Interview: “There Was not Even a Discussion about whether to Terminate the License to Russians”

12 minutes

The Nemiroff CEO talks about the vodka market in wartime with Oksana Polovyna for Business Telegraph

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Few people know that Ukrainian vodka in the European market is distributed by …Coca-Cola. Thanks to the partnership with this company, Nemiroff, an alcohol manufacturer, survived the most difficult months after the start of a full-scale war. Its CEO Yuriy Sorochynskiy told Business Telegraph how the company survived during the period of a full ban on sales of its products in Ukraine, and why he shows photographs of garbage containers from his phone at the meetings with government officials. 

Did the war force Ukrainians to drink more vodka?

I can’t say much about the big increase in vodka consumption, but demand for Ukrainian vodka has started to grow. Here, the factor of the price increase on the imported products played a role as well as patriotism. In general, the war consolidated Ukrainians and they began to buy more Ukrainian products. 

Has there been a redistribution of demand toward cheap vodka?

We do not have a large portfolio in the value segment. We work more in standard and premium segments. We do not see that consumers switched to cheaper products. Rather, part of the demand moved to the shadow market. 

Accordingly, has the legal market collapsed?

Yes, the market has declined significantly. Occupied territories, suspension of sales in March, bans, restrictions, people leaving Ukraine and to safer areas of our country, relocation of the facilities that is not always possible, inflation, air raids – all this played a negative role. At the same time, the excise duty has increased and the cost of products rose by 80%. For example, glass production needs gas and electricity, if there is no electricity, diesel generators have to be installed, so the cost of production increases catastrophically. Banks have raised the rate; prices of all products have risen and continue to rise. Therefore, sales in Ukraine have fallen by 20-25%. However, we managed to compensate for these losses with exports.

You are still among the TOP3 worldwide suppliers of vodka for Duty-Free?

No, we aren’t. In 2020, Duty-Free sales stopped in almost all countries. When tourism began to revive a little – vaccination, certificates made it possible to revive travel – in 2021, we went down only one position to rank #4. But 2022 became more difficult for us in Duty-Free because it affected purchases not only by Ukrainians but also by those traveling across Ukraine. In 2022, sales are supposed to be lower, but we have not yet collected data in full. If we talk about the share of exports, it has increased to about 40% so far. At the same time, if we look at the shipments of Ukrainian vodka, we are number one. We account for 48% of Ukrainian vodka. Starting from 2020, even before COVID hit, Coca-Cola became one of our distributors in Eastern Europe. They took over the Baltic States, Poland, the Czech Republic, Slovakia, and Moldova. So, in particular, this cooperation helped us achieve such indicators.

Are you lobbying for the lifting of restrictions on the sales of alcohol due to martial law?

When sales were banned in March, I started communicating with Government officials explaining that the ban on alcohol sales is not a punishment for me as a producer. We are at the end of the process; behind us are only retailers and the end consumer. In front of us are manufacturers of glass, caps, alcohol, and farmers. Of course, when there was the first shock at the beginning of a full-scale war, it was logical to impose such restrictions. But then people did not stop drinking alcohol. It was just a good moment for the shadow market to “work” more. Consequently, revenues to the budget stopped. When the war broke out, the chains were hugely indebted to us, and we still had to pay both suppliers as well as salaries to the staff. By the way, back, in March, nobody knew where the Government decision-makers were.

But you found them, didn’t you?

Yes, I did. When the sale of alcohol was allowed in April, we gave everyone a boost. After all, internal grain processing, for instance, is an added value for the budget. I argued that people still drink alcohol; I brought a photo from Western Ukraine showing piles of no-name bottles of alcohol near the garbage containers with a full ban on sales being in effect.

What do you think of the initiative to replace paper excise duties with electronic ones?

I believe that people proposing such changes do not fully understand the problem. The shadow market is still there, they smile and wait for the legal sector to stop operating as a consequence of various statutory and non-statutory methods. The excise duty is paid even before the products are shipped, so what effect will that electronic stamp give you? Those working in the shadow will never bother about it. In my opinion, excise stamps are just another obstacle to legal businesses. When certain “experts” say that all the producers in the European Union affix an excise stamp, this is not true. EU directives emphasize that this issue is up to the country to decide. Whoever sells has to pay the excise duty – that’s all. In Ukraine, new obstacles are underway to be introduced, and this is presented as “they are struggling against something”. 

The idea of switching payments for alcohol in the shops exclusively to cashless payments is still being discussed. How do you feel about it?

This is the same misunderstanding of the problem because it does not matter to someone buying illegal alcohol products how legal ones are sold. This will be a new challenge for retail. You come to buy groceries and a bottle of alcohol. You have cash, and they will tell you: pay cash for this and use your card for that. 

In 2020, you privatized a distillery that had been idle since 2011. Is it already operating?

When all the payments were made and documents were prepared, we began to find out what we bought. We hoped for it to be in a better condition than it turned out to be. Nevertheless,  we began dismantling and cleaning it up. Part of the equipment was taken for repairs to Mykolaiv, other part was to the Dnipro Region. We planned to launch it in the summer of 2022. But then the war broke out. So this project is still waiting for its implementation. 

How badly affected are your contractors located in the war-torn regions?

In the summer, we started transporting our contractors from the occupied territories and sheltering them as we have vacant premises. We offered them to fulfill our order and continue working for others. The same story of cooperation was with our partner Fozzy Group (Silpo and Fora chains) after their warehouses in Brovary were damaged. In March we gave them ours, which they still use today. 

You canceled the license to manufacture products under your trademark in Russia in late February 2022. How did this affect the company’s work?

We have had no assets in Russia since 2014. A production license was still valid for one independent manufacturer in Penza. Within the board of directors, on February 24th, there was not even a discussion about whether to terminate the license. It was withdrawn on the 25th. Those royalties are insignificant compared to our understanding of the situation and potential image losses due to cooperation with the aggressor country.