The spirit of Russia

The real Russian revolution? Perhaps the drastic shake-up of the traditional vodka industry that accompanied 1980s perestroika. How can traditional vodka distiller Liviz deal with new competitors, especially in the glamorous and lucrative upscale segment?

What is vodka to the Russian soul? An elixir? A blight on productivity? A source of business for sure.

Since 1147, when mention was made of the construction of a distillery in Khlynov, vodka has certainly been one of the lubricants of Russian society. However it was only at the end of the 19th Century that famous chemist Dmitri Mendeleev helped classify and categorize the manufacture and compounds of the by-then well-imbibed spirit.

For associate professors Gladkikh and Starov the interest lies not so much in the medicinal values of the drink, but in the radical upheavals in the beverage’s marketing and sales since the fall of the Soviet Union in 1991. Their deeply-researched case is testimony to the Russian passion for the national drink, and delves into many different aspects of the vodka market.

The basics of vodka making are set in ice. Start with alcohol made from rye grain. Add if desired maybe 2% or 3% of spirits from other grains. Distill thrice. Add pure spring water until the resultant mix is 40 to 46 proof. Place in bottle (usually half-liter). Slap on label. To your health!

One still per city

Vodka making could be called a national sport, and the parallel to soccer does not stop there: every large self-respecting Russian town had its own vodka maker. For St Petersburg, the company is Liviz. For Moscow, the names are OAO Cristall or Russian Wine & Vodka. For far eastern Novosibirsk, Kaolvi calls the game. No wonder Russia counted more than 650 wine and spirit producers in 2000; not including numerous bootleg operations which accounted for an estimated one-third of the market sales!

As the Russian transport network modernized, and excise taxes were revised, the competition between distillers intensified. Moscovite vodka could retail in Siberia and Petersburgian alcohol could flood the Ural. This changed life for manufacturers by adding that imponderable parameter… marketing and especially market positioning.

Of course competitive positioning could – to a certain extent – be based on product characteristics, namely purity. But increasingly the vodka honchos needed to appeal to emotional factors, such as those that an advertising campaign or a sophisticated label on the bottle, or the shape or material of the bottle, could provide.

Vodka for any wallet
One of the easiest manners to segment the market is by price. The case proposes a five-tiered segmentation based on price, from mass-market to inexpensive to mid-range to expensive to premium. At the lower end of the spectrum, a half-liter of plonk would cost Ivan less than 50 Rubles (ca. $1.75 at 2000 rates). The premium variety would set him back $3.50 or more.

And of course the point of sale also has an impact on the positioning. The old snack and beverage pavilions of yesteryear (most closed in the 1990s) were surely not the place for a 150-Ruble bottle of Cristall Black Label. Reciprocally, the extensive vodka section at an upscale retailer was terra incognita for 30-Ruble rotgut.

To complicate matters, a substantial portion of vodka is sold “on-trade”, i.e. in restaurants, bars, cafes and clubs. Getting onto the beverage list is not always easy. The parallel? When one American fast food outlets swears by Coke, then Pepsi has no chance of being accepted. In Russia, about 15% to 20% of vodka sales by value are through the on-trade channel, making it critical for distillers to cultivate their relations with restaurant owners. This is especially true in the premium segment, where restaurant image plays an important role.

As if those worries were not sufficient to turn a hardened manager to the bottle, there are of course advertising constraints. As elsewhere in the world, alcoholic beverages cannot simply be promoted on any old media: no television, limits on print, restrictions on billboards, and so forth.

With this backdrop in mind, the case (see reference below) presents the issues of the leading St Petersburg vodka manufacturer, the Liviz company. Liviz is a haloed name in Russia, and its various beverages benefit from excellent reputations for both consistent quality and good taste.

So Liviz management is all the more worried that upstart competitors are infringing on its established territories, namely in the premium vodka segment, where sales quantities may be low, but sales revenues are high and growing higher. All the more so that Liviz’s 40% market share in the St Petersburg expensive category risks serious onslaught from newly arrived competitors Cristall and Russian Wine & Vodka Co., and Russian Standard Co.

Some vodka brand managers circumvent promotional constraints by turning to some merchandising tricks, a la Marlboro Classics clothing. These brewers also distribute (and advertise) innocuous beverages such as water or fruit juice, yet elements of the logo are similar to those on the vodka labels… Should Liviz also resort to such roundabout brand enhancement? How should Liviz confront the premium and super-premium challenges? How can the company position its Diplomat premium brand?

Have no fear, dear reader, for the fate of Liviz, for as the case states: “In the elite alcohol market, the specific motive of purchase…is either hedonistic (men sometimes wish to imbibe excellent vodkas) or self-confirmation…” On such sure grounding, vodka is bound to flow for years!

Reference:
ECCH case number 507-031-1
“Diplomat vodka makes a break for premium class”
Associate Professors I. Gladkikh and S. Starov
St Petersburg State University (Russia), Graduate School of Management