The Eastern European Spirits Market is Ripe for Structural Changes

As a result, the value and low priced segment are taking the full blow of the volume contraction, while higher quality and more expensive products benefit from rising demand. In Poland, MBWS indicated that its clear vodka portfolio was suffering from escalating pricing pressures in 2H 2017, while Pernod Ricard signalled a good performance of its Strategic International Brands, in particular its Scotch portfolio for the same period. Marie Brizard’s largest vodka brand in the country, Krupnik, sells at around 20 zlotys per 500 ml bottle. Pernod’s most sold Scotch brand, Ballantine’s, is at least 50% more expensive. In some cases, such as in the clear vodka segment in Poland, the segment is becoming commoditised, with price becoming a main driver of brand success, resulting in marked pricing pressure. For producers, this situation translates into lower volumes, lower margins, or both.

The majority of the value brands—which dominate the market in volume terms—are in the hands of the leading domestic operators, who reached their market position by acting as local consolidators in the past decades. Their local distribution power and market insights made them outstanding distribution partners for international players aiming to enter these markets. By signing distribution agreements, both parties benefited: local players could complement their portfolios with more premium foreign brands, and international brand owners gained access to a strong distribution network, and minimised the risks and costs of international expansion into emerging countries.

Now, however, this status quo may be facing structural change. International brands are gaining traction, and, as volumes reach certain thresholds, we believe it is becoming more interesting for their owners to consider setting up their own distribution capabilities in certain countries. This also fits with the increasing appetite shown by leading industry players to directly invest and control their route to market.

For the local players, this means a double risk. First, their distribution fees are likely to decline, hurting top line and margins. Second, international players have powerful tools they can enforce when fully integrated, becoming challenging competitors instead of partners.

Although the market context may become more challenging for established players, demand for local and value products will remain, and international players with smaller volumes in the region will still use local distribution. However the size of their profit pool left for these types of players is likely to gradually reduce, exacerbating competition and increasing the gap between winners and losers. Those able to enlarge their share of the market through either organic growth or acquisitions are the best positioned to maintain or even expand their profits. A new round of market consolidation seems ready to take off.