Beer and wine have passed vodka as Russia’s favourite drinks by volume but that does not seem to worry William Carey, the chief executive of Central European Distribution Corporation, the spirits producer, which has concluded a string of deals with Russian vodka companies this year.
In the last few months CEDC, which has a dual listing in Warsaw and on Nasdaq in New York, has made three key Russian purchases. It paid $157m for a 40 per cent stake in Russian Alcohol, a vodka producer with a 10 per cent share of the market in Russia. The rest of the company was acquired by Lion Capital, a London-based venture capital firm, but CEDC can exercise a call option in two years.
CEDC also spent about $280m for 75 per cent of the shares and 49.9 per cent of the voting rights of Whitehall Group, Russia’s leading alcohol distributor, with an option to buy the rest of the company in 2013. Earlier this year, CEDC bought the producer of Parliament Vodka, Russia’s most popular brand.
In total, the purchases mark the largest Polish investment ever in Russia.
“The Russian market is the most exciting market to be in in Europe and possibly the world,” says Mr Carey, sitting in CEDC’s operational headquarters in Warsaw. The company is legally registered in the US.
The reason is that Mr Carey is focusing on the high-end branded segment of the Russian vodka market, which appeals to the country’s growing middle classes, and not the rot-gut vodkas which are the preserve of the poor.
Mr Carey predicts that the currently fragmented Russian market will quickly consolidate around four or five leading alcohol companies which have the strongest brands, and he wants CEDC to be among the winners.
“Our aim is to have the recognisable brands that will be on the shelf when the market consolidates,” he says.
He does have a model to go on – his experience in Poland, where the Florida native started CEDC in 1990 distributing Western beer to Poles thirsty for quality ale. The company quickly grew, becoming Poland’s leading alcohol distributor. It then embarked on an acquisition spree, buying up many of the country’s largest vodka makers. It now controls about a third of Poland’s vodka market.
CEDC saw sales last year grow by 26 per cent to $1.5bn, with gross profits up 25 per cent to $249m. The company’s stock, on a split adjusted basis, has jumped from a low of $1.08 in 2000 to about $250.
As in Russia today, Poland in the 1990s had bad infrastructure, a fearsome bureaucracy and a fractured alcohol market with no dominant players. Like Russia, Poland also enjoyed fast economic growth and, increasingly, quality and status conscious consumers.
“Our biggest advantage is that we know what happened in Poland and we can see what is going to happen in Russia,” says Mr Carey. “Russia is almost a mirror of what happened in Poland. It is about five to seven years behind, but it is catching up fast.”
As in Poland, Russians are also beginning to drift away from their traditional reliance on vodka, turning more willingly to lighter wine and beer. But vodka remains by far their favourite spirit, and sales of upmarket brands are growing much more strongly than their cheaper rivals, says Mr Carey.
“Consumers are trading up,” he says. “There will be more and more growth in the mainstream and premium sectors.” And Mr Carey hopes CEDC will be one of the main beneficiaries of that trend.
