximum profit with non-trading mechanisms — shadow payments, inflating the margins and retro bonuses. The government declares that it can’t interfere in the margins regulations, and that’s right because if the state once again begins to regulate everything we will return to the regulated economy again. Extra supermarket profits are usually hidden in the retro-bonuses. Now the state is trying to eradicate this practice of retroactive benefits. It is a usual practice for chains to say they have such a small margins, only (let’s say) 20%! And it’s true, they have a small margin from the initial price that we negotiate on, but after the sale we will give them another 25% as a retro-bonus, and afterwards they will add a little more – and here it is, a 65% margin.
Thus, the wine market is very opaque, chains are beginning to twist importers’ hands saying “You should do like that because we want you to do like that”. This is hard. I hope that the new trade law which will soon be adopted will lead the wine trade in supermarkets to a more civilized form. We need to discourage supermarkets’ passion for wealth and force them to deal not with our arguments and their conscience but with the authorities and the real threat of big fines for non-market trade. Rather than receiving profits from the fair margins, as it should be, they profit from the gray schemes.
I have a highly negative attitude to some regulated wine monopolies: it is a pure corrupted mechanism. I saw those buyers of these monopolies, they tend to wear too many diamonds. And this is not strange — these people make an important wine choice for the whole country. Even the importers themselves admitted they do certain things that tip the scales in their favor. I can understand some effectiveness in fight against drunkenness — well, those people are not restricted in their movements, they can always go to nearby countries with their own laws and purchase alcohol there. In our global world, it’s just a wild idea. In Russia this just wouldn’t work.
In Russia you need to look for ways to control illegal traffic of alcohol because about 50% is not legal. We are mostly talking about cheap vodka here. It is crucial to reduce the duty on imported bottled wine. Indeed the problem is not only that vodka is cheap, but also that wine is expensive. Local wine supply can’t cope with today’s volumes of consumption. Russia is a risky viticultural zone, which means that in any year all the harvest and all the investments can be lost. The ideal model for the Russian wine trade includes the recognition of foreign wine certificates, because the Russian bureaucratic system really does not certify anything. The second – we need major reductions in import duties, and the third – we have to get rid of the regional barriers, when a region sometimes requires a dual certification of wine, jus to collect some additional money while this practice is totally illegal.
Specialist wine shops are still a very difficult business to run and we don’t see any new significant players. Among the importers we see different trends: the crisis has shown who is capable of what, who has the right financial and managerial skills and power. The wine market here is being totally rebuilt, we see brands changing importers and companies disappearing. I do not see any prospects for the emergence of new players. The consolidation around the strong players will continue and we will try to take advantage of the situation to become stronger and gain more influence.
The ruble prices rose significantly after the devaluation, but people who used to buy wine for 500 rubles (€11,4) continue to buy for 500 rubles. And in reality they do buy cheaper wines. Cheap wines are selling better while expensive bottles show almost a complete failure. In the regions the situation is even harder, many distributors went bankrupt, and people are more sensitive to prices.
In current situation it is absolutely meaningless and impossible to make predictions for the future. In Russia wine is still a kind of luxury item, rather than a daily demand. If people do not have enough money, the luxury products are ignored».