The real Russian revolution? Perhaps the drastic shake-up of the traditional vodka industry that accompanied 1980s perestroika. How can traditional vodka distiller Liviz deal with new competitors, especially in the glamorous and lucrative upscale segment?

What is vodka to the Russian soul? An elixir? A blight on productivity? A source of business for sure.

Since 1147, when mention was made of the construction of a distillery in Khlynov, vodka has certainly been one of the lubricants of Russian society. However it was only at the end of the 19th Century that famous chemist Dmitri Mendeleev helped classify and categorize the manufacture and compounds of the by-then well-imbibed spirit.

For associate professors Gladkikh and Starov (click here and here for bios), the interest lies not so much in the medicinal values of the drink, but in the radical upheavals in the beverage’s marketing and sales since the fall of the Soviet Union in 1991. Their deeply-researched case is testimony to the Russian passion for the national drink, and delves into many different aspects of the vodka market.

The basics of vodka making are set in ice. Start with alcohol made from rye grain. Add if desired maybe 2% or 3% of spirits from other grains. Distill thrice. Add pure spring water until the resultant mix is 40 to 46 proof. Place in bottle (usually half-liter). Slap on label. Hа здоровье! (to your health)!

One still per city
Insert Chart 1 – Main vodka manufacturers

Vodka making could be called a national sport, and the parallel to soccer does not stop there: every large self-respecting Russian town had its own vodka maker. For St Petersburg, the company is Liviz. For Moscow, the names are OAO Cristall or Russian Wine & Vodka. For far eastern Novosibirsk, Kaolvi calls the game. No wonder Russia counted more than 650 wine and spirit producers in 2000; not including numerous bootleg operations which accounted for an estimated one-third of the market sales!

As the Russian transport network modernized, and excise taxes were revised, the competition between distillers intensified. Moscovite vodka could retail in Siberia and Petersburgian alcohol could flood the Ural. This changed life for manufacturers by adding that imponderable parameter… marketing and especially market positioning.

Of course competitive positioning could – to a certain extent – be based on product characteristics, namely purity. But increasingly the vodka honchos needed to appeal to emotional factors, such as those that an advertising campaign or a sophisticated label on the bottle, or the shape or material of the bottle, could provide.

Vodka for any wallet
One of the easiest manners to segment the market is by price. The case proposes a five-tiered segmentation based on price, from mass-market to inexpensive to mid-range to expensive to premium. At the lower end of the spectrum, a half-liter of plonk would cost Ivan less than 50 Rubles (ca. $1.75 at 2000 rates). The premium variety would set him back $3.50 or more.

Insert Chart 2 – Market segmentation

And of course the point of sale also has an impact on the positioning. The old snack and beverage pavilions of yesteryear (most closed in the 1990s) were surely not the place for a 150-Ruble bottle of Cristall Black Label. Reciprocally, the extensive vodka section at an upscale retailer was terra incognita for 30-Ruble rotgut.

To complicate matters, a substantial portion of vodka is sold “on-trade”, i.e. in restaurants, bars, cafes and clubs. Getting onto the beverage list is not always easy. The parallel? When one American fast food outlets swears by Coke, then Pepsi has no chance of being accepted. In Russia, about 15% to 20% of vodka sales by value are through the on-trade channel, making it critical for distillers to cultivate their relations with restaurant owners. This is especially true in the premium segment, where restaurant image plays an important role.

As if those worries were not sufficient to turn a hardened manager to the bottle, there are of course advertising constraints. As elsewhere in the world, alcoholic beverages cannot simply be promoted on any old media: no television, limits on print, restrictions on billboards, and so forth.

With this backdrop in mind, the case (see reference below) presents the issues of the leading St Petersburg vodka manufacturer, the Liviz company. Liviz is a haloed name in Russia, and its various beverages benefit from excellent reputations for both consistent quality and good taste.

So Liviz management is all the more worried that upstart competitors are infringing on its established territories, namely in the premium vodka segment, where sales quantities may be low, but sales revenues are high and growing higher. All the more so that Liviz’s 40% market share in the St Petersburg expensive category risks serious onslaught from newly arrived competitors Cristall and Russian Wine & Vodka Co., and Russian Standard Co.

Some vodka brand managers circumvent promotional constraints by turning to some merchandising tricks, a la Marlboro Classics clothing. These brewers also distribute (and advertise) innocuous beverages such as water or fruit juice, yet elements of the logo are similar to those on the vodka labels… Should Liviz also resort to such roundabout brand enhancement? How should Liviz confront the premium and super-premium challenges? How can the company position its Diplomat premium brand?

Have no fear, dear reader, for the fate of Liviz, for as the case states: “In the elite alcohol market, the specific motive of purchase…is either hedonistic (men sometimes wish to imbibe excellent vodkas) or self-confirmation…” On such sure grounding, vodka is bound to flow for years!

ECCH case number 507-031-1
“Diplomat vodka makes a break for premium class”
Associate Professors I. Gladkikh and S. Starov
St Petersburg State University (Russia), Graduate School of Management


Strategic development of private labels at retail chains needs integration

Click here for the full biography from the St. Petersburg website.

What area of research are you currently working on?
Brand Management in Retailing (private labels, store brands)

 A case study that you think is important. Why?
One of the major tasks when using a case study in teaching is the development of students’ creative thinking skills. Teaching with cases broadens the creativity horizon. It is aimed at emphasizing the role of creative improvisation, multiple ways to solve the problem and various alternatives of decisions as such.

In my opinion, one of the most interesting case study in marketing, that allows to unlock the potential, is the case «Colgate-Palmolive» prepared by Professor Sandra Vandermerwe of IMD, Lausanne, Switzerland. This case show the need for an integrated approach to launch a new brand and show the dangers of assuming that a product successful in one market will do well in another.

 A management book you think highly of (written by someone else). Why?
David A. Aaker «Building Strong Brands» (New York, The Free Press, 1996).

The reasons for this choice:

  • presents conceptual models of brand building and managing brand identity;
  • illustrates complex approach to brand equity measurement across products and segments. Measurement is of use to managers with multiple markets and brands; it also provides a quantitative discipline to the conceptual branding models;
  • explores issues surrounding brand extension decisions, and reviews global brand strategies.

 A very recent business or management title you read, and its significant lessons.
“Value-Based Marketing” by Peter Doyle (John Wiley & Sons, 2006). The book redefines the concept of marketing. The result of this new approach (integration of marketing and finance) is a concept of marketing that is more practical and more relevant to the objectives of today’s top management.

 What is one of your well-liked teaching moments (case, discussion topic, …)?
I prefer to use the so-called ‘short vignette’ case format, that consist of 1-5 pages and one or two appendices. Those cases are usually incomplete in terms of some information that the students would like to have. The students must make appropriate assumptions to fill the gaps. Besides, the scarcity of information in vignette cases provides the opportunity for students to be very creative in solving the problem and offering alternative action plans. For example, the case about brand promotion may not describe the figures of promotional budget, and students have the chance to use their imaginations to develop effective combination of promotional tools.

What was your most interesting consulting assignment? Why?
The most interesting consulting project was developed in 2010. It was the project Zenit-mobile by one of the largest mobile phone operators in Russia, MTS. MTS and the well-known Russian soccer club Zenit from Saint Petersburg announced the launch of the joint project in which dual rates addressed the needs of fans of football club in the voice communication, Internet access and additional services.
One of the interesting and challenging marketing objectives of this project was to involve buying rates for women who, as a rule, are not football fans, but whose involvement could increase the MTS market share nationally.

If tomorrow you could occupy an executive function in any company, what function and company? Why?
I would test myself as brand director for the strategic development of private brands of large chain retailers. The direction of the creation of private brands in Russia since the mid 1990’s has been growing rapidly due to the concentration of the retail industry and the entry of large western chains (e.g. Metro, Auchan, Carrefour). Many Russian retailers are expanding their portfolio of private brands, complementing their premium private label. There is a need to develop an integrated approach to developing a balanced brand portfolio, specifically by using various models of brand management.