Signs indicate that the global glass industry has started to recover from the global economic downturn. At the same time, however, the industry’s performance in Eastern Europe remains negative. This difference can be explained by the different impact of the economic slowdown on various regions. In 2009, GDP in Eastern Europe dropped by 22 per cent, while the global figure saw ‘only’ a 5 per cent decline.
Moreover, the Russian glass industry does not look too promising for the forecast period with retail unit volumes of glass predicted to decline by 2 per cent CAGR (Compounded Annual Growth Rate) over 2011-2015.
It is obvious, therefore, that declining alcohol consumption in Russia (-1 per cent CAGR over 2006-2011) has a natural effect on this, even if the country is fourth in the world in terms of pure alcohol consumption.
The Russian government has been working to actively to combat alcohol abuse. The Ministry of Health announced that the pure alcohol consumption was 18 litres per capita in 2009, and, in 2010, this figure dropped to 15 litres. However, the improvement in statistics only occurs among urban residents, and in rural areas there is no improvement.

Glass packaging in Russia 2006-2015
The weaker volume growth recorded for glass in Eastern Europe was due almost entirely to poor performance from white spirits in Russia, where glass bottle units fell 4 per cent on average per year over the 2006-2011 period.
Changes in taxation and further plans to place a double exc...

Signs indicate that the global glass industry has started to recover from the global economic downturn. At the same time, however, the industry’s performance in Eastern Europe remains negative. This difference can be explained by the different impact of the economic slowdown on various regions. In 2009, GDP in Eastern Europe dropped by 22 per cent, while the global figure saw ‘only’ a 5 per cent decline.
Moreover, the Russian glass industry does not look too promising for the forecast period with retail unit volumes of glass predicted to decline by 2 per cent CAGR (Compounded Annual Growth Rate) over 2011-2015.
It is obvious, therefore, that declining alcohol consumption in Russia (-1 per cent CAGR over 2006-2011) has a natural effect on this, even if the country is fourth in the world in terms of pure alcohol consumption.
The Russian government has been working to actively to combat alcohol abuse. The Ministry of Health announced that the pure alcohol consumption was 18 litres per capita in 2009, and, in 2010, this figure dropped to 15 litres. However, the improvement in statistics only occurs among urban residents, and in rural areas there is no improvement.

Glass packaging in Russia 2006-2015
The weaker volume growth recorded for glass in Eastern Europe was due almost entirely to poor performance from white spirits in Russia, where glass bottle units fell 4 per cent on average per year over the 2006-2011 period.
Changes in taxation and further plans to place a double excise on vodka had an important effect on consumer purchasing power, thus contributing in reducing glass bottle sales amid the country’s still weak economy. A further sales decline for white spirits, primarily vodka due to its maturity and saturation, is expected, with retail volume sales of white spirits likely to decline at a CAGR of 4 per cent over 2010-2015 in Russia.
Glass bottles remain the traditional packaging format for strong spirits. However, a shift in demand from premium quality to standard quality glass and back again has been observed. While the 2009 crisis affected sales of spirits, and the standard 500ml glass bottle was in strong demand, in 2010-2011, premium spirits slowly recovered. Therefore, producers of spirits (especially vodka and cognac) started to play with bottle shape, glass quality and printing once again in order to make their products stand out on retail shelves.

Russian wine market in 2011-2012
According to industry experts, the average alcohol consumption in the world was 19 litre/person in 1997, 23 litres/person in 2011 and is expected to reach to 25 litres/person by 2016. Beer remains the most popular kind of alcohol globally: with the present average consumption of this beverage at about 17.5 litres/person annually. This is followed by wine (about 3 litres/person annually) with hard spirits in third place with about 2.2 litres/person annually.
The highest rates of alcohol consumption during recent years have been registered in Estonia and Lithuania: per capita consumption in these countries exceeded 100 litres/person in 2011 while in 1997 this rate was about 60 litres/person. Analysts forecast further increases of alcohol consumption in the said countries, which, over the next 4-6 years, could reach 140 litres/person (!) annually. High annual rates of alcohol consumption are also found in Latvia, Finland and Russia – about 90 litres/person.

Sales
According to industry experts, in 2011, sales of wine in Russia constituted 1 billion litres in volume and USD 8 billion in value. The decreasing trend was therefore broken, with wine sales seeing a 2.7 per cent increase in volume and 3.4 per cent growth in value.
The positive dynamics of sales volume and value was demonstrated by all market segments. For instance, sales of still wines – a segment providing 60 per cent of total sales volume and half of sales value – saw a 1.9 per cent increase in volume and 2.4 per cent growth in value. Fortified wine and vermouth – 20 per cent of sales volume and 40 per cent of sales value – increased by 4 per cent and 3.4 per cent respectively. Sparkling wines demonstrated the highest growth rates – 4.8 per cent in volume and 5.3 per cent in value.

Wine production in Russia
The production of wine in Russia declined by 6 per cent in 2011 compared to the previous year and constituted 72.7 million dal.
During the first two months of 2012, Russia produced 8.2 million dal of wine with a 4 per cent period-to-period increase.
According to official statistics, in March 2012 the average retail prices constituted: for fortified wine – 275 rubles/litre, for table wine – 234 rubles/litre, for Russian sparkling wine – 208 rubles/litre.
During 2011 wine prices grew slowly with under 1 per cent month-to-month increase. However, in January 2012 prices for fortified and sparkling wines increased significantly while, on the contrary, prices for table grape wine declined by 2.5 per cent.

Glass becomes outdated for wine
Glass packaging for wine is gradually losing its position in Russia. Despite the fact that the usage of glass in wine grew by 4 per cent CAGR over the 2006-2011 period in Russia, it was the most slowly growing pack type in this product category.
Since the mid-2000s, wine in bag-in-box packaging, especially non-grape wine, has gained share at the expense of glass packaging.
In grape wine, brick cartons, which are also replacing glass, are becoming increasingly popular. Many producers still follow tradition and use both glass and cartons. Experiments with metal beverage cans for wine may also pose a threat to the traditional consumption of wine in glass bottles.

Decreases and increases in wine production
According to the analysis of the “International Organization of Vine and Wine”, in 2012, global wine production declined by 6 per cent or by 15.9 million hl* due to the continued reduction of vineyard areas and unfavourable climate conditions. France conceded its leadership among winemaking countries to Italy. The most important events of the global winemaking industry in 2012 were slowed down by the growth of vineyard areas in the United States and countries of the Southern Hemisphere, as well as the decline of vineyard areas in Australia and South Africa.
The most impressive increase in wine production in 2012 was registered in the United States – 7 per cent or 1,363 million hl; followed by Australia – 4 per cent or 460 million hl; and Chile – 4 per cent or 402 million hl. Meanwhile, a decline in wine production was demonstrated by France –19 per cent or 9.301 million hl; Argentina –24 per cent or 3,692 million hl; and Spain – 6 per cent or 1,897 million hl.
More and more players are entering the global wine market. Though traditional winemaking countries such as France, Spain and Italy are still the leaders of the global wine market, their competitors are the new wine suppliers with their many advantages: large-scale production, technical know-how contributing to product quality, well-thought marketing and competitive prices.

Global consumption
The global consumption of wine has been growing over recent years, even though slower than that for beer consumption.
According to GIA (Global Industry Analysts, Inc.), wine consumption is forecasted to reach 26.1 billion hl by 2015. Increasing demand for wine is related to the continued assimilation of western living standards and growing consumer affluence.
The benefits of wine related to health are an important factor providing sustained market growth. Recent studies have shown that a moderate consumption of wine prevents heart diseases, cancer, Alzheimer’s disease and muscular dystrophy. Widespread promotion of research findings stimulates wine consumption at home and in HoReCa places (Hotels, Restaurants, Cafes, etc.). Formerly, the wine consumer base was mainly driven by mid-age people but today more and more young consumers prefer wine to other kinds of alcohol. Health advantages of wine will make it a strong rival to beer and other alcohol drinks in the future.
Consumer preferences for different types of wine are also changing. For instance, sales of champagne demonstrated a decline over recent years, and the consumption of fruit wines in Eastern Europe and Pacific Asia also declined. Consumer interest in Italian wines has decreased, while South American wines are enjoying increasing popularity driven by affordable prices.

Present global economic situation
The present global economic situation is complicated and improvements are hard to expect. Practically all countries are facing economic problems and strict financial order is required to overcome them. However, analysis shows that in the short term, the perspective Russian wine industry is going to grow: by 2015 the wine market will increase by 20.9 per cent in volume and by 36.9 per cent in value to reach 1.23 billion litres (8.67 litre/person) and USD 10.98 billion respectively.
The increase of consumer incomes, development of wine consumption culture, displacement of hard spirits with wine due to the health benefits of wine, the government’s correct strategy targeting industry development, renovation of production facilities, technological and product innovations – these are just some of the important catalysts behind the industrial growth of Russian wine.

The Russian beer industry in the third quarter of 2012
Production
In the January-September 2012 period, Russia brewed 724.6 million dal of pale beer with a 2.2 per cent period-to-period decline. In the first quarter of 2012, period-to-period decline constituted 8 per cent, while in the second quarter it came to 3.3 per cent. Thus, in the second half of 2012, the negative trend determined by the 20 per cent increase of excise tax continued, resulting in a significant decline in production volume at the beginning of the year (maximum -17.7 per cent in January).
Meanwhile, in the second quarter of 2012, a seasonal boost in sales resulted in a production volume increase equalling the production volume of the second quarter of 2011; in the third quarter of 2012, production volume saw just 0.6 per cent period-to-period decline. The best production dynamics can be seen in the results of the January-August 2012 period, with just 1.8 per cent period-to-period decline. In July, beer production demonstrated period-to-period growth, but in September, when the seasonal boost of sales ended, the descending trend recovered and the production volume of September 2012 constituted 93.8 per cent of the production volume of September 2011. The most important trends of the alcohol market over the first quarter to third quarter of 2012 were a period-to-period increase in hard spirits production (+12.3 per cent in the vodka segment, +29.4 per cent in cognac) and a decline in beer and wine production (the wine segment saw a 6.9 per cent decline).
This situation is, to a great extent, determined by the current strategy of alcohol market regulation in Russia. The decline of the beer industry is its response to various restrictive measures – a ban on beer advertising in electronic media, Internet, on billboards and transport, as well as a ban on sales during night time and in non-stationery retail for beer with more than 5 per cent alcohol by volume (abv) valid since July 2011. Besides, many local markets have their own restrictive measures applied to beer sales, thus not facilitating the work of beer brewers.

Retail sales
During January-August 2012 beer retail sales accounted for 712.7 million dal, with 4.2 per cent period-to-period growth. After the increase in January-February determined by an after effect of increased excise tax, beer sales practically returned to the indices of the previous year by the end of the first quarter of 2012 (+0.1 per cent) and by the end of the first half of 2012 negative dynamics were demonstrated (-0.3 per cent). However, aggregate sales of July and August exceeded sales of the same period of the previous year by 18.3 per cent, which was determined both by a favourable climate, as well as by low indices of the previous year. Interestingly, beer sales in July and August increased on the background of declining sales of other excisable beverages, including hard spirits and wine, which was related to the seasonality of the alcohol market.

Financial aspects – tax and excise
Excise collected on beer (production and imports) in January-August 2012 constituted RUR 79 billion with a RUR 12.9 billion period-to-period increase. In relative terms, the growth of collected excise tax (+16.3 per cent) was lower than the increase of excise tax introduced at the beginning of 2012 (+20 per cent) and lower than the period-to-period increase the previous year (+17.7 per cent). The lagging behind of collected excise in the third quarter of 2012 increased. The share of beer in the total increase of tax collection on excisable drinks in January-August 2012 constituted 41 per cent; this index also showed a decline in comparison for the first two quarters of 2012. Comparing this to the January-August 2011 period, this index constituted 73.3 per cent, even though the excise tax increase was lower than this year.
In 2012 excise collected on beer (production and imports) exceeded excise collected on hard spirits** only in June; in January-August this difference constituted RUR 8 billion in favour of beer. Meanwhile, in 2011, excise collected on beer exceeded the amount of excise collected on hard spirits already in the January-April period.
The share of beer regarding total tax collected on excisable drinks in January-August 2012 constituted 49.7 per cent, 2.1 per cent less than during the same period of the previous year (51.8 per cent). The share of hard spirits increased from 39.5 per cent to 44.6 per cent. The share of beer also declined in total amount of excise collected on excisable alcohol produced in Russia – from 54.4 per cent to 52.5 per cent; while the share of hard spirits increased from 37.7 per cent to 42.8 per cent. The share of beer declined even in the total amount of excise collected on imported excisable alcohol – from 21.2 per cent to 20.3 per cent. Imported beer provided 3.6 per cent of the total amount of excise collected on beer.
The significant increase of beer regarding collected excise was observed only in regional budgets; this was related to the new distribution of collected excise between budgets of different levels. Formerly, 100 per cent of collected tax on excisable alcohol – excluding ethanol – was directed to consolidated budgets of Federal Districts; since 2012, regional budgets receive only 40 per cent of excise collected on vodka and other alcohol drinks produced in this region. Thus, in January-August 2012, the share of beer in excise collected and directed to regional budgets reached 70.9 per cent, while the share of hard spirits reduced to 23.1 per cent providing less than a quarter of the total amount.
In January-August 2012 beer excise provided RUR 76.17 million in revenue to regional budgets; this was close to the total amount spent by regional budgets on physical culture and sports (RUR 80 billion). However, in some federal areas (for instance, in the Amur and Lipetsk regions) local authorities introduced extra restrictions applied to beer sales and this will inevitably affect both sales and production of beer and, therefore, budget revenue from excise tax.
In November 2012, Rosal-kogolregulirovanie (RAR) abandoned the idea to ban PET bottles for beer bottling and allowed beer brewers use PET containers.

Rough competition with PET for beer
Glass bottle production is highly consolidated with the leading players producing more than 50 per cent of total volume of glass packaging.
Glass bottles for beer demonstrated the highest decline rate in 2010 and 2011 – 8 per cent and 6 per cent respectively – this period was not very successful for beer sales due to the growing popularity of beer in less expensive and bigger PET bottles. PET, in fact, demonstrated only 1 per cent decline in 2011.
General negative trends in beer in the review period were mainly linked to the recession and restrictions in retail: beer sales were banned from 23.00 p.m. to 08.00 a.m. Moreover, advertising for beer on TV and radio has been banned since 1 July 2011.

Overview of the glass bottle market
In recent years, glass bottles have been one of the very few segments of Russia’s glass industry showing any growth. So far, glass bottles account for as much as 81.5 per cent of the total glassware output for the food industry. Domestic and international investment dollars have been pouring into Russia’s glass industry since 1995. Some of the major investors have been Belgium, the Czech Republic, Germany and Turkey.

Undersupply
Russia’s glass packaging market is currently undersupplied. So far, the gap has been bridged by bottle recycling, which is shrinking, and imports, which are on the rise. The market of glass packaging cannot be fully supplied unless Russia’s glass industry picks up.
Apart from recycled bottles, Russia needs to produce 5.5 billion bottles more annually to meet the needs of its alcohol and soft drinks bottlers alone. In the Czech Republic, Germany and the United States, no more than 15 per cent of beverages are bottled in recycled packaging; in Poland, only 5 per cent. Russia still bottles 70 per cent of its beer in recycled bottles.
There is no great variety to domestic glassware on the market. There is a shortage of small-size, ‘exclusive,’ and ‘gift’ bottles, which are vastly popular with consumers. At the same time, many producers only bottle their beverages in ‘fancy’ bottles; others use bottles of varying sizes and design to diversify their product ranges and give their products a distinctive appearance. Russia’s output of fancy, ‘gift’ bottles and brand-name bottles with printed logos for alcoholic beverages meets only about 5 per cent of the demand. Ninety five per cent of premium wine, vodka and beer come in imported bottles.

Outdated equipment
Russia’s glass industry is hampered by its outdated equipment. Producers are simply not equipped to meet modern standards in glassware design and look. They cannot produce lightweight bottles or switch quickly to new bottle design.
The brewing, soft drinks and distilling industries absorb the bulk of domestically made and imported bottles. More than 60 per cent of glass bottles are used for bottling beer; and some 20 per cent, to bottle vodka and other hard liquors.
Russia’s market of glass packaging, including recycling and imports, absorbs an estimated 10 to 12 billion bottles annually, but only 40 per cent of the market is being supplied by domestic glass producers. The remaining 60 per cent is shared by imported and recycled bottles: 20 per cent and 40 per cent, respectively.
With brewing companies being by far the largest consumers of glass bottles, glass factories naturally gear their production towards the brewing industry. Brewers use about 8 billion bottles annually, but their consumption is expected to reach 10 to 12 billion a year in the next 10 years.

Production and costs
Glass bottles generally cost less to manufacture in Russia than elsewhere in the industrialized world. At a cost of 48 to 70 kopecks per bottle, glass producers are assured of steady profit margins. New domestic 0.5 l brown-glass beer bottles cost brewers an average of rbl 2 per bottle compared to rbl 3.52, or USD 0.11 a bottle for western imports. Production cost-cutting does not always pay off; in most cases, inferior quality translates into heavy bottle loss and rejects during bottling.
Imports of glass bottles increased in 2001, the key exporters to Russia being Ukraine (28 per cent) and Poland (27 per cent). Finland supplies 15 per cent of Russia’s imports, or USD 6.5 million in monetary value. Austria, Moldova and the Czech Republic also export substantial qualities of glass packaging to Russia.
Similarly to domestic output, imports are dominated by glass bottles, which account for 83 per cent of the lot in value, and 75 per cent in natural volume.

Investors and imports
Over the next few years, the industry may expect further investors from the Czech Republic, Germany, Italy, Turkey, Belgium, Sweden and Finland, as well as domestic investors from among major bottlers such as Baltika, Veda, Streaminvest, and others. New facilities launched in 2002 include Vedapak in Kingisepp, Leningrad region, and the 100 per cent Turkish-owned Rusjam Glass Factory in Gorokhovets, Vladimir region. However, these new producers are powerless to keep up with the skyrocketing demand for bottles as Russia’s output of beverages revs up.
Imports of ‘fancy’ and regular bottles from the Czech Republic, Germany, Italy and France are not expected to drop since no quality alternatives are domestically available in Russia. The low quality and high cost of bottles made in Ukraine, Belarus, Bulgaria and Poland are likely to hobble imports from these nations.
With domestic glass bottles being more affordable, which helps producers cut their costs, Russian brewers, soft drinks bottlers, quality distilleries and wineries in need of prompt supply of exclusive bottles, will be increasingly sourcing their supplies from Russian glass producers.
As tinted bottles are particularly sought-after by bottlers, it would make sense to focus on producing brown-glass beer bottles.

Restriction on plastic packaging
Following in the footsteps of western Europe, Russia is currently considering restrictions on bottling alcoholic and soft beverages in plastic packaging, which is inferior to glass in chemical integrity. This would also boost demand for glass bottles.
Investments in new glass factories may pay back in between 18 months and 6 years, depending on site preparedness and output. Therefore, it will be another 3 or 4 years before Russia’s glass packaging market is saturated. As competitive pressures mount, success awaits those producers who take marketing seriously and aspire to produce quality.