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Allied Domecq gambles on Stoli

30-Nov-2004

Despite the unresolved legal battle over rights to the brand, Allied Domecq is to take on global distribution of Stolichnaya vodka, writes Kim Hunter Gordon.

Allied Domecq this week announced a five year contract with SPI Group (Soyuzoplodimport) to market and distribute Stolichnaya in Europe, Latin America, Asia Pacific and Africa. This gives the British company near global control of the brand; it has had the licence to distribute the vodka in North America, Mexico and Scandinavia since 2001.

North America is currently Stoli's core market. Figures from AD indicate that sales in the US have increased by 58 per cent since they took the contract in 2001. Stolichnaya is the second-biggest imported vodka in the U.S. after Absolut, and competes with Diageo's Smirnoff.

 

Global vodka sales are expected to continue to grow and now AD will have finally added a major vodka brand to its international portfolio. SPI sales will benefit from the global reach of the world's number two wine and spirit producer.

 

"The marketing machine of Allied Domecq will have a significant impact on sales in Europe," said Datamonitor analyst John Band, "Stoli already has a good reputation and significant niche sales in Europe".

 

But, these benefits may be shortlasting. In 2001, a Russian court ruled that the brand was dishonestly acquired during the privatisation of the vodka industry. SPI's Stolichnaya, which has the words "Russian Vodka" written on its label, has since then been distilled in Latvia.

 

Allegedly, during the fall of the Soviet Union, state employees created a company with virtually the same name as the agency in which they worked. From Soyuzplodoimport, they removed the letter 'o' to make Soyuzoplodimport. In 1997, while head of Soyuzplodoimport, Yury Shefler sold the trading rights for $300,000 to what became his own company. The government puts the brand's worth at more like $400 million; other appraisers have estimated as much as $1.4 billion.

 

With international sales of $680 million a year, Shefler was not prepared to relinquish Stolichnaya, and moved production abroad. He then instructed Stoli's US distributer since 1971, PepsiCo, to pass the brand rights to Allied Domecq. But, last month, a lawsuit was filed in the US by the Russia government, claiming sole ownership of the brand name.

 

Datamonitor's Band said that "the brand will probably have to be returned to the Russian government if Allied loses the US court case". Allied Domecq's defence hinges upon documents that the Russian government claims that it can prove are false.

 

Last February, the Russian government launched its own Stolichnaya, identical to SPI's product except it is actually distilled in Russia and contains the fine print: 'Produced under licence of the Agriculture Ministry of Russia.' While the brand is authentically Russian rather than Latvian, it does not have Allied Domecq's distribution contracts and is therefore not yet any competition.

 

Given this uncertainty, Allied Domecq will probably get a good price for the Stoli contract. But, if it is allowed to keep the rights to the brand it will be in an immensely strong position. Of the big three global drinks groups, only Diageo has a major vodka brand (Smirnoff) and major rivals, such as Absolut or Finlandia, are unlikely to be sold. Stolichnaya is AD's only real chance of playing a major role in the international vodka market.

 

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