Black market waters down local spirits producersaa‚¬a„¢ profits

After the market contracted by 17 percent in 2010, Romanian spirits producers – legal ones that is – are facing another flat year as consumption is showing no signs of picking up so far. But as they struggle, the black market is reaching new heights, while the authorities are turning a blind eye, legitimate players complain.

Simona Bazavan

“It is becoming very hard for any foreign investor, in our case our German shareholders, to grasp the local market situation. It is difficult to explain not only why tax evasion hasn’t been taken care of in so many years, but why it has instead been increasing exponentially lately! One can’t be surprised by investors’ lack of interest in the local spirits industry,” Emil Popescu, president of Romanian spirits producer Zarea, told Business Review.

The economic crisis has generated a vicious circle for the country’s spirits and alcohol industry, reducing consumption and at the same time taking the black market to new heights.

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“The hike of excise tax in June 2010 and then VAT have almost doubled the shelf price of some products, which is very hard to justify to consumers who in most cases have seen their income go down. This created a very good environment for tax evasion,” Popescu said.

Over the past eight years tax evasion with alcohol and spirits has led to no less than 80 percent of Romanian spirits producers closing their businesses, with the loss of about 7,000 jobs as well as approximately EUR 3.3 billion (EUR 4.5 billion with VAT included) to the state budget, according to Romulus Dascalu, president of the Employers Organization of the Alcohol and Alcoholic Beverages Industry (Garant). Tax evasion amounted to about EUR 700-750 million in 2010 which accounts for a staggering 70 percent plus of the local market, Dascalu announced earlier this year, accusing the authorities of turning a blind eye.

“The economic climate of the last few years has fostered tax evasion and boosted obscure companies while large manufacturers have lost ground. Illegal practices, such as selling spirits at a price that doesn’t even cover the excise tax, by companies that have also caused their own insolvency, must no longer be tolerated,” he said.

The situation has only got worse in the past couple of years but 2011 could see a new record. The number of excise stamps for spirits released by the authorities decreased from about 456 million in 2003 to 151.5 million in 2009 and fell further to 136 million last year. In the first two months of 2011, the number of spirits excise stamps dropped to 9 million, from 17 million in January-February 2010, Dascalu warned. The Garant president underlined that improving the law and making fiscal inspections more efficient are crucial in order to protect the remaining legal producers on the market.

Not paying the excise tax translates into a shelf price that is as much as 50 percent cheaper than it should be, making it very difficult for any producer that respects the law and pays the tax to be competitive, Popescu said.

In his opinion the drop in consumption, tax evasion and imported spirits that don’t meet EU laws are the main issues that local producers are facing. “Although the plunge in consumption is due to the general international context and is affecting most industries, for the latter two issues there are a multitude of solutions that could be implemented. Unfortunately we’re seeing a total lack of interest in doing that,” bemoaned Popescu.

Gyuri Eperjessy, commercial director of Alexandrion Grup Romania, added that the government’s commitment to taking drastic measure against a black market which he estimates at 25 percent for brandy and 30 percent for vodka is necessary if the firm is to reach this year’s objectives.

So far, 2011 has not brought good news for the spirits market. “Judging by internal data we can say that the market has dropped quite a lot since the beginning of the year. (…) The general economic instability is fuelling a sense of panic and so far there have been no actual measures that would stimulate consumption,” said Popescu.

As in 2010, prices and promotions will save the day, or at least underpin sales volumes. “I believe that quality matters the most. (…) Promotions and other measure that support the brand and sales follow. On a market that is uneducated and uniformed about quality, price matters too,” Alin Ursu, manager of Angelli Spumante & Aperitive, told BR. The company reached a turnover of approximately EUR 15 million last year, although profit was down, and plans to increase it by EUR 1 million in 2011. Angelli Cherry, Angelli Cuvee Imperial, Angelli Cocktail Pesca and Angelli Vermut are among its most popular brands. The firm saw its exports grow to 10 percent last year and plans to raise their share to 18 percent in 2011. “We intend to enter new markets. So far we are performing very well in Hungary, Italy, Spain, Turkey and Cyprus,” said Ursu.Zarea is also putting foreign markets on its to-do list. Most of its production is for the domestic market but the company plans to increase exports to Spain, the UK, Germany, Cyprus, the Netherlands, Japan and Thailand and to enter new markets, said Popescu.

Zarea’s target for 2011 is to maintain its sales volumes even though the market dropped by 15 percent in the first quarter. “Last year our turnover amounted to RON 71 million (e.n. approximately EUR 17.3 million) and for this year we estimate a decrease of no more than 5 percent which is an acceptable result considering the market conditions,” said the general manager.

Some of Zarea’s most popular brands include the Zarea, Athenee Palace and Dorato sparkling wines, brandies like Milcov and Arad, Corrido sangria and the Florentino liqueurs. The company has also launched several brand extensions and this year has included the Stalingrad vodka brand in its portfolio.

simona.bazavan@business-review.ro