Excise taxes, imports, shadow market, exchange rate risks. Bayadera Group CEO about alcohol market, state alcohol and pricing in the new year

The owners of the capital’s alcohol boutiques can envy the office of Anatoliy Korchinskiy, Bayadera Group CEO. Not far from the entrance, there is a variety of alcoholic drinks, from huge bottles on stands to small ones. Colleagues and partners enlarge the collection. The range in the office tells us how competitive the Ukrainian alcohol market is.

Big changes are coming in this market next year. The state refused from monopoly on alcohol production, and since mid-October, the State Property Fund has been selling distilleries to the business. This is good news for the industry - such a step will reduce the share of the shadow market, which reached 50% in previous years. However, there is also unpleasant news - that is an increase in excise taxes on the production and sale of alcohol by 11.6% (which, for example, will lead to an increase in the price of a bottle of vodka by UAH 5-7).

Have Ukrainians really started drinking more imported alcohol and buying drinks via the Internet? What happens to the shadow market and legal exports? All this in an interview with Anatoliy Korchinskiy, Bayadera Group CEO.

Global changes are taking place in the alcohol production market this year. The State Property Fund is actively selling distilleries, which were previously managed by Ukrspirt State Enterprise. Bayadera Group has not participated yet in auctions for the purchase of state-owned enterprises. Are these assets interesting to you?

We are watching the bidding and several distilleries may interest us. However, it all depends on the price, which must be economically justified. I am not saying that it should be low or high. Alcohol is one of the ingredients for vodka production.

How many plants are the company interested in?

Two or three. The capacity of one distillery is not enough to provide us with alcohol.

Did the representatives of the SPFU or Ukrspirt organize visits to the distilleries that are planned to be sold? What condition are they in now?

We visited them. Distilleries will need to be modernized, and production will need to be automated. According to preliminary estimates, it is necessary to invest from $ 2 to $ 3 million in each enterprise.

Now the plants of Ukrspirt State Enterprise produce alcohol. Are they producing enough alcohol?

There is barely enough alcohol on the market. Some distilleries are standing still. The prices at which alcohol is sold in Ukraine are higher than in Eastern Europe.

Are they noticeably higher?

I think about 20%. Excise taxes, which are very high in Ukraine, have a much greater impact on production costs. For example, in the price of a bottle of vodka worth UAH 89.4, taxes take UAH 25.4. Moreover, manufacturers pay this excise tax on an advance payment. That is, we have not yet produced or sold vodka, but already have to pay the state. And here we are suffering financial losses.

The state budget for next year plans to increase excise taxes by 11.6%. How will this affect the vodka market?

A bottle of vodka can rise in price by 5-7 UAH. In addition, this will negatively affect the legal producers. Vodka production will decline, as will receipts from excise taxes. Buyers are not willing to pay more. Foreign producers are already selling their vodka at the same price as we are. Therefore, imports are growing. If last year it occupied 2-3% of the vodka market, now it is 6-8%. Our consumers prefer imports. This is clearly seen in the wine market. Although I would like to note that the quality of products from foreign competitors may be significantly lower.

Are you considering buying plants abroad?

Not yet, but we are placing orders to foreign enterprises for the production of alcohol under our brands. We work with a state-owned enterprise in Belarus according to this scheme. We cooperate with plants in Azerbaijan and Turkmenistan. These countries have set high customs duties, so it is unprofitable to import products into their markets. We are looking for partners abroad and are building a joint business with them.

What happens to the illegal vodka market

Sergey Bleskun, the acting head of Ukrspirt, said that buyers of distilleries would be able to export alcohol. Is it profitable?

For export to be interesting, it is necessary to adjust the legislative norms. Ukraine has introduced quotas for the export of alcohol, and they are small.

Experts say the illegal vodka market is dropping. Have you noticed this trend?

The illegal vodka market currently accounts for more than 50% and there is no effective struggle on the part of the state, including law enforcement agencies.

How will the situation develop?

With the increase in excise taxes, the situation will only get worse.

How much will production grow in 2021?

Up to 10% for the market as a whole. Another reason for the growth of the market is that the amount of excise tax remained at the level of previous years. A rise in the cost of excise tax may set us back several years.

Did you discuss the issue of increasing the excise tax with the government?

Producers met with Aleksey Goncharuk when he was prime minister. But the tax committee of the Verkhovna Rada deals with this issue. We were not given any arguments why the excise duty should be increased.

One of the Bayadera Group's businesses is wine production. There are no import duties on wine. Is it interesting to do wine business in such conditions?

Wine production in Ukraine is in a difficult state. We are one of the few companies in the country that is engaged in a full production cycle - from growing grapes to bottling and selling wine. I can say with confidence that it is not profitable to be engaged in winemaking in Ukraine. In 2019, our company additionally planted 200 hectares of vineyards, but we will get the first harvest only in 2024. All this time they need to be looked after. Bayadera Group ranks first in terms of grape processing. In 2020, Koblevo winery harvested and processed more than 9.5 thousand tons of grapes.

The Ukrainian wine market is dropping. In 2020, wine production decreased by 6% compared to 2019. Foreign wine occupies about 50% of the market. If the trend does not change, then its share may grow to 70% within the next two to three years.

Bayadera Group's market share in wine production is nearly 11%.

In mid-June, the Ministry of Economics first dismissed and then reinstated acting Head of Ukrspirt Sergey Bleskun. The leaders and owners of the largest alcohol companies in Ukraine opposed this decision. What were the reasons for such changes, in your opinion?

It is hard for me to say what it was connected with. Our company is far from politics. However, I think it was a mistake. Or they did not understand the situation. Under Sergey Bleskun, the illegal alcohol market began to drop, privatization processes shifted, and Ukrspirt's financial performance improved. Firing an experienced manager who is profitable is illogical.

The state is a bad manager. It is necessary to invest large funds in distilleries, which the state does not have. What for? This is a non-core business of the state. Therefore, the decision to give the plants to private hands is correct. The state will earn on taxes and excise taxes.

How the company reacts to exchange rate fluctuations

Last year, Bayadera Group refused to import alcohol from the Proximo group (TM Jose Cuervo, Bushmills, Kraken, etc.), but you still have a Diageo portfolio (TM Johnnie Walker, Crown Royal, White Horse, Smirnoff, Captain Morgan, etc.). Your competitor - a vodka manufacturer under the TM Nemiroff, LVN Limited, imports Proximo products to Ukraine. Why did you refuse to cooperate?

Proximo has good brands. I think that LVN Limited will be satisfied and the import of these products will allow the company to be rewarded. The conditions that we had did not suit our company very much. Therefore, during the discussion, we made a mutual decision to part.

What share of your sales is import?

Overall, 12% in real terms.

This year, the risks of importers increased due to the devaluation of UAH. Perhaps the national currency will fall in price next year as well. How can this affect sales?

This will lead to lower sales. However, this will not affect the products of the high price category. If consumers buy a product for UAH 1.5 thousand, then they are ready to spend UAH 1.7 thousand on it. Importers will suffer losses. We buy goods based on EUR rate of UAH 33, and we pay for it at the rate of 35. The end consumer will feel the devaluation in two or three months, since it is not easy to coordinate the price increase with food chains.

How do you insure yourself in this situation? Do you include a higher rate in the cost of products?

No. Otherwise, they will not buy it. These are our exchange rate risks. This year, for example, we did not raise prices for imported products.

We have already talked about business diversification. Therefore, export is very interesting for us.

Do you mainly export vodka?

Yes. We also supply wine and sparkling wine to foreign markets, but the supply volumes are small.

What is your company's export share in the sales structure?

Approximately 7.5% in volume terms of the total.

Are exports growing?

Exports are not growing this year. For example, the export of all Ukrainian vodka decreased by 7% compared to 2019. Bayadera Group's vodka exports dropped 15%. The duty-free channel is practically closed this year. Sales fell more than 3 times (by 64%). Most of all products are sold not at airports, but at transport crossings on the border with Europe.

How I had to change my approach to work

COVID-19 has forced many companies to change the way they work.

This is true. We created remote offices for all employees and learned how to work remotely. No more than 20-30% of employees come to the office.

HoReCa channel suffered the most. Restaurants this year were closed for almost three months. After they opened, did sales return to pre-quarantine levels?

No. We tried to cover losses through other sales channels.

Did people really drink more during quarantine?

People began to drink alcohol at home or meet outdoors, stock up. According to our internal statistics, sales of the strong alcohol segment, namely Ukrainian vodka, increased by 5% during the spring quarantine period. Later, however, there was a decline in consumer demand for these products.

Are they comparable to last year?

In general, the overall sales figures do not exceed the results of 2019.

Has it really become more difficult and more expensive to export products?

Yes. Customs rules could change at any time, cars could be stopped in EU countries. Therefore, prices for the transportation of products increased by an average of 15%. However, after the lockdown was canceled, they did not return to the pre-quarantine level.

One of the promising areas is online trading. Are you planning to develop this area?

We launched Wine & Wine wholesale chain this year, which provides consumers with an attractive price for imported alcohol. Our online platform for sale of Ukrainian alcohol will start working soon.

Figures quoted are based on the following data sources: RTRI, Nielsen, Bayadera Group internal analytics

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