finance & markets

Keeping up spirits

07.11.2014 | By Svitlana Popel

Despite sharp increase of fiscal load on alcohol, the producers of alcoholic beverages managed to come up with a plan of how to prevent new increase of prices and making the sobering up consumers drunk. This year has become a real shock for alcohol consumers. From January till August, the minimum retail prices (MRP) for vodka have been raised several times, just as the excise duties did for the 40% alcohol

The last time the excise duties were raised for vodka distillers in July to UAH 70.53 per one liter of 100% spirit. MRP grew 5.6%, 15.9% and 14.3% over the course of the year. Since August the cheapest halfliter bottle in retail chains cost UAH 39.9 (although in the beginning of the year a bottle of legal 0.5 l vodka bottle cost only UAH 28.5).

In September vodka producers have again spoken about low profitability and prepared to print new price tags again. Now, however, the largest companies promised not to raise the prices for vodka, at least in the nearest future.

VODKA AS IT IS

Following lengthy negotiations between state company UkrSpyrt and UkrVodka association, the industry lobbyist managed to convince the state monopoly to reduce sale prices for ethyl alcohol by UAH 10 per decaliter. Starting from October the maximum price of ethyl spirit of Lux category is reduced to UAH 178.04/dal. The current result is a real precedent that will help eliminate price increases of other components of the production cost of the alcoholic products, as over the past five years nobody made any concessions for the companies neither in the raw materials issues nor excise duty. For instance, from 2010 to 2014 the prices for ethyl spirit of Lux category almost tripled: from UAH 70/dal to UAH 188.04/dal. The last time Ukrspyrt added to the cost of its products UAH 21/dal in the beginning of this year. It is difficult to tell what pushed the state monopoly to such a show of loyalty. On the one hand record yield of grain crops, in particular corn, could have influenced reduction of the price for ethyl spirit. Collapse of world corn prices (from US $190/t to US $160/t on FOB terms) also contributed to the situation.

On the other hand, it is also possible that this was a new thing of the changed policy of Ukrspyrt, the new management of which declared a fight against counterfeit products, although in 2013 the share of the shadow market reached record high 50%, according to ProConsulting. In particular, thanks to production of unaccounted products by Ukrspyrt the government fell short of UAH 3.5 bn.

Inspired by success lobbyists immediately demanded from the officials to adopt a moratorium for increase of excise duties for 2015 and not to introduce 5% tax for retail sales of commodities subject to excise duty. Peoples incomes are not catching up with the price growth, which is why the sales are declining, says President of the Ukrainian Commercial and Industrial Confederation Volodymyr Demchak. The decline of the vodka market in 2014 is nearly 15%, according to the estimates of UkrVodka.

Chairman of the board of directors of Nemiroff Yakov Hrybov says that the production cost of a bottle of vodka in the medium price segment is US $0.750.8 (UAH 9.510.3) along with marketing expenses US $11.25 (UAH 12.9516). If you add to that the excise duty and VAT (UAH 22.08 per half a liter bottle) and also earnings of distributors (UAH 23) and retail chains (UAH 57), the vodka producers are not making much. The situation is similar in the economy segment, although the marketing expenses are lower.

EXCISE STORY

If the prices for vodka do not increase on the eve of the New Years holidays, the manufacturers will manage to earn more by selling larger volumes of the alcoholic beverages as NovemberDecember account for nearly 40% of the total volume of sales.

It seems that market players are strongly interested in keeping the vodka prices affordable for the consumers, because in the current situation of continuously deteriorating quality of life total sobering up of the nation risks of becoming tougher than any hangover. In fact, according to the World Health Organization our country has started losing its reputation of a vodka state. Following the report of WHO, over the past year Ukraine dropped from fifth to sixth place on the list of the heaviest drinking nations in the world. In 2013 each Ukrainian consumer drank a liter less of pure alcohol 13.9 l instead of 15 l as it was in 2012.

However, so far the purchasing power of Ukrainians continues to remain at the low level and the domestic consumers often calculate the most acceptable and affordable ratio between the price and the strength of alcohol. Although in natural units (liters) Ukrainians drink more beer, its percentage share on the alcohol market is twice lower due to the low alcohol content. In addition, a degree of alcohol in beer is more expensive than a degree of alcohol in vodka.

At that, vodka at the MRP remains the most demanded product of the past several years. Concentration of producers and labels in the lowers price segment reached its high its share is around 80%.

In 2008 every producers believed it beneficial to have a brand from the subpremium price segment, while now the majority of trademarks changed their price policy, claims analyst of Tanita Capital Pavlo Mishchenko. As a result, the nonbranded products and brands from the higher price segments practically equalized in price on the legal market.

When people are in a bad mood, they drink strong alcoholic beverages, and when people are in a good mood, they drink light alcoholic beverages for communication (beer, wine), says former general director of Carlsberg Group Ukraine Petro Chernyshov.

Furthermore, vodka for Ukrainians has now become more affordable that in the last decade of the USSR. Back then, only 7 bottles of vodka could be purchased for the minimum wage. Now (even taking into account increase of the excise duty and revision of MRP to UAH 39.9 per 0.5 l bottle) Ukrainians earn at least 30 bottles per month.

Printable version
comments powered by Disqus

News