Alcohol may become too expensive for Ukrainians

Photo: Eugeny Musienko

Escalation of prices for alcohol broke all historical records. Since the beginning of the year the price of the most popular alcohol – vodka and 3-star cognac – has increased on average by 30%.

Next year alcohol distillers may break two anti-records at once if the increase in excise duties proposed by MPs is approved. Firstly, the price of alcohol will update the record and a bottle of vodka will cost no less than UAH 60. Secondly, the grey market will expand, meaning that legal manufacturers of alcoholic products not be able to withstand competition with cheap counterfeits.

Dazed and confused

The size of price increase depends on the type of alcohol. For example, according Chairman of the Board of Directors of Nemiroff Yakiv Hrybov, on the vodka market the most inexpensive products became subject to the highest rise in prices – 36.13% to UAH 28.26 per bottle. The price per bottle in the medium segment rose by 26.14% to UAH 31.56. Premium vodka now costs UAH 75, which is 26% higher than at the beginning of the year. “These are average selling prices. Add 12% of distributors’ margins and a 25–30% mark-up by retail chains and then you will see the real price,” says Hrybov.

General Director of the alcohol holding company Bayadere Group Serhiy Velychko recalls that due to higher margins products in stores located in residential areas are more expensive than in supermarkets.

On average, the price of wine was raised by 10–15%, according to Director of the Innovation and Marketing Department at Ukrainian alcohol company Olympus Andriy Matuzko. For example, the price of dessert proprietor’s wines was raised over the year by 11.9% and the prices of semi-sweet proprietor’s wines - by 28–32%. Cognac prices went up 25–30%. Last year, Marseille cognac cost 60% less than today, Bakhchisarai – 44% and Lionel – 50%.

Overregulation

Manufacturers have a number of reasons to justify the hike in prices. One of the main reasons is that excise duties were raised three times this year: from January 1 – by 11.7%, from July 1 – by 25%, from September 1 – by 5%, says Marketing Director at Eastern Beverage Trading Serhiy Kolesnychenko. To preserve the margin for producers in mid-July the government raised the minimum retail prices for all types of alcohol.

Specifically, the retail price of wines in glass containers (volume 0.7 l) or other containers (1 l) was increased by 11% - up to UAH 20 and on wine in glass containers (0,75 l), as well as some other types of wine (0.7 l) – by 26.9% up to UAH 33. Cognac prices were raised by 39–51% depending on the number of stars: the lower the age, the higher the increase. A 0.5 liter bottle of the cheapest cognac costs UAH 59, which is 51.9% more expensive than prior to the increase.

In September, the minimum retail prices were once again raised, but only for vodka – to UAH 34.9 and UAH 39.9 per half-liter bottle. Devaluation of the hryvnia also played its role and led to an increase in the cost of raw materials, imported elements: caps, some types of packaging, etc.

The rise in the prices of alcoholic beverages clearly led to a sharp decline in demand. At year-end, according to the predictions of industry associations, the alcohol market in all its segments may show a record decline of 20%. Shrinkage of the market due to the annexation of Crimea and the war in the east of Ukraine, however, also cannot be ignored. “Civilized trade under the circumstances [in the east] is impossible,” complains Kolesnychenko.

Surprisingly, the share of the black market, according to Velychko’s estimates, remained at the same level as last year – 30%.

Necessity is the mother of invention

Chief of the Fiscal Service Ihor Bilous promised alcohol producers not to raise excise duties in 2015. But in December a bill proposing an increase of excise duties on alcohol from UAH 70.53 per liter of 100% alcohol up to UAH 104.5 and on low-alcohol beverages from the current UAH 70.53 per liter of 100% alcohol to UAH 141 per liter of 100% alcohol in the finished product was registered in the parliament. According to the authors of the document Hanna Hopko, Viktor Kryvenko, Tetyana Ostrykova (Samopomich faction) and Oleh Musiy (PPB faction), such measures will bring the budget approximately UAH 8 bn in 2015 in proceeds and at the same time reduce alcohol consumption.

Marketing Director at the Global Spirits International Holding Oleksandr Blokhin says that if the MPs’ initiative is approved the excise duty for a 0.5 liter bottle of vodka will increase from UAH 14 to UAH 21. “Thus, the price of the product in retail will increase by UAH 10–12 per 0.5 liter bottle,” says Velychko. He predicts that by spring the cost of alcohol may increase by 5–7%.

Experts doubt that consumers will be able to withstand another round of a hike in prices. Hrybov believes that counterfeit products will win. “It will not increase the earning power of the state treasury. We have been through that in the past, when deductions only decline with each hike in excise duties,” he said.

Velychko believes that in the event of a sharp increase in the excise duty the legal alcohol market will shrink by 30–40%. Kolesnychenko is convinced that the only way to develop the market is to reach a compromise between the state’s desire to receive taxes from vodka producers, producers’ opportunities to turn a profit from this business and people’s purchasing power.