Water into wine

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United Distributors is one of Russia’s biggest wine companies. And it began to expand the day its CEO realised that ‘wine’ and ‘wine business’ are two different things. Anton Moiseenko speaks to Valery Filatov.

Valery Filatov is CEO of wine importer United Distributors. The company — like its CEO — is no ordinary one: with its many wine outlets and aggressive regional strategy, it’s managing to ride Russia’s turbulent business conditions, while slowly evolving from ‘wine’ to ‘wine business’, as Filatov puts it.
Indeed, wine started with water for Filatov, when he became involved in importing French water in the mid-1990s. “Water is a weird thing to import: it costs seemingly nothing, but weighs a ton,” he says. “In order to make it economically viable we had to add other goods to our containers and the French guys decided it had to be wine.” It didn’t work out as planned: the French company was scared of the possible market consequences of the 1996 Russian presidential elections and ceased operating in Russia. But the idea of doing business with wine stayed in Filatov’s mind.

Into distribution

United Distributors’ head office, 20 minutes’ drive from the Kremlin, is a typical mid-sized B-class office; cost-cutting means a lot in this business. The CEO’s spacious office is full of bottles from the company’s portfolio, and Filatov speaks calmly and confidently, occasionally checking to see if you understand what he says.

Originally, Filatov’s idea was to bring in top wines to supply the rapidly growing number of restaurants demanding “the very best”, although at that stage he had neither experience nor wine knowledge. Slowly, the portfolio grew and names such as Ornellaia, Fontanafredda, Poggio di Sotto, Bodegas Roda, Dr. Loosen, Lapostolle, Achaval- Ferrer and Torbreck found their places in United Distributors’ portfolio. Many others followed. Until 2006, the company also imported foods, until finally deciding to focus solely on wines and spirits.

Today, United Distributors has offices in 20 Russian cities, plus 9 Aqauvita wine outlets in Moscow and four more in other regions. Filatov expects this year’s turnover to be twice that of 2013, when it was 3.6bn Rubles ($57m), with the steady growth highlighting that the company’s turnover has risen tenfold since 2010.

Filatov keeps himself busy: not only is he head of the importing business, but he also oversees wine distribution throughout Russia. United Distributors, in fact, consists of a number of companies, only one of which is the importing business. Others include distributors within a group of companies that are divided by region: Moscow, St Petersburg, Siberia, the Urals and the Far East. Each region – except Moscow and St Petersburg – includes several major cities.

From 2010, he says, United Distributors began to rethink its strategy. At the time a niche on-trade player, it had ambitions to become a national distributor with strong brands, capable of thriving in the harshest of retail conditions The world outside HoReCa was a revelation for Filatov. “If you want to build something notable, you ought to work with big brands,” he says. “It’s not easy to deal with the retail segment, but staying in a single niche wasn’t very interesting for us.”

Going beyond high-end restaurants and bars was an important step in United Distributorsʼ strategy. Expansion, new regional markets, mass consumers — all of those needed to be won over with new brands, new approaches and new fuel. United Distributors may not seem an active market player to the ordinary Moscow bar- goer anymore, because they seem to have disappeared. Yet while the company has been slowly fading from the wine lists of the A-class restaurants, an aggressive plan has come to fruition. From 2010, United Distributors began to expand rapidly – at the expense of established, but weaker players.

Aggressive approach

The multiple crises in the Russian market o ered an opportunity to acquire assets and brands from those in trouble. Step-by-step, Filatov was able to gather a group of very strong brands under one roof, while cutting management costs and expanding distribution, thanks to taking over the capacities of other companies. Among the notable companies whose assets were partially acquired were Vagr Vina Vita, Kazumian and Mozel. “We never buy companies themselves,” says Filatov. “It’s normally too expensive. What we do is negotiate the purchase of di erent listing obligations and speci c brands.” He adds, casually, “With some of the acquired brands we had success, with others we had to discontinue collaboration.” Among the successful acquisitions were brands such as the Chilean winery Viňa San Pedro and Gonzalez Byass’ Tio Pepe.

Given the current economic downturn in Russia, Filatov thinks consolidation is the only possible market response. “The wholesale wine trade is not e ective in the current conditions,” he says. “There are lots of players in a small market, the exchange rate is unstable, and companies need big margins – but even then can’t cover today’s [ nancial] risks.” Retailers, on the other hand, he says, “are not denying themselves anything and put margins on from 35% to 100%. Our customers just cannot bear it.” This means, adds Filatov, that further market consolidation is inevitable. “The big ones will be getting bigger and the small players must leave. Fifty healthy importers is what this market needs.”

United Distributors is currently looking for ways to cut costs and expand, all at the same time. As paradoxical as it sounds, there are opportunities to do this. Retail wine trading in 2014 was a mess for everyone: when the value of the ruble fell 50% to 80%, retailers forced their suppliers to absorb some of the exchange rate losses, to ensure that prices rose as little as possible; in some cases this was only 20%. Overall, according to Filatov, while the ruble lost 80% of its value against the Euro, European wine prices in Russia rose approximately 32%. “This means severe margin trimming for us,” he says. “We have to ght back with increased volumes and decreased expenses.”

The spirits and beer markets are also undergoing a series of mergers and acquisitions. The Central European Distribution Corporation (CEDC), one of the world’s biggest distributors of vodka, was sold in 2013 to Roust Inc., a division of Russian Standard. “Russian wine producers are going through the same business phase,” says Filatov, pointing at examples like Abrau-Durso, one of Russia’s wine producers, which acquired a majority stake in the small and artisanal Vedernikov Winery earlier this year.
The consolidation of wine importers isn’t easy. “It’s like putting two artists into one room,” says Filatov ironically. “Each one has his own vision, each one is an artist of his own. It’s hard for us too, even though we realise it’s inevitable”.

Day-to-day business

Unlike Russian wine distributors like Simple and MBG Impex, United Distributors puts all of its brands in a single portfolio, enabling them to cut operations costs, as they don’t have to run multiple companies with di erent brands. “We are, of course, trying not to put competing brands together,” says Filatov. “Our portfolio has to be e ective and work in our channels and in di erent local markets.” However, he says that the United Distributor approach is di erent for di erent cities. “The two major principles that we respect are: meeting demand, and rotation. We have niche wines in our portfolio, but we understand fully that we need sales. If we send fantastic niche wines to Vladivostok and they don’t sell — we are in trouble.”

For obvious reasons, the Moscow company showcases the full portfolio, while small cities like Khabarovsk — a staggering 6,000 km to the east — only have a selection, with Ekaterinburg (Urals) and Novosibirsk (Siberia) being somewhere in between.

Market players believe United Distributors made a clear choice in moving away from the niche A-class market of Moscow towards thinking about retail and distribution throughout Russia. “That’s right, we are in wine – but in the wine business,” says Filatov rmly. He says that back in the early 2000s, the company was doing ‘wine’. “We were selecting wines rigorously and e ortlessly, so
as not to compromise anything. We didn’t really see that the wine market can be very diverse,” he says. “We ignored the mass market, where few consumers know anything about wines. We now see that the market is much wider and we work through all the channels.”

Being a legal company in Russia means complying with wine regulations, which include the controversial distance sales ban. This requires the buyer to see the actual bottle in vivo prior to paying for it. This means that the only legal way to sell wines directly to Russian consumers is through a wine shop with a retail sales license. “Because of these legal boundaries, we believe the best way to manage direct sales is to have our own outlet in each major city,” says Filatov.

United Distributors’ shops are called Aquavita, which is ironic: consumers won’t nd any vodka on sale. Each outlet is situated in a business centre, not in the city streets. “Business centres are attracting paying customers,” explains Filatov. “They don’t have as much tra c as central locations but the demand is steady and the sales are growing. We are actually planning to open two more by the end of the year.”

Filatov clearly understands that being passionate about wines and doing wine business don’t have to be connected, especially in Russia. “About ten years ago, I suddenly realised that you don’t have to run a wine business in order to enjoy ne wines. You don’t have to bear all the costs of such business.” He says his philosophy has changed a lot. “I am now doing more management, consolidation and integration, than ‘wine’. I am solving purely managerial tasks, the same as in every industry.”

Yet despite him saying “from wine to wine business”, Filatov insists he hasn’t lost his passion for ne wine. “I still try to taste all the wines from our portfolio,” he says, indicating the rows of wine bottles in his o ce. “Have I changed my attitude to wines? No! I love great wines. It’s just that I understand that not everyone can a ord a $100.00 wine. There are people who want to pay $10.00. Is this poetry or prose? I don’t know.”

This article appeared in 5/15 Meininger’s Wine Business International