Download - Hidden menace in the baltic alcohol MARKET: the social and economic impact of underground economy
HIDDEN MENACE IN THE BALTIC ALCOHOL MARKET:THE SOCIAL AND ECONOMIC IMPACT OF UNDERGROUND ECONOMY
Valters KažeBusiness Development Director of Baltic Business Unit, SPI GroupBrand Director, Latvijas balzams JSC
2
Global beverage industry leaderUSD 1bn assets, USD 0.4bn annual revenueOperations across 160 countries worldwide#1 in Baltic beverage production and distribution
#1 producer of alcohol
112 years of exellence
260 years for Riga Black Balsam, oldest Baltic TM
120 brands and products
>100 international awards
74m bottles produced annually
70m € annual revenue
>600 employees
35 direct export countries
160 Stolichnaya export markets via SPI Group
26% market share in Latvia
57% share from local producers in Latvia
#12 in National Reputation Top
Silver category in National Sustainability Index
Global SpiritsBusiness Unit
RussiaBusiness Unit
Wholesale distributionin 160 countries
Agriculture / raw spirits productionin Tambov, Perm, Kaliningrad etc.
BalticBusinessUnit
LV
LT
EE
Latvijasbalzams
52 LBoutlets
SPI Distribution(Latvia)
24 Bravo Alcooutlets
BennetDistributors
SPI Distribution(Estonia)
Real Estate & Private Equity Investment Business
Corporate HQ (Luxembourg)
WholesaleRetailProduction
3
THE STORY TODAY IS ABOUT...
... DAYLIGHT
What are challenges for the legal alcohol industry in the Baltics?
Is there something called ‘scientific lobbying’ possible in the Baltics?
... TWILIGHT
What is the impact of illicit non-commercial alcohol market?
Do taxation decisions facilitate underground economy?
DAYLIGHT:THE LEGAL INDUSTRY CONTEXT
5
ALCOHOL: INDUSTRY CONTEXT
SOCIAL CONTEXT
Produced since Neolithic era, 9,500BC
55% of adult population have ever consumed alcohol, 42% still do
Social interaction element
ECONOMIC IMPACT
Contribute around 2% to global GDP
Contribute on average 2-5% of state tax revenues
Strictly regulated industry
Non-commercial alcohol accounts for 50% of total
alcohol consumption worldwide
NEGATIVE ASPECTS
4% of total death are alcohol related
2.5m people die from harmful use annually
Heavy burden on social budget
NO BLACK AND NO WHITE, JUST IMPORTANT
6
THE BALTICS: THE LEGAL ALCOHOL MARKET
LEGAL ALCOHOL MARKET 2011E, mn 9Lcs
Beer77%
Wine9%
Spirits8%
Cider/RTD6%
Beer76%
Wine11%
Spirits8%
Cider/RTD5%
ESTONIA
20
LATVIA
22
LITHUANIA
41
Sources: IWSR, WHO, government statistics offices, internal data
Beer70%
Wine7%
Spirits9%
Cider/RTD14%
Estonia Latvia Lithuania
0.8m
1.3m
2.2m
TOTAL CONSUMER POOL, 2012
BALTICS = 4.3m CONSUMERS
RECORDED ADULT PER CAPITA CONSUMPTION, abs l
Estonia Latvia Lithuania0
5
10
15
14.0 10.5 12.8 European average
9.5
SMALL MARKETS, YET CONSUMPTION ABOVE AVERAGE
7
THE BALTICS: LARGEST MARKET PLAYERS
KEY FACTS
Latvijas Balzams Liviko Stumbras Alita Vilniaus Degtine
Located Riga, LV Tallinn, EE Kaunas, LT Alytus, LT Vilniaus, LTEstablished 1900 1898 1906 1963 1907Ownership Public Private Public Public PublicUltimate shareholder SPI Group: 90% NG Invest: 100% MG Baltic: 95% FR&R Invest IGA: 84% Belvedere: 68%Employees 634 378 236 228 179Revenue, EUR m 74.4 54.8 * 29.1 25.5 12.1EBIT, EUR m 6.6 1.5 * 5.6 -23.7 -0.2Local SOM, % volume 26% 23% 14% 8% 3%
EXPORT PORTFOLIO
Core brands Riga Black Balsam Riga Sparkling Wine
Grand Cavalier
Vana Tallinn Viru Valge vodka
999 Alita Sparkling Wine Sobieski vodka
Share of export 12% (LB only)74% (+SPI Group)
35% 11% 8% 8%
1
2
3
4
5
1 2 3 4 5
* - approximate as data is not public and integrated with distribution business
Sources: NASDAQ OMX, Baltic news agencies, internal data
ALL LARGEST PLAYERS ARE IMPORTANT EMPLOYERS AND TAX-PAYERS
TWILIGHT ZONE:HOW THE SHADOW MARKET IS BORN
9
THE NON-COMMERCIAL ALCOHOL
LICITNON-COMMERCIAL ALCOHOL
Production: legalDistribution: might have minor issuesTaxation: mostly compliant
Traditional home beverages
Transnational trade
ILLICITNON-COMMERCIAL ALCOHOL
Production: illegal (apart from smuggled)Distribution: illegalTaxation: fully avoided
Smuggled product
Counterfeited product
Home brewed for commercial distribution exceeding restraints
Poor quality unknown product
Surrogate product
10
THE BALTICS: WHAT HAS HAPPENED OVER LAST 5 YEARS?
THE RESULT: STATE TAX REVENUES DECLINE
INCOME OF HOUSEHOLDS HAS DECLINED
Household average monthly disposable income, €
2007 2008 2009 2010 2011E700
800
900
1000Estonia Latvia Lithuania
RECESSION HAS HIT ALL THE BALTIC MARKETS
Real GDP growth, % yoy
2007 2008 2009 2010 2011E
-20
-15
-10
-5
0
5
10
15
Estonia Latvia Lithuania
BALTIC POPULATION HAS DECLINED BY 0.7m
Estonia Latvia Lithuania0
500
1000
1500
2000
2500
3000
35002007 2011 official 2011 adjusted
Population, ‘000
-50
-280
-380
BALTIC ALCOHOL MARKET DECLINED BY OVER -33%
2007 2008 2009 2010 2011E4,000
6,000
8,000
10,000
12,000
14,000Estonia Latvia Lithuania
Wine & spirits market (w/o beer), ‘000 9Lcs
Sources: IWSR, Eurostat, government statistics offices, internal data
11
POLICY MAKERS DESPERATELY SEEK
SOLUTIONS...
.
IF TAX REVENUES FALL...... LET US RAISE TAX RATES INSTEAD.
THAT SIMPLE
SOCIAL AND ECONOMIC IMPACT:CASE OF ILLICIT ALCOHOL IN LATVIA
13
TAX RATES ON STRONG SPIRITS UP +49%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3'00 '01 '02 '03 '04 '05 '06 '07 '08 2009 2010 2011
700
800
900
1,000
1,100
1,200
1,300
1,400
783
896
1,174
1,2661,337
Excise tax rate
+31%
+8%
+6%
Excise tax rate on strong spirits, €/l aa
LATVIA: ENTERING TWILIGHT ZONE
BITTER TRUTH: CONSUMERS SWITCH TO NON-COMMERCIAL ALCOHOL
+49%
EXCISE TAX REVENUE DOWN -15%
2004 2005 2006 2007 2008 2009 20100
20
40
60
80
100
44.3 57.6 72.6 89.9 91.0 84.0 77.3
Excise tax revenue, €
-8%-8%+1%
CONSUMPTION LEVEL REMAINS STABLE
2002 2003 2004 2005 2006 2007 2008 2009 2010E0
5
10
15
20
0
1
2
3
4
EUR
10.15
%3.7%
Household alcohol consumption
Expense for alcohol,EUR per capita annually
Share of alcoholin total household consumption, %
MORTALITY GROWS
Alcohol related mortality per 100,000 population
2005 2006 2007 2008 2009 2010E0
5
10
15
20
12.1 8.8 6.3 7.9 12.8 14.6
-29% +27%
+14%
Sources: WHO, Eurostat, Central Statistics Department, State Revenues Department, internal data
14
LATVIA: IMMERSION INTO THE SHADOW
JOINT RESEARCH PROJECT
INTERNATIONALLY PROVEN METHODOLOGY
INDUSTRYLADRIA
GLOBAL PARTNERSEFRD, ICAP
ACADEMIC RESEARCHUniversity of Latvia
BUSINESS RESEARCHData Serviss, Ex Novo
1040respondents
in generalpopulation
152regular
non-commercialalcohol consumers
50non-commercial
alcohol producersand distributors
FACTS & FINDINGSFOR SHARING AND SUPPORTING
POLICY MAKERS
15
FINDINGS: GENERAL POPULATION
52%admit that it is easy to buy non-commercial alcohol
50%have ever purchased counterfeit well-known alcohol brands
36%have friends or relatives among regular consumers
18%justify and raise voice in support of non-commercial alcohol
16
FINDINGS: REGULAR CONSUMERS
56%are regular consumers for at least 10 years
34%plan their purchase well in advance
59%‘go shopping’ at least once a month
25%buy alcohol at ‘close to home outlets known to everybody’
17
FINDINGS: HUSTLERS
58%are in business for at least 10 years
40%operate it as main source of income
80%do it at their residential address
62%of their customers are returning ones
20%smuggle products cross-
border or sell such
16%have arrangements with
somebody at law enforcement
32%say penalties are not
severe enough
20%know how to avoid being
punished
18
FINDINGS: FACTS AND CONSEQUENCES
~40%from total alcohol market in Latviais illicit non-commercial alcohol
Growing mortalityrepresents a serious threat toalready declining population
>40m €annually are lost in a form of potentialtax revenues orextra burden to social budget...
If only we would cash it in for...1 year: enough to feed 5,000 average households2 years: enough to construct National Library3 years: enough to build all 100 required kindergartens
19
LEARNINGS, FINALLY...
ANY CHANGES ALREADY?Priority to fighting shadow economy givenNo excise tax increase anticipated for couple of yearsIndustry association engaged as NGO partner in decision making
LEARNINGS FOR INDUSTRYScientific lobbying possible: build a case on proven argumentsIndustry power: get togetherBreak the box: pro-active resource mobilization beyond usual boundaries
LEARNINGS FOR POLICYMAKERSNo simple math: when dealing with consumersIndustry is a partner: legal business is willing to support most initiatives
NEW CHALLENGES AHEAD...New legislative initiatives underway across Europe and in the Baltics
THANK YOU!