Jim Beam Didn’t Get Putin Memo as Whiskey Eyes Russians

November 5, 2012 JRL Russia List Economy, Business, Investment, Trade, Health, Epidemics, Substance Abuse, United States, U.S.-Russian Relations

Shelf of Alcoholic Beverages with Red and White Tape Across It

(Bloomberg – bloomberg.com – Duane D. Stanford – November 5, 2012)

Beam Inc. (BEAM) wants more vodka-imbibing Russians to drink Jim Beam and Maker’s Mark whiskey.

Apparently Vladimir Putin didn’t get the memo. In a campaign to help his people live longer, Russia’s president is pushing the biggest crackdown on alcohol since the cold war. That could complicate Beam’s efforts in a nation that’s a cornerstone of its emerging-market strategy.

Russians looking to show off burgeoning prosperity have helped make imported whiskey the fastest-growing spirit in Russia as vodka sales fall. The trend figures into Beam’s goal to get 25 percent of its annual sales growth from emerging markets and double sales in Russia in three years.

The surge in whiskey consumption comes amid government bans on late-night alcohol sales, drinking in public places and alcohol ads on TV, radio and billboards. Russia also has put in place new taxes in an attempt to restrain alcohol consumption that’s the world’s fourth-highest per capita.

Such measures may require even more agility on the part of importers such as Beam, Jack Daniel’s-maker Brown-Forman Corp. (BF/A) and Johnnie Walker-maker Diageo Plc (DGE) as they seek to quench Russians’ thirst for dark spirits, said Spiros Malandrakis, a global alcohol drinks analyst for researcher Euromonitor Plc.

“There has been a massive series of legislative attacks,” Malandrakis said. “You have to take slow steps so you don’t gather the wrath of the Kremlin on your head.”

Trading Premium

Beam, based in Deerfield, Illinois, rose 2.8 percent to $57.15 Nov. 2 after reporting third-quarter per-share earnings, excluding some items, of 62 cents, beating the 55-cent average of analyst estimates compiled by Bloomberg. The shares have risen 12 percent this year. Beam has traded, on average, at a 76 percent percent premium on a price-to-earnings basis to the Standard & Poor’s 500 Index during the past year, according to data compiled by Bloomberg.

Carlsberg A/S (CARLB), owner of Russia’s leading brewer, Baltika, knows all too well how volatile Russia can be. After investing billions in a country that accounts for almost 40 percent of of its global profit, the company has struggled against a declining beer market amid the government crackdown. Consumption fell 2.4 percent from 2007 to 2011, according to International Wine & Spirit Research.

“Part of the ability to compete in markets like Russia is to understand that reality,” Beam Chief Executive Officer Matt Shattock said. “We have to play by the rules established in each market and sometimes in environments like this, those rules move.”

For Russians, American spirits are as much about status as inebriation. At Globus Gourmet, a high-end food store in the heart of Moscow — where conspicuous consumption fuels two Rolls Royce dealerships — the liquor boutique looks like a diamond store. Showcase lighting transforms bottles of bourbon, cognac and scotch into shimmering displays of amber and caramel hues.

Luxury Mall

A bottle of L’Esprit de Courvoisier, with its own decorative carrying case, sells for 226,630 rubles, or almost $7,300. Next to Red Square, in the Gum luxury mall, the centerpiece of a massive spirits display at the Gastronom No. 1 grocery features almost all brown spirits. Shelf after shelf of vodka, meanwhile, has been pushed to the sides.

“We’re looking at premium outlets where people with the money go,” said Bill Mateo, who manages Beam’s Russian distribution partnership, called Maxxium.

In a Russian spirits market that fell 4.6 percent last year, including 4.9 percent for vodka, whiskey consumption grew 48 percent, according to the London-based ISWR. Russians’ love affair with Western spirits showed up in tequila consumption as well, which jumped 45 percent. Beam is concentrating its Russia marketing and distribution efforts on Sauza tequila, Courvoisier cognac and Teacher’s scotch in addition to Jim Beam.

Real McCoy

“Russians are a spirits-drinking nation and they are extremely bored of vodka,” Malandrakis said. “As they try to shed all the associations with a Soviet past and move into a Western direction, premium whiskeys and tequila make sense.”

If it weren’t in the center of Moscow on the ground floor of a Stalin-era apartment building, the Real McCoy Speakeasy Bootlegger’s Bar & Restaurant could be mistaken for an attraction at Walt Disney World’s Frontierland.

The saloon-like space is adorned with peeling faux cement walls. One corner holds a jail cell. The bar is perched on fake wooden booze barrels. As if to drive home the point, the white outline of a sprawled corpse is painted on the wood plank floor. The drink of choice here: whiskey.

“We’re seeing some exciting growth of Western spirits,” Shattock said. “As Russian incomes grow, there is an opportunity to switch from local to imported brands.”

King Vodka

Still, vodka is king, making up almost four-fifths of spirits consumption in the country. Whiskey didn’t even register one percent, making it less of a threat to regulators fighting overconsumption.

Russia cut alcohol consumption to 15 liters (4 gallons) from 18 liters per capita in the past two years, Deputy Prime Minister Viktor Zubkov said in December. The government wants to reduce it at least to 8 liters by 2020.

To help, Russia banned sales in stores between 11 p.m. and 8 a.m. Late last year, the Russian government adopted a plan to raise alcohol excise taxes 30 percent by the end of next year, following a 2010 beer tax increase of 200 percent.

Much of the regulatory attention so far has had a greater effect on low-cost spirits, rather than premium brands such as Jim Beam. A 0.7-liter bottle of Jim Beam can cost 1,660 rubles ($53) at the high end. Jack Daniel’s can go for 2470 rubles ($79). By contrast, Green Mark, the best-selling vodka in Russia, sells for about 181 rubles ($6) for a half-liter bottle.

Emerging Markets

Since spinning off from Fortune Brands last year to become a standalone spirits maker, Beam has looked to expand its presence in emerging markets from Brazil to China. In Russia, Beam is horning in on an import whiskey market dominated by global behemoths such as Diageo and Pernod Ricard SA, maker of the Glenlivet single-malt Scotch whisky and Jameson Irish Whiskey.

After years of work to expand distribution nationally through hubs in 28 cities, Beam has turned its attention to brand (BRND) building, Mateo said.

In one campaign, crews of attractive young women are sent into Russian bars like the Real McCoy to look for Jack Daniel’s drinkers. They are offered a free blind taste test including Jim Beam and asked to pick a favorite. Beam hosts golf events with cigar makers and tastings at yacht clubs to attract affluent drinkers.

“It’s about putting luxuries together,” Mateo said.

Beam boosted its share of the American-made whiskey market in Russia to 25 percent last year from 14 percent in 2009, according to Euromonitor. Market leader Jack Daniel’s now controls 72 percent of the segment, down from 80 percent in 2009. In whiskey overall, Beam is still a bit player in Russia, with 1 percent of the market compared with Diageo’s 41 percent share.