The Russian spirits market is facing new challenges that threaten its past growth drivers. Regulation of the alcohol market has increased through higher excise taxes, minimum retail prices, and restrictions on advertising and distributor licensing. These changes devalue strategies that previously supported growth, such as new brand launches and aggressive promotion. Companies now operate in a more restrictive regulatory environment with fewer opportunities and greater risks of losing licenses or facing penalties for illegal activities.

1. Russian spirits market 2013:
new growth drivers needed to
uncover hidden opportunities
Stas Marketing Group Opinion
2013

2. Four major factors have been driving Russian spirits market growth
during last decade
Russian vodka market dynamics
§ Vodka: ZURABLI, FIVE LAKES, 397
360 355 363
ZELENAYA MARKA, BELENKAYA, 325 327 335 348
PUTUNKA, etc. 298
Brand launches § Brandy: STARIY GOROD, TROFEYNIY, 252
217
KOMANDIRSKY, STARIY KOENIGSBERG, -38%
etc.
211 216 221 218 197 185
§ Active growth aligned with 177 166 158 136 137
development of independent retail
Distributors
Exclusive brand teams paid by brand
development 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E
owners and working together with
distributors sales force
Russian brandy and cognac market dynamics
113
§ New marketing channels 105
Aggressive § Partial ban of alco advertising 85
91
82
Promotion via stimulated creativity inside the
media channels industry 62
49 +3%
33 38
22 28
11 11 11 12 12
§ Illegal schemes of writing off and 5 6 6 7 8 9
reselling excise stamps to other
Resorting to companies 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E
fraud § Illegal excise optimization schemes
through using complicated factoring Value, bn RUR
operations Volume, mn dal
Page § 2 Source: Russian Federal Statistics Service, Stas Marketing analysis

3. Series of unfavorable events devalue the market growth drivers
Basic growth drivers of Russian spirits market don’t
work anymore
Reinforcement of alcohol market regulation
§ 2009: Federal Alcohol Market Control Agency § New vodka brands cannot be
established as a body within Government successfully launched without
Brand launches aggressive advertising support
Excise tax increase and minimum retail price § Middle class consumers slowly moving
imposition toward consumption of other products
§ 170 RUR for 0,5l vodka, 280 RUR for 0,5l
cognac, 250 RUR for 0,5l bandy from 01.01.13 § Shelf space is limited – no chance for
new brands to be placed on shelf
Distributors
Re-licensing of distributors in 2011-2012 § Distributors became unreliable
development
partners with high risk of license
§ Up to half of distributors have lost their annulation
licenses and businesses in 2011-2012
§ Only in-store marketing and viral
Banning of alcohol advertising in majority of Aggressive
marketing are still available for
media channels Promotion via
spirits marketers in Russia
media channels
§ New edition of advertising law place the total
ban on all advertising activities except in-store
and horeca promotion
§ Illegal schemes are no less available
Changes in consumers’ preferences for companies without special
Resorting to fraud
support and contacts in regulation
§ Growth in consumption of non-traditional
authorities
premium spirits
Page § 3 Source: Stas Marketing analysis

4. Russian spirits market regulation is becoming more and more
restrictive
Sphere of regulation Possible alternatives of regulation measures
Minimum retail price for vodka, cognac Loss-making sales are not permitted No
Price regulation and brandy
Annual excise tax increase for
Excise tax and special tax for alcohol
Tax regulation alcoholic drinks with pure Special tax
sales (differ in categories)
alcohol content>9%
Obligatory marking the product with excise label No
Product labeling
Production site is to be licensed State monopoly (before 1994) No
Production regulation
Sales and consumption Point of sales are to be licensed State monopoly for retail sales of alcoholic No
restrictions Consumption place are limited drinks
Low-alcohol content drinks allowed Spirits allowed from 20/21 years Any drinks allowed from 18
Drinking age limits from 18 years old old
Drinks sales are limited within daytime Drinks sales are limited to certain days of the No
Time restrictions for sales week
Full ban of advertising of drinks with alcohol Spirits advertising is banned. Wine and beer advertising
Advertising restriction
content is limited
Page § 4 Source: Stas Marketing analysis

5. SWOT-analysis of an «typical company» in spirits market (based on
more than 50 projects in alcohol industry
Strategic alternatives for independent spirits company in Russia lies on the
crossroad of internal and external development factors
Opportunities Strengths
§ Consumers income growth, switch to premium § Wide coverage of channels and regions(S1)
brands (O1) § Own production capacities (S2)
§ Modern Trade and HoReCa upgrowth (O2) § High level of quality control (S3)
§ Changes in consumers’ preferences (O3) § Successful brands of previous decade(S4)
§ A lot of production capacity is available (O4)
EXTERNAL FACTORS Strategic alternatives INTERNAL FACTORS
Threats Weakness
§ Share of heavy drinkers goes down (Т1) § Focus on low price segments (W1)
§ Restrictive, even repressive state policy (T2) § Poor portfolio and cost management(W2)
§ Product names line COGNAC is in the risk area § Periodic Out-of-stock (W3)
(T3) § Sales team motivation schemes conflict
§ Market consolidation, high risk of aggressive with business objectives and needs (W4)
acquisition (T4)
Page § 5 Source: Stas Marketing analysis

6. Five strategic alternatives which can activate new growth drivers are
developed based on SWOT-analysis of an «averaged company»
STRENGTHS (S) WEAKNESSES (W)
S1 S2 S3 S4 W1 W2 W3 W4
OPPORTUNITIES (O)
O1
Focusing on private label
production for third-party
O2 companies
Transferring production of
O3 own brand to the third-
Focusing on premium party production facilities
market segment
O4
T1
THREATS (T)
T2 Operating processes optimization
Export markets entrance
T3
Minimum risk
strategy
T4
Page § 6 Source: Stas Marketing analysis

7. Only companies which increase it’s operating effieciency will have an
ability to stay and earn in changing spirits market
Operating income increasing
strategies
PnL structure before PnL structure after
2012 * 2012 *
1. Operating processes bn RUR bn RUR
optimization 15 15
2. Focusing on premium
market segment
10 10
14
15 (91%)
3. Export markets entrance (100%)
7
5 5 9 (76%)
(100%)
4. Focusing on private label 1
production for third-party (9%)
2
companies (24%)
0 0
Выручка Expenses Operating Выручка Expenses Operating
income income
5. Transferring production of
Company with large sales volume/ Focus on operation efficiency may affect sales
own brand to the third-party value but low operating income decrease but surely significant increase in
production facilities operating income
* Estimation based on financial data of market
leaders and outsiders
Page § 7 Source: Stas Marketing analysis

8. Operating processes optimization strategy assumes following solutions
in distribution, logistics and sales teams incentive schemes
Distribution and logistics optimization
§ Client base optimization § Logistics strategy should be
and clients regrouping allow reengineered in order to
reshaping commercial terms avoid out-of-stock
and conducting focused situations, especially in
trade marketing activities peak seasons
Sales teams incentive schemes optimization
§ Sales team incentive scheme should be build to increase sales, reduce client debt and
stimulate distribution
§ Wider use of non-monetary incentives.
§ Wider use of period / target motivation
Page § 8 Source: Stas Marketing methodology

9. Operating processes optimization strategy assumes following solutions
in category management, costs reduction and trade stock optimization
Category management and costs reduction
§ Regular cutting range tail § Uncovering new margin
(products generating less drivers and loss generators
than 10% of total sales) through deeper analysis of
value chain
§ Implementing cost
monitoring
Trade stock optimization
§ Reducing loans and interest payments through minimizing low-demand products stocks
and production
§ Reducing warehousing and transportation costs
§ Increasing product turnover
Page § 9 Source: Stas Marketing methodology

10. More risky strategies are focusing on premium market segment, export
market entrance and changes in production policy
Focusing on premium market segments Export market entrance
§ Seeding and growing own § Understanding priority
Focus on premium premium brands markets
market with
§ RTM (Routes-to-
emphasis on § Regular valuation and Market ) development
modern trade and acquisition of promising for faster entrance in
HORECA but yet small premium foreign markets
brands
Private labels bottling for retail chains Outsourcing production
Middle class § Outsourcing own brand
In the lack of advertising consumer is looking bottling abroad
possibilities and growing for new products as
appetite of retail bottling an alternative to § Launching the brands looking
private labels might be a old-fashioned vodka similar to famous imported
good opportunities for the premium brands
companies with modern
high-productive capacities
Page § 10 Source: Stas Marketing methodology

11. For more info please contact
Andrei Stas
Stas Marketing / Managing Partner
andrei@stasmarketing.com
Kirill Safronov
Stas Marketing / Senior Associate
k.safronov@stasmarketing.com
STAS MARKETING – MOSCOW
+7 499 504 1653 (t) +7 499 504 1654 (f) www.stasmarketing.com info@stasmarketing.com
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