Spirited Away

In the mid 1990s, Poland was flowing with vodka. There were then some 1,000 distilleries in the country, but that number has now dropped to a mere 100 as producers struggle to make ends meet

by Jacek Ciesnowski

 

“The three most astonishing things in the past half-century were Blues, Cubism and … Polish Vodka” is a famous quote attributed to Pablo Picasso. Whether he actually said it is disputed and even if he did, Polish vodka was invented centuries ago not in the 20th; but the truth is that for generations, Poland was synonymous with the clear, grain-based alcohol. It was consumed by royals and simple folk, and inspired numerous literary works.
Local brands very often transcended borders. Years before the fall of communism, there were two Polish things that you could buy in every airport in the world, canned Krakus ham and a bottle of Wyborowa. No wonder that with such a reputation, international companies snapped up the most famous Polish brands and distilleries. France’s Pernod Ricard owns the Wyborowa and Luksusowa brands among many others, while Russia’s CEDC has Żubrówka and Palace Vodka. France’s Louis Vuitton Moët Hennessy (LVMH) owns one of the world’s most famous super-premium vodka brands – Belvedere.

Unlike with many other items, international companies love to emphasize that their products are actually made in Poland. When a white-goods producer manufactures its fridges or cookers in Poland it usually puts a “Made in EU” sticker on it, as if they’re ashamed of their origins. In the instance of vodka, however, the Polish flags are proudly displayed on the label.

polish-russian vodka warsThis is why Canadian-born and Michigan-based entrepreneur Terry Olson decided to sell Polish vodka in the States. His Zim’s Vodka, which boasts the white eagle and the Polish flag on the front of the bottle, is made in Wrocław and is exported to the US. “I considered producing it in the US originally, but after research, I concluded that Poland is the motherland of vodka and authenticity is critical to marketing and brand strategy,” said Olson. “If you want the best wines you think of France and Italy. For beer it’s Germany, Belgium, and I have to say Canada because that’s where I’m from. … When you get to vodka there’s no question it’s Russia or Poland,” he added.

Excise excess

Still, it’s a sad irony that in a country which prides itself on being an originator of the term “vodka,” making it is becoming a money-losing operation.
“We thought that after a disastrous 2011, when producers lost PLN 326 million combined, there was a hope that everything would go back to normal, as in the following year they posted some PLN 199 million in profits. But it looks like the situation will repeat itself,” said Leszek Wiwała, president of the board, Polish Spirits Industry, an organization encompassing the majority of vodka producers in the country. Wiwała was referring to a recent government decision to raise the excise on spirits by 15 percent. The last excise hike was back in 2009 (by 9 percent), but producers took that rise on themselves and instead of increasing the price, they lowered their profit margins. This time around, they can’t afford to do so again.

The economy ministry estimates that thanks to the excise hike, the budget will get an additional PLN 780 million. But according to a report by the Sobieski Institute, a think-tank, the budget will actually receive PLN 150 million less from alcohol sales, as most consumers, instead of paying PLN 2 more for a bottle of vodka in a store, are more likely to buy it from illegal sources. “Such booze is made by organized criminal groups, it’s very often made from industrial-grade alcohol used in products such as wiper fluid. It’s not only cheap, but also dangerous to your health,” said Wiwała. The organization estimates that the so-called “gray area” is responsible for 15 percent of vodka sales in the country.
how much vodka costs
Wiwała’s concerns are echoed by Andrzej Szumowski, deputy CEO of Pernod Ricard Polska, the producer of the world-famous Wyborowa Vodka, and president of the Polish Vodka Association. “We feel cheated. We pay taxes, excise and nobody even asked for our opinion. What’s even worse, only excise for vodka was raised, other alcohols like beer and wine were left alone.” Szumowski is not excited about the future of vodka producers. “Only a fortune-teller can predict how 2014 will look for us. But I’m sure we will be hit by the decision to raise the excise duty.”

Roller coaster ride

The excise increase has had a short-term positive effect on the industry, however. Shops and wholesalers were buying as many cases as they could before the end of the year so they could still sell it with the lower price tag. Because of that, in December alone the production grew by 47 percent year-on-year, which will definitely improve financial results for 2013. On the flipside, after a period of increased production, manufacturing in the first months of 2014 has come to a screeching halt. As an example, January sales of Belvedere, which produces popular brands like Sobieski and Krupnik, dropped by 50 percent y/y.

Short-term gains

The PLN 2 per bottle increase might not look significant, but in reality it is. Many vodka enthusiasts in Poland are not drinking the products for their taste: they’re counting every penny, and every price increase forces them to turn to cheaper booze, even if it means risking their health.
Other sources of cheap alcohol for Poles are discount stores. “They’re buying high volumes of our products but they offer a very low mark-up,” said Wiwała, explaining that producers are between a rock and a hard place, as they have to sell their products under discount stores’ conditions or risk losing a significant piece of their market share.

Obey the law

Lower profits coincide with lower consumption. According to the International Wine & Spirit Research (IWSR) report, between 2008-2012, consumption dropped by 2.6 percent and by 2016 it will contract by another 1.6 percent. This stems from the fact that Poles’ taste in alcohol is changing and they can afford to buy more expensive, imported spirits. Just between 2008-2012, whiskey sales increased by 22 percent. “The main whiskey consumers are 25- to 30-year-old educated men. Consumers are keen to experiment with this alcohols which has become more available and affordable than ever,” said Piotr Poznański from IWSR.

So maybe a good idea for producers would be to concentrate on premium and super-premium brands, which they sell less of, but enjoy much bigger profit margins from. Opinions are divided on the subject, however. “I don’t think Poles are ready for such a change. We simply are not affluent enough to afford super-premium products,” said Wiwała.

Others think that this might be something that can save the industry from going into oblivion. The Polish Vodka Association, which encompasses several Polish (or Polish-based) producers, heavily lobbied the Polish parliament to pass a bill that clearly stipulates what can be called “Polish Vodka.” According to the recently passed bill, the label can be applied only to products manufactured exclusively in this country, as well as made from potatoes or traditional cereals (rye, wheat, barley, oats and triticale).

Some producers were against the legislation. As much as 30 percent of vodka in Poland is made from corn, which is much cheaper than other cereals, but can hardly be called “traditional,” and these products under the new legislation won’t be able to call themselves “Polish Vodka.”

“We should differentiate vodka made in Poland from Polish vodka,” explains Szumowski, who lobbied hard for the bill to be passed and calls it “a milestone that will greatly help promote Polish vodka abroad and in Poland,” adding that currently only 10 percent of vodka produced locally meets all the criteria to be called Polish vodka. He does hope, however, that such numbers will soon increase.

The bill is the first step to transform Polish vodka from a cheap but potent spirit to a super-premium brand drunk by the élite. It’s an ambitious plan, but it has been done before.

American Revolution

The super-premium sector of vodka in the US was created in the second half of the 1990s by Polish brands such as Chopin and Belvedere. They were promoted through references to the Polish traditions of distilling vodka and quickly gained popularity, especially among musicians. Many rappers replaced their bottles of Courvoisier cognacs with their newly-found favorite Polish drinks.

“Only 15 years ago, drinking pure vodka in the US was unimaginable. It was used only as an ingredient in cocktails,” said Wiwała. Americans preferred unadulterated whiskey and brandy. Nowadays, most colored drinks end up in cocktails. This all resulted in creating a new super-premium sector, a shelf higher than the one occupied by Finlandia and Absolut.

Even Bruce Willis jumped on the bandwagon, becoming a spokesman, and eventually an investor, in the Sobieski vodka brand.

Super-premium

But what worked in the US might not be that easy to repeat in Poland. The local sector is dominated by cheap products. The value sector is responsible for some 90 percent of the market, while standard sectors have the remaining 10 percent. The premium and super-premium spirits are sold in miniscule numbers domestically, and these sectors are expected to increase by 8 and 39 percent respectively by 2018, but it will only be a drop in the sea of 80 proofs.

 

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