Interview Ukrainian macroeconomics

The state’s respect for transparent businesses finally became visible

Igor Nazarov, the head of Brown Forman Ukraine, told about some behind the scenes events of the Ukrainian alcohol market and his luxury segment in particular, about faking and smuggling in the background of the crisis, as well as about how it all relates to the culture of consumption of strong drinks and the specific government’s steps.

: What is Brown Forman?

I.Nazarov: Brown Forman is an international corporation with the American origins, employing almost 6 thousand workers now. This company is among the top five leaders of the premium alcohol production. The most famous brands are Jack Daniel’s and Finlandia. The company is almost 150 years old, and a representative office in Ukraine was registered 10 years ago.

: Have you been working for this company from the very beginning?

I.Nazarov: Yes, I have. I was the youngest director of the subsidiary throughout the whole company’s history. I was 29 years old when it was launched. I used to work “on the other side of the fence” before, I was a distributor of Jack Daniel’s whiskey. When they opened a subsidiary, it turned out that I headed it.

: What brands are members of the group?

I.Nazarov: I have already mentioned well-known ones. They are Jack Daniel’s whiskey, Finlandia vodka and El Jimador tequila. There are more regional and less recognizable brands. They are Old Forester and Woodford Reserve bourbons, the French liqueur Chambord. We have bought three single malt brands from Scotland recently. BenRiach is the best-known one in Ukraine. Globally, at the scale of the whole country, the most significant ones are Jack Daniel’s and Finlandia.

: What criteria did you consider when choosing Ukraine for doing business here?

I.Nazarov: These brands have been presented in Ukraine since long ago. If I am not mistaken, the discussion regarding opening a representative office began in 2007. First of all, the business estimated the potential – the market population, the alcohol consumption (by the way, we are among the leaders, although I’m not sure if we should be proud of this).

Additionally, the company’s stock portfolio was divided between two distributors 10 years ago. Some guys sold Finland, others sold Jack. It was decided to unite the forces and start a long-term investing process in a stable market with the full potential from the standpoint of sustainability.

: What place does Ukraine take in the Brown Forman group by the profitability?

I.Nazarov: We are not among the leaders at the moment. If I recall correctly, the company operates in 163 markets, and those markets are much larger than Ukraine.

However, Ukraine has been ranked first in Europe based on the pace of the growth of various indicators over the past four years. That is why at the global and international level, Ukraine is among the top ten countries on which the company will focus the next 5-10 years.

: What countries take the first places?

I.Nazarov: The United States is the first for sure. Then, if I’m not mistaken, go the United Kingdom and Germany. The most potential countries are Russia, China, Brazil.

: Large companies complain about plenty of counterfeits in the Ukrainian market, this affects the profitability of the productions. Do you face such a problem?

I.Nazarov: Unfortunately, this is probably one of the main problems we face. However, I wouldn’t state that it dramatically affects the profitability and scale of businesses. I’ll explain what’s the matter. There aren’t any pure fakes of our brands, at least in Ukraine. I’m aware that somewhere in Asia people try to fill up empty bottles with some kind of questionable fluid, but people from our lands don’t do that, thank God.

There is another situation in Ukraine, it is a brand new solution – so-called ‘bag-in-box’ alcoholic beverages. These are large three-liter boxes with a plastic bag inside and a tap. The box has a very decent look and completely repeats the identity of well-known brands. This applies not only to Finlandia but also to other premium beverages including whiskey and rum. This is probably one of the hottest problems now, but I wouldn’t say that it somehow significantly affects our sales. In fact, three liters of fake alcohol are sold at the price of an original half-liter bottle. People who understand what is high-quality alcohol are ready to buy the real product. They are aware that such cheese can be only in a mousetrap. Most likely, the problem is that falsifiers damage the brand image, and of course, the consumers’ health.

This negatively affects us in any case in the long run, so we are trying to fight this phenomenon. In particular, we cooperate with the relevant state authorities on the basis of the European Business Association. A fascinating fact – while speaking to absolutely different levels and directions of our executive power a year ago, we heard disappointing answers, people threw up their hands, they told us they could do nothing. The attitude has radically changed over the last six months, our state authorities activated. After the prime minister intensified combating the illegal market, the Ministry of Internal Affairs, the Antimonopoly Committee, the cyberpolice, the police and the customs became involved in the process. Now, I see more support from the authorities in combating this phenomenon.

: Well, does this mean that people should not buy your alcohol in packs, in the paper package?

I.Nazarov: You can buy it only on the Internet, as such products have never been formally manufactured and cannot be sold officially. Alcohol in packs is produced in basements, garages, and full unsanitary. Guys just make a nice looking box and fill it with the most ordinary bag with diluted with water alcohol. They invented a beautiful story about a Duty-Free product of some cruise liners. There are people who believe in it, unfortunately.

: What are other problems of the alcohol business in Ukraine?

I.Nazarov: We can pay some attention to smuggling. This problem has become smaller because of the current exchange rate. Smuggling is not profitable.

The next problem is the e-commerce regulation. You must have a license to sell alcohol, there should be a shop, a cash register, and 90% of sites don’t have anything. So, we are talking about the total lawlessness. Official market players have to buy a license that costs half a million UAH while e-commerce sellers without a license get fines around 17 thousand hryvnias only. They can pay a fine once a month, and it will still be less than normal sellers pay.

: For how long is your license available? How often do you need to renew it?

I.Nazarov: If I am not mistaken, the license for the group is issued for five years, it costs us half a million UAH per year.

: So, is it more profitable to pay a fine?

I.Nazarov: Apparently, it is so. Still, the problem doesn’t lay in fines. A site or a server can be located somewhere in Malta, the Bahamas, or anywhere else. Dealing with this is difficult. Now, we are starting our joint work with the tax and cyberpolice to stop the actions of illegal Internet operators.

: Are there first results or have you just started this?

I.Nazarov: No, no. The tax authorities capture 2-3 such basement garages every month. In several cases, they managed to trace the whole chain from the site to the producer, both of them closed. We are now negotiating with tax officials, the executive service and the Ministry of Justice of Ukraine regarding creating a certain structure for all processes. Everyone needs to understand the problem’s scale and the progress they are making.

: Many of our speakers noted that there is such a problem and they are struggling with it – for example, let’s take counterfeiting – they find a source of such products, complain, come to them and confiscate their property, but later, this property…

I.Nazarov: …returns to the market.

: Exactly. Do you face such issues too?

I.Nazarov: Most likely. It took us almost a year to understand the process that takes place behind the doors of governmental offices. We met with the leadership of the tax police a couple of weeks ago, and finally, we came up with a certain pattern. First of all, it is about a rather weak state regulation and even weaker processes and procedures within the state system. This way, tax authorities actually find the site, go to a garage producing counterfeit goods and arrest them. So, the work of the police ends with transferring the case to the courts. They transfer it to the court and the executive service starts ts processing. Only God knows how the executive service proves this case, where it stores this case, how it destroys the confiscation.

: Do you receive any reports?

I.Nazarov:  We started working in this direction just recently, literally a week ago. As I mentioned, all this is aimed at systematizing and keeping some records to monitor the process dynamics.

: Do you tackle this on your own or with the support of the European Business Association?

I.Nazarov: We deal with it solely on the basis of the Association. I don’t want to interfere on behalf of Brown Forman as it is a pure crime. I’m not going to fight the crime.

: Moreover, if you fight, you have to fight collectively, not by means of just one company.

I.Nazarov: Absolutely. I mean I don’t figure anywhere, I don’t really need it. We approach this issue along with the entire industry. All market operators are engaged in similar things via the European Business Association.

: Where should people buy your products with the utmost confidence that it’s a high-quality product, not a fake one?

I.Nazarov: Everywhere, if this is ‘glass’.

: Don’t they fake glass?

I.Nazarov: I have been working at Jack Daniel’s for 15 years, 10 – at Brown Forman, and 5 – before that. We know only one unique case near Kharkov when the fake glass was found. Still, we wondered whether it was fake or not. Essentially, the elite product isn’t faked massively here.

: Is faking products profitable?

I.Nazarov: It may be so. For example, a liter bottle of Jack costs around 600-700 UAH. If you find an empty packaging and pour some caramelized alcohol there, you can make at least 400 UAH. The question is who will be ready to buy such a drink. Still, the key role here is the product’s premium status: it is unlikely to be sold in the open markets, as there is no target audience. Normal market players – bars, restaurants, nightclubs, shops – are usually socially responsible to understand that counterfeit goods cannot be offered to consumers. The main point is that a consumer can almost always determine whether it is fake or not. Therefore, I know very few cases of direct counterfeiting of elite drinks.

: How do you assess the investment climate in Ukraine?

I.Nazarov: I answer this question in the European Business Association at least twice a year. Let’s say, the first answer that comes to my mind is likely to be: “I think it is dynamic”.

: Do you mean there is some recession?

I.Nazarov: No, no. This climate is constantly changing. Unfortunately, this dynamism is very much related to our government. What’s more, various authorities implement the government policy in realities in different ways. I can state that Ukraine is much more attractive now (I’m not talking only about the alcohol business) than it was 5 years ago. Still, as far as I know, our instability stops large investors.

If we recall the last few years, there was no chance for any kind of constructive long-term planning, as ministers changed every six months. Everything became more balanced and stabilized now, although the ideal is still far away.

The elections are coming soon again. Therefore, I am absolutely convinced that any large investor, even not an institutional one, will decide to wait for several years. The elections will take place in a year, and the country will need at least one year to understand where it moves.

: Many speakers tell us that Ukraine is a risky country for investing, but those who invest can earn here more than, for example, in Europe, where earnings are lower but more stable, and calmer. So, an investor comes there and sleeps well while in our country he/she would be nervous. Do you agree with this?

I.Nazarov: To my mind, it still depends on the investment direction. If we look from our perspective, I mean premium-quality alcohol, the answer will be “definitely yes”. The market has grown about 6-7 times over the past 10 years. Investing is definitely worth it. My hat’s off to the Brown Forman’s leadership. They really made the right bet. As I mentioned, Ukraine was in the first place for Brown Forman in terms of growth rates for several years.

: For what purpose did you become a chairman of the Association committee? How did you make this choice? Tell us about the procedure.

I.Nazarov:I have been a chairman of the committee for the fourth year in a row. I’ve been already elected for four times, maybe I will have five terms in a row like Lukashenko. In fact, everything is very democratic, at least in our Wine & Spirits committee. Anyone along the candidates can nominate an applicant if they don’t mind. It’s interesting for me, as I’ve been sitting in my office for 10 years, so I want to broaden the spectrum not in the sense of the responsibility, but from the perspective of doing something outside of my company.

: You have to work and cooperate with your competitors…

I.Nazarov:I think that it is really great! We don’t discuss the details of business or brands in any case. We always discuss the position: what I would like to do on behalf of the industry. You know, I have never seen any open or hidden lobbying of own interests by the participants over the past five years.

: Is this forbidden?

I.Nazarov: I wouldn’t state this is forbidden. They all are just adequate people. Maybe that is one of the reasons why we don’t always accept some local players who want to get into the Association to promote their own interests. We believe that – and this completely correlates with the principles of the Association – there should be one vector for the entire industry.

: What are you responsible for as the committee’s head?

I.Nazarov: Oh, what a nice question! In fact, I am not its head in the full sense of this work. All committee members are at exactly the same level. When we meet with different external organizations or even within the Association, I just represent the interests of our committee. Therefore, the first my duty is being the face of the committee, and being aware of the latest events.

: Tell us about the market, please.

I.Nazarov: If to talk briefly, our country was “case per face” at first, that means “one box for each person”. This is a certain measure of international alcoholic beverage producers of how much alcohol the country consumes. We had 42 million people and 40 million boxes of alcohol drunk annually. So, every average person, including pensioners and infants, consumed 9 liters of alcohol.

: Is this a number for a year?

I.Nazarov: Yes, it is. It’s just ordinary statistics. There is a population, there is the official alcohol turnover. Recently, this turnover began shrinking by 10-15% per year. The cause for this is the population decrease due to occupied or annexed territories, and easy migration. There are not 40 million of us anymore, if I am not mistaken…

: Aren’t there any sales in the occupied territories?

I.Nazarov: Definitely no. If there are any supplies, they are likely to come from Russia. Our alcohol market is falling in general. Along with this, the premium segment has been growing steadily for several years despite a series of crises and devaluation of the hryvnia. Frankly speaking, I believe that this is a very encouraging sign. I am very pleased to watch how our country overcomes the post-Soviet binge and begins to develop a civilized culture of alcohol consumption.

If we look at restaurants, bars, we won’t see a company of men with a bottle of vodka and herring. I notice wine and cocktails on the tables, which is more common to the western style of alcohol consumption.

: What are your relationships with tax authorities? We know that you were under pressure from their side.

I.Nazarov: I was almost participating in a criminal case in 2012, it was not issued by the tax, however…

: Was this case addressed to you or a company?

I.Nazarov: It was addressed to me as the head of the company. In 2011, under the previous government, the customs decided that everyone should pay bribes. Being a transparent and honest international company, we were already the leaders among taxpayers in the region and refused to make any unofficial payments. They began to overestimate the customs value for us, there were delays in the registration and they interfered with our workflow in different ways. We paid the excessive taxes and sued them, we acted according to the law. A year later, after realizing that I wouldn’t give up, they fabricated some sort of smuggling case and arrested a container with Jack Daniel’s. The official importer was accused of smuggling while smuggling around was just flourishing. It was a great experience, I lost weight – 10 kilos in 6 weeks. Later, the American and Finnish embassies and American senators influenced this situation. Finally, this problem was solved at the international level.

: Even if a business is working legally, there are no guarantees that it will work calmly in our country, right?

I.Nazarov: It was so earlier. There are almost no such situations now, or there are much less of them. We had a tax audit a few years ago. I made everything clear at the very beginning, like: “Guys, there won’t be any bribes for you, just take everything you find.” They did not hesitate to write down an absolutely unjustified fine for a multimillion sum. Over a few weeks, the situation was set up at the highest level with the support of the European Business Association and the common sense of the authorities’ headships.

: Have you proven that you are right?

I.Nazarov: No, we didn’t have a chance to prove it. On the contrary, the fine was too much unreasonable. I finally saw the state’s openness and respect for transparent businesses. If I had to know literally all the bosses and deputies in my tax before, I am not acquainted with any of them now, although we are served in the office of large taxpayers.

: Companies face a problem that people don’t want to work for a completely “white” salary. It is not profitable for them, as they pay taxes from their own money, which are then not compensated in the envelope like in companies that use “grey schemes”. Because of this, there are staff turnovers, a bunch of vacancies is opened, still, many people do not go there just because they have, for example, loans. Did you face such a problem? Or do people come to you as to a “white” company?

I.Nazarov: I haven’t come across such a problem. Moreover, I always believed that a “white” salary is an advantage. I think Brown Forman Ukraine is one of the most reputable employers in the country. You are likely to talk about large companies where the number of staff is huge and there are some basic professions for which every 100-200 UAH of taxes are of paramount importance.

Please read: To be successful in Ukraine, you need to forget everything you’ve ever known before entering its market

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