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. Last Updated: 07/27/2016

Spirits Giant Teams Up With Alfa

bloombergAlfa's Smirnov will join up with Diageo, which owns rivals brand Smirnoff.
British-based spirits group Diageo is strengthening its Russian operations by forming an alliance with the maker of Smirnov vodka, which rivals Diageo's own Smirnoff brand.

Diageo said Monday that it had agreed to set up a joint venture company with Alfa Group's A 1 Group, which owns Smirnov vodka, to market, distribute and sell spirits in Russia.

"Smirnoff and Smirnov, with their unique Russian heritage, are uniting," said A 1 Group managing director Igor Baranovsky. "Building the Smirnov brand will now acquire a new emphasis."

Diageo said it would own 75 percent of the venture and pay $50 million to Alfa.

"This company will be the exclusive distributor of Diageo spirits brands and the Smirnov vodka brand in Russia," said Diageo.

Last year, Smirnov sold 220,000 of its 9-liter cases of vodka in its Russian market, while Smirnoff sold slightly more than 25 million 9-liter cases globally, a Diageo spokeswoman said.

The venture depends on regulatory clearance, and the two companies will decide on their brand strategies in coming weeks, she added.

When Diageo reported first-half results this month, the company said the amount of liquor it sold in Russia jumped 41 percent in the period.

"In mature markets in Europe, there's a lot of pressure," said Jamie Norman, an analyst at Dresdner Kleinwort Wasserstein in London.

"There are real opportunities as you go further east."

Both partners will contribute to the strategic management of the venture's distribution unit in Russia, Diageo Distribution. This company will be the "exclusive" distributor of Diageo spirits and Smirnov vodka in Russia, the British company said.

The venture is expected to be fully operational in July and requires approval from Russian anti-monopoly authorities, the company said.

The new business is expected to employ as many as 300 people, and on completion the Smirnoff and Smirnov brands will be united under common ownership.

Alfa is run by Mikhail Fridman, who with a fortune worth $11.4 billion is Russia's second-wealthiest man, according to a list published by Finans business magazine on Feb. 13.

Western Europeans are going out to drink less often as rising taxes and energy costs erode incomes and governments in countries, including Ireland, ban smoking in bars. Russian real incomes rose 8.8 percent last year after gaining almost 9.9 percent in 2004.

Michael Bleakley, an analyst at Credit Suisse in London, said in a note to investors published last month that higher-priced spirits and beer brands "are seen to be consumed almost as a fashion statement" in Russia, China and Eastern Europe.

Britain's High Court ruled in April 2003 that Diageo could retain trademarks it had been granted by authorities in the country for its Smirnoff vodka brand.

Boris Smirnov, the great-grandson of the Russian distiller who first produced Smirnov, sued the distiller in 1995, claiming it had acquired its rights from a relative who had been bought out of the business.

(Reuters, Bloomberg)