Russians Resist Foreign Vodka,
Frustrating Western Distillers
By ERNEST BECK
Staff Reporter of THE WALL STREET JOURNAL
MOSCOW -- Roman Drenovich marches down the cluttered liquor aisle
of his neighborhood supermarket and discovers that in today's Russia, all
vodkas are not created equal.
Picking his way along the shelves, Mr. Drenovich fingers a fancy
frosted-glass bottle of Absolut, selling for $25. He scrutinizes the sleek
reindeer on an equally expensive bottle of Finlandia. He moves past a $12
bottle of Smirnoff. Squinting at prices, the 58-year-old finally reaches for a
local brand called Komdiv. Made by Moscow's Cristall Distillery, it has a
flimsy twist-off cap and a picture on the label of a famous Russian actor.
The price: $3.
"I buy only Russian vodka," declares Mr. Drenovich, with patriotic fervor.
"It is the purest, the smoothest, the best."
Grandiose Plans
In 1990, when Western companies-like Smirnoff's owner Diageo PLC of
Britain and Absolut's V&S Vin & Spirit AB of Sweden-first eyed the vast
vodka market here, they believed Russia's voracious drinkers could be
lured to their products. With famous brand names and well-honed selling
skills, the companies reasoned, they could carry coals to Newcastle, as it
were, and overpower stodgy, Communistera products. The goal was to
capture consumers eager to trade up to Western brands.
But in a surprising role reversal, Russia's private and state vodka
producers are challenging Western marketers and even beating them at
their own game -- pouring new niche brands onto the market and hawking
them with clever, eye-catching packaging and advertising campaigns. After
nearly a decade, the newcomers have little to show for their efforts --
except a bad hangover and a combined market share estimated at less
than 1%.
The setback is frustrating because Russia is by far the world's largest
vodka market: Consumption reached an estimated 250 million cases in
1996, industry watchers say, though exact figures aren't available. That
compares with 33.4 million cases in the U.S., the largest market outside
Eastern Europe, according to Impact International, a trade-research
company. While vodka sales are declining world-wide, about 80% of
Russians drink vodka on a regular basis, surveys indicate, and
consumption is increasing. Russian drinkers could help power
much-needed growth for distillers and their distributors in a crowded,
global spirits sector.
Humbled, foreign companies now concede that it may be years before
they can grab a big share of the market, but they insist that they aren't
giving up. "We're not here to make a profit now -- that might only come in
five, maybe 10, years," says John Kamviselis, country manager of
Seagram Co., which distributes Absolut in Russia. "This is a strategic
market, and we're still in the early stages of the game."
'Strategic' Industry
To be fair, not all the problems of the Western companies are of their own
making. In many ways, what went wrong in Russia is a classic tale of a
risky emerging market, with the usual problems of creaky infrastructure,
economic turmoil, low incomes, a poor distribution network and quickly
shifting consumer tastes. Yet Russia posed other obstacles: a government
determined to protect the "strategic" vodka industry by imposing high taxes
and import duties. Another blow came in 1994, when alcohol-advertising
restrictions -- including a ban on television ads -- began to be phased in, in
a bid by health authorities to cut the high rate of alcoholism.
What's more, organized crime infiltrated the vodka trade and today is said
to control the market for cheap, illicit hooch. About 50% of the Russian
vodka market is said to be "illegal," that is, untaxed, counterfeit or bootleg,
according to industry officials. While police have cracked down on
moonshine merchants, sales still flourish in alleys. One winter night in
Moscow, an elderly woman in a threadbare coat plies her wares on an
upturned banana box. "Real Russian vodka!" she screams in a raspy voice,
offering a suspicious bottle with an unsealed cap to a group of men
standing nearby. They fork over rubles worth about $1 and swill the stuff
while swaying down the street.
Drinking Objectives
"Russia isn't a drink-the-label market yet," remarks Leon Stelmach, an
analyst at Canadean, an alcohol-industry research company in London.
"Russians aren't fussy: The goal is to get drunk."
Selling any foreign vodka to Russians was never going to be easy. Most
Russians believe vodka, a colorless spirit distilled from grain or beets and
potatoes, originated here in the 12th century -- although the Poles dispute
that. So for many Russians, vodka is like mother's milk -- a native drink
from the sacred Russian soil that makes you feel warm in winter, bonds
friends, enlivens family celebrations, and nourishes the legendary Russian
soul. "Vodka is a Russian product," notes Vladimir Korovkin, planning
director at SmartCommunications, a Moscow marketing consultant. "Just
try selling whisky to the Scots."
But in the early 1990s, the market seemed ripe for the taking. Trade
liberalization had opened the borders to importers. And vodka was
vodka, a basically generic product. Few real brands -- in the Western
sense -- existed here, though Russians knew names like Cristall, a
distillery, and Stolichnaya. (Five distilleries make the popular Stolichnaya
for export.) Sensing a great opportunity, popular brands like Smirnoff --
the world's best-selling Western vodka -- and Absolut arrived, hoping to
capitalize on the rage for Western products -- from Mars bars to Tide
laundry detergent. Initially, they proved popular as bribes or trophy gifts,
kept on display in the buyer's home, or as status symbols for the brash,
free-spending new Russian rich.
For the most part, though, marketing strategies that worked well in
London or New York were simply plunked down in Moscow, with only
minor tinkering.
Absolut, trying to communicate directly with Russians, adapted its famous
global ad campaign to include Absolut dacha and Absolut Bolshoi, but it
kept its high prices. "We aim for the rich, and aspiring middle classes,"
explains Andreas Berggren, vice president of Russian operations for
Absolut. Indeed, less than 2% of the population can afford to buy a bottle
of Absolut, the company estimates. It is Absolut's policy never to produce
outside Sweden, officials insist, and even Russia's mind-boggling potential
didn't change that.
Smirnoff had a rough ride in Russia, too, after an initial surge of interest as
a status brand. At first, it was available only in foreign-currency shops. But
by 1993, consumerism was booming and Smirnoff felt emboldened to
import and sell via a joint venture on the retail level. However, the
company didn't carefully consider important factors like income levels,
distribution and a swing away from pricey, foreign-branded goods, says a
company insider who didn't want to be identified. A move to become
more Russian -- by launching an inexpensive brand, called Bread Vodka
-- was rejected because the low end of the market was overcrowded.
Ads weren't customized to the local market; instead, global campaigns
were deployed.
Limited-Success Story
While Smirnoff and Absolut struggled with their high-priced products, one
company went after the mass market and -- at first -- did reasonably well.
White Eagle, a brand owned by American United Distilled Products Co.,
in Minneapolis, Minn., in a joint venture with Archer-Daniels-Midland Co.
of Decatur, Ill., launched a big advertising and marketing campaign in
1992. Ads were geared to Russian tastes, featuring a stumbling, drunken
American Indian that Russian consumers considered funny, says a
company official. "We couldn't do that in America," he adds. Lightweight
plastic bottles were used to cut shipping costs. A large variety of vodkas
-- including cranberry and lemon-flavored ones -- were introduced,
creating a family of related products. The strategy worked: Sales of White
Eagle soared to between three million and four million cases annually,
according to the company.
But in 1994, the government started raising import duties to help local
vodka producers compete with imports from the West and former Soviet
republics. Further tax increases followed, as well as strict rules requiring
that all duties be paid in advance. For White Eagle, that meant adding
about $9 in costs to a liter bottle of vodka that cost 60 cents to produce in
the U.S. White Eagle subsequently pulled out of direct sales and marketing
in Russia.
"Russia is a wonderful market, and we were making money, but basically,
the government prohibited us," grumbles Douglas Mangine, chief executive
of American United. The company also looked into building a production
site in Russia but backed away. "You can't invest in bricks and mortar
when laws change every day," Mr. Mangine says.
Something for Everyone
Meanwhile, Russian marketers grew savvier and began outmaneuvering
the Westerners. Maverick businessman Vladimir Dovgan jumped into the
value-for-money vodka sector and backed the launch of myriad midprice
vodka brands with packaging and advertising featuring the chubby
entrepreneur as pitchman.
His food-and-spirits company currently markets 25 brands -- each with
his picture on the label. "The foreigners fight for the money of the wealthy,
and I flood the market and let the people choose," boasts Mr. Dovgan, a
self-styled consumer populist. Bolting around his modern Moscow office,
Mr. Dovgan shows off a glass case crammed with bottles of Dovgan
vodka. Among the offerings are a mild-tasting Lady brand, a robust
Imperial variety and a hardy Winterone. Retail prices are from $5 to $10.
Such saturation marketing, which cuts across price points and niche
categories, appears to be working. After two years, Mr. Dovgan claims he
will have sold 2.5 million cases in 1997. The Western companies refuse to
disclose sales figures, but their shares are estimated to be significantly
lower than Dovgan's.
For consumers, the market is awash with vodkas, known here as the
"water of life." At a small, well-kept store in a Moscow suburb, vodkas of
all shapes and sizes, labels and prices can be found next to a deli counter
stuffed with sliced meats and slabs of smoked fish. On the shelves are
odd, local brands like Sibirskaya, in a bullet-shaped bottle, and Narkom,
short for People's Commissar. "This probably appeals to crazy old
Communist drunks," scoffs Leonid Tarasov, director of Ansdell Russia, a
consultant to United Distillers & Vinters, the new Diageo beverage unit, in
Russia.
New Brand Loyalty
Despite the wide selection, Irina Maximova, the store manager, says
Russians are sticking to brands -- mostly Russian ones -- and closely
comparing prices. In other words, they are evolving from being "buyers
and users," in marketing-speak, to brand-loyal consumers. "Five years
ago, customers would wander around and didn't know what to buy. Now,
nobody is confused," Mrs. Maximova explains. According to Gallup
Media in Russia, leading Russian brands like Moskovskaya and Russkaya
score over 70% in brand awareness surveys, while Smirnoff is at 28.7%.
White Eagle scores an impressive 43.7%.
With few self-service retail stores, clever packaging is essential, and
Russian distillers like Cristall are learning from their Western competitors.
State-owned Cristall's new range includes Priviet, which sports bold black
lettering and silver foil wrapping over the cap. "Made with water from
Russia's icy glacial lakes that are perfectly clean," attests the label, in an
appeal to Russian fears of pollution. And then there's a premium range for
around $13 -- roughly on a par with Smirnoff -- with bold black-and-gold
labels. The Cristall name is daubed in elegant script.
"Russians are coming back to Russian vodka, and we're helping with
attractive new brands," says Edward Kusmitsky, deputy director of
Cristall. He shows off a limited edition Cristall vodka to commemorate
Moscow's 850th anniversary.
The explosion of vodka brands -- there are more than 400 now -- took
Westerners by surprise. (Even Vladimir Zhiranovsky, the right-wing
politician, launched his own vodka.) But for Smirnoff, there was another
woe: Boris Smirnov, a Russian namesake, launched a vodka and sued
Smirnoff for trademark infringement.
Going Local
While the case is still tied up in the courts, Smirnoff is implementing a new
marketing gambit: After years of turbulence as an importer, it has gone
local. Since March 1997, the brand has been produced in Russia at a St.
Petersburg distillery.
"This should make Smirnoff seem more Russian," suggests a Smirnoff
official, who asked not to be named because of security and legal
concerns. Indeed, the revised strategy -- which includes made-in-Russia
labels, a Smirnoff telephone hot line and ads that underline the brand's
"international quality" and Russian roots-is an attempt to convince
consumers that Smirnoff is indeed a Russian brand. "We want Russians to
realize that Smirnoff came to Russia to produce for Russians," adds the
official. New print and poster ads highlight the double "ff" in Smirnoff, to
mirror the way the rulers of Imperial Russia, the Romanoff family, spelled
their name.
So far, though, Smirnoff's gamble hasn't paid off: The company says sales
volumes haven't budged, although its price has fallen 15%, to around $11
a bottle, because of lower costs.
Sergey Koptev, chairman of ad agency DMB&B in Moscow, which has
the Cristall premium account, believes foreign brands will eventually find a
niche in the huge market but will never capture a major share of it -- or the
Russian soul. "Vodka was, and is, a matter of love and trust for us. It's our
national brand," says Mr. Koptev. |
