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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 Kaže Business Development Director of Baltic Business Unit, SPI Group Brand Director, Latvijas balzams JSC. Global beverage industry leader USD 1bn assets, USD 0.4bn annual revenue

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Hidden menace in the baltic alcohol MARKET: the social and economic impact of underground economy

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  1. Hidden menace in the baltic alcohol MARKET:the social and economic impact of underground economy Valters Kaže Business Development Director of Baltic Business Unit, SPI Group Brand Director, Latvijas balzams JSC

  2. Global beverage industry leader USD 1bn assets, USD 0.4bn annual revenue Operations 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 Corporate HQ (Luxembourg) GlobalSpiritsBusinessUnit Wholesale distributionin 160 countries RussiaBusinessUnit Agriculture / rawspiritsproductioninTambov, Perm, Kaliningradetc. BalticBusinessUnit Production Retail Wholesale LV Latvijasbalzams 52 LBoutlets SPI Distribution(Latvia) LT 24 Bravo Alcooutlets BennetDistributors EE SPI Distribution(Estonia) RealEstate & PrivateEquityInvestmentBusiness

  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?

  4. DAYLIGHT:THE LEGAL INDUSTRY CONTEXT

  5. Alcohol: Industry Context SOCIAL CONTEXT ECONOMIC IMPACT NEGATIVE ASPECTS Produced since Neolithic era, 9,500BC 55% of adult population have ever consumed alcohol, 42% still do Social interaction element 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 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 TOTAL CONSUMER POOL, 2012 RECORDED ADULT PER CAPITA CONSUMPTION, abs l 2.2m 1.3m European average9.5 0.8m Estonia Latvia Lithuania BALTICS = 4.3m CONSUMERS LEGAL ALCOHOL MARKET 2011E, mn 9Lcs ESTONIA 20 LATVIA 22 LITHUANIA 41 Sources: IWSR, WHO, government statistics offices, internal data SMALL MARKETS, YET CONSUMPTION ABOVE AVERAGE

  7. The Baltics: Largest Market Players 1 2 3 4 5 2 1 3 5 4 * - 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

  8. TWILIGHT ZONE:How the SHADOW market is born

  9. The Non-Commercial Alcohol ILLICITNON-COMMERCIAL ALCOHOL Production: illegal (apart from smuggled) Distribution: illegalTaxation: fully avoided LICITNON-COMMERCIAL ALCOHOL Production: legal Distribution: might have minor issuesTaxation: mostly compliant Smuggled product Counterfeited product Home brewed for commercial distribution exceeding restraints Poor quality unknown product Surrogate product Traditional home beverages Transnational trade

  10. The Baltics: What Has Happened over Last 5 Years? RECESSION HAS HIT ALL THE BALTIC MARKETS INCOME OF HOUSEHOLDS HAS DECLINED Real GDP growth, % yoy Household average monthly disposable income, € BALTIC POPULATION HAS DECLINED BY 0.7m BALTIC ALCOHOL MARKET DECLINED BY OVER -33% Population, ‘000 Wine & spirits market (w/o beer), ‘000 9Lcs -380 -280 -50 Sources: IWSR, Eurostat, government statistics offices, internal data THE RESULT: STATE TAX REVENUES DECLINE

  11. POLICY MAKERS DESPERATELY SEEK SOLUTIONS... IF TAX REVENUES FALL... ... LET US RAISE TAX RATES INSTEAD. THAT SIMPLE .

  12. Social and economic impact:Case of illicit alcohol in Latvia

  13. Latvia: Entering Twilight Zone TAX RATES ON STRONG SPIRITS UP +49% EXCISE TAX REVENUE DOWN -15% Excise tax revenue, € Excise tax rate on strong spirits, €/l aa +6% +1% -8% -8% +8% +31% +49% CONSUMPTION LEVEL REMAINS STABLE MORTALITY GROWS Alcohol related mortality per 100,000 population Household alcohol consumption Expense for alcohol,EUR per capita annually Share of alcoholin total household consumption, % +14% -29% +27% Sources: WHO, Eurostat, Central Statistics Department, State Revenues Department, internal data BITTER TRUTH: CONSUMERS SWITCH TO NON-COMMERCIAL ALCOHOL

  14. Latvia: Immersion into the Shadow JOINT RESEARCH PROJECT INTERNATIONALLY PROVEN METHODOLOGY INDUSTRY LADRIA ACADEMIC RESEARCH University of Latvia BUSINESS RESEARCH Data Serviss, Ex Novo GLOBAL PARTNERS EFRD, ICAP 50non-commercialalcohol producersand distributors 152regularnon-commercialalcohol consumers 1040respondentsin generalpopulation 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 20% smuggle products cross-border or sell such 16% have arrangements with somebody at law enforcement 40% operate it as main source of income 32% say penalties are not severe enough 80% do it at their residential address 20% know how to avoid being punished 62% of their customers are returning ones

  18. Findings: Facts and Consequences ~40% from total alcohol market in Latviais illicit non-commercial alcohol Growing mortality represents a serious threat toalready declining population >40m € annually are lostin a formofpotentialtax revenues orextra burden to social budget... If only we would cash it in for... 1 year: enough to feed 5,000 average households 2 years: enough to construct National Library 3 years: enough to build all 100 required kindergartens

  19. Learnings, finally... ANY CHANGES ALREADY? Priority to fighting shadow economy given No excise tax increase anticipated for couple of years Industry association engaged as NGO partner in decision making LEARNINGS FOR INDUSTRY Scientific lobbying possible: build a case on proven arguments Industry power: get together Break the box: pro-active resource mobilization beyond usual boundaries LEARNINGS FOR POLICYMAKERS No simple math: when dealing with consumers Industry is a partner: legal business is willing to support most initiatives NEW CHALLENGES AHEAD... New legislative initiatives underway across Europe and in the Baltics

  20. THANK YOU!

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