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					         INNOVATION MODEL OF THE STATE MANAGEMENT OF ALCOHOL
     PRODUСTS DISTRIBUTION IN RUSSIAN REGIONAL CONSUMER MARKETS

       Reference: Mazanko, E.I. Innovation model of the state management of alcohol products
distribution in Russian regional consumer markets/ E.I. Mazanko, V.M. Kiselev, V.M.
Poznyakovsky // Economic crisis: reorganizing food, fiber and bioenergy chains: VII International
Pensa conference at Brazil.- University of San Paulo, November 26-28, 2009


       Key words: alcohol market, modeling, state regulation, conflict of interests, parity or
requirements
       Abstract. The article describes author’s innovation model of the state management of alcohol
products distribution in Russian regional consumer markets based on the identification,
systematization and study of regional specific factors which form product quality of this product
group, as well as contemporary methodological management approaches. Introduction of principles
and methods of the state involvement in the regulation of alcohol products distribution in consumer
markets will result in the improved quality of life and will increase life expectancy of the
population. Regional aspects of alcohol products distribution at the Russian consumer market
constitute fundamental factors that largely determine the range and nature of other processes that
impact and ensure the quality of alcohol products, methods of its evaluation, structure of the selling
proposition, properties and SKU indicators. These issues greatly affect consumer perception of the
quality of alcohol products. Ultimately, identification of such regional issues, their systematization
and understanding would not only improve economic efficiency of the merchandize flow, but will
also produce a significant social impact, thus, helping maintain life and health of Russian
consumers through assurance of adequate product assortment and quality. Innovative regional
initiative may become the most useful tool of state regulation of alcoholic beverages distribution in
Russian regional consumer markets. This initiative implies regulation of the quality and
consumption of alcohol products, reflecting, on the one hand, the priority of the increased volume
of alcohol products with a low concentration of ethyl alcohol (less than 20 % vol.), and reducing the
volume of per capita average consumption of other alcohol products, on the other hand.

       Practical implementation of this initiative will require the development of basic principles and
methods of the state regulation of sales proposition in the regional alcohol markets based on the
methodology of quality function deployment, which is related to the parity of requirements between
the participants of integrated channels of merchandize flow (from producers to consumers), as well
as the principles of identification and traceability of supply chains (ISO 9001; 15394:2000;
2742:2005). Such combination of methodological approaches through information support of the
merchandise flow from the manufacturer to the consumer will not only address the social problem
of high mortality due to the poor quality and counterfeit alcoholic beverages, but will also to ensure
the economic efficiency of the process.
       The article describes author’s innovation model of the state regulation of alcohol products
distribution in Russian regional consumer markets based on the identification, systematization and
study of regional specific factors which form product quality of this group, as well as contemporary
methodological management approaches.
       Studies of product distribution factors revealed the following trends in the development of
alcohol sales proposition throughout Russia: change of the consumer preferences from vodka to
low-alcohol drinks (wine, beer, low-alcohol carbonated beverages), distrust for vodka quality,
increased consumer demand for reputable and expensive brands.
       Over the last decade (Fig. 1) per capita consumption vodka’s volume in Russia has been
rapidly growing, considerably increasing safe per capita norm (up to 5 liters per year).
      The function of vodka consumption volume (V) with incremental change of the argument
(where х - is time period beginning with 1998) can be adequately described by the sextic function
(R² = 0.922) as follows:
                           V = -0.017x6 + 0.645x5 – 9.455x4 + 68.57x3 – 256.1x2 + 461.6x – 179.5 (1)
       In this case, the annual growth rate of the analyzed indicator was 3.65%. This, of course,
produces an adverse impact on the quality of life of Russian citizens and aggravates national health
statistics. Overall Russian market tendency is symmetrically reflected in the regions (Fig. 2) and
Table 1.




        Table 1 – Vodka Assortment Indicators in the Retail Market
 Indicators of extent of assortment of  Average for all merchandise flow
                                                                           Average on the integrated channels
                 vodka                               channels
Average value                                         117,32                            273,00
The maximum value                                      2100                              522
The minimum value                                        26                              120
Often meeting value                                     102                              102
Correlation with the size of the                       0,60                              0,58
trading area
Correlation with size of the average                   0,66                              0,45
check
       The need to reconsider the importance of vodka in the live of Russian citizens is obvious. In
order to address this issue, adequate public policies regulating the volume and structure of vodka
production and consumption should be developed. The model proposed by the author is illustrated
in Figure 3 and Table 2.
       The most important indicator influencing consumer perceptions of vodka sales proposition
quality (value) is the assortment indicators (Table 1). The correlation between the assortment
saturation and the average sales receipt value (r = 0.66) illustrates its affect on the consumer
behavior at points of sale, while the correlation of this indicator with the number of buyers (r = 0.6)
illustrates the attractiveness of rich vodka assortment for buyers, which is a significant factor that
impacts customer evaluation of vodka quality.
       The interests of participants of the product distribution integrated channels do not match in
most cases. Vodka sold in the national segment represents a significant share of turnover, estimated
in-kind (18.4%). It characterizes a significant buyer interest in the purchase of cheap vodka.
However, the share of this price segment in the turnover estimated in monetary terms and the
assortment size is substantially lower (4.7 and 3%, respectively). This means that buyer interest is in
conflict with economic interests of the participants of the product production and distribution
systems.
       Premium price segment, on the contrary, has a high turnover share, estimated in monetary
terms (12.6%), and low - in physical terms (3.5%). These data support the conflict of economic
interests existing between the parties involved in vodka distribution and consumption.
       Similar differences have also been noted in the above-the-average price segment.
Understanding of the existing conflict of interests suggests a search for solutions since it affects the
overall structure of vodka proposal. In other price segments the abovementioned differences are
smoothed.
       With the growth of vodka retail price, price indifference level declines. The lowest level of
consumer indifference in the premium price segment is due to the emotional factors, including
brand’s image. Thus, vodka retail price is one of the most important factors influencing consumer
assessment.
         Among significant factors impacting consumer assessment of vodka quality are organoleptic
properties, as well as the awareness of health damage or benefits arising from product consumption.
For this purpose, consumer preferences with regard to the analyzed factors were defined on the
basis of statistical research and analysis of organoleptic, physical and chemical properties of those
vodka brands, which are leaders in consumer demand within the analyzed channel of merchandise
flow (case study: city of Novokuznetsk).
         Consumer demand, as expressed in the structure of regional vodka turnover and calculated
in physical terms, showed that in 23% of cases, buyers prefer vodka with artificial flavors and
physiologically active additives, whereas monetary expression of these preferences accounts for
19%, and the number of SKUs in vodka assortment - for 28.4%. These data indicate the high
importance of the analyzed factors in buyer evaluation of vodka quality [1].
       Organoleptic evaluation of vodka showed that all analyzed samples of popular brands possess
high organoleptic properties (Table 2).
       Given the fact that analyzed vodka samples occupy a significant share in the overall turnover
structure, data contained in Tables 2 and 3 confirm the influence of organoleptic, physical and
chemical properties on the consumer assessment of vodka quality.
       Safety study of analyzed vodka samples confirmed the compliance of heavy metals and
radionuclides content with the sanitary regulations and norms. This confirms the idea that customers
prefer to purchase vodka from reputable manufacturers only who, among other things, ensure
counterfeit protection of their products. This can also be considered as one of the factors affecting
consumer assessment of vodka quality.
Table 2 – Organoleptic evaluation of the analyzed vodka samples (average for all tests)
                                                                                            Mark
                    The name of commodity mark /The producer                                            Quality estimation
                                                                                         estimation
    Strategist/ Mariinsky Likero-vodka distillery, the Kemerovo area                      9,3+0,15          perfectly
    Beluga/ Mariinsky Likero-vodka distillery, the Kemerovo area                          9,2+0,14          perfectly
    Card an as. Games are ended/ Mariinsky Likero-vodka distillery, the                   9,2+0,13          perfectly
    Kemerovo area
    Putinka/Crystal, Moscow                                                              9,0+0,16              good
    The Russian Standard. Original/LIVIZ, S-peterburg                                    8,9+0,12              good
    White. Lux/Tradition of quality, Krasnoznamensk                                      8,8+0,14              good
    Stolichnaya/ Crystal, Moscow                                                         8,8+0,14              good
    The kind. Hang-over Off. Lux / Ladoga, S.-Petersburg                                 8,8+0,15              good
    Lake Tanaj. Lux/SVC, Mariinsk                                                        8,7+0,17              good
    Governor's Kuzbass/ Mariinsky Likero-vodka distillery, the Kemerovo area             8,6+0,16              good
    Accent/ Novokuznetsk                                                                 8,5+0,18              good
    ХХI a century/ Mariinsky Likero-vodka distillery, the Kemerovo area                  8,4+0,15              good
    Myagkov. Amber/ First LVM, Odessa, Ukraine                                           8,4+0,17              good
    Gzhelka/ LIVIZ, S-peterburg                                                          8,3+0,16              good
    Side/ Novokuznetsk                                                                   8,2+0,18              good
    Five lakes/ Omskvinprom                                                              8,0+0,19              good
    42-RUS/ Novokuznetsk                                                                 7,6+0,23          satisfactory
      According to the gas-chromatographic analysis, trace impurities in most popular vodka brands
do not exceed specified allowable values.
      Physical and chemical properties of analyzed vodka samples also confirm with the state
requirements (GOST R 51355-99 - “Vodkas and special vodka types”), which proves manufacturer
control over product quality (Table 3).
Table 3- Physical and chemical indicators of analyzed vodka samples

                                 Mass                              Mass concentration, mg/dm3            Volume fraction
        Наименование          concentra-
                                              Alkali1                                                    of methyl spirit,
       товарной марки           tion of                                     The higher
                                                           Aldehydes                          Aethers          %
                              alcohol, %                                      spirits
    Strategist                 39,9+0,1       1,9+0,1        1,2+0,2           <1,0             <1,0      0,0024+0,0004
    Beluga                     39,9+0,1       1,9+0,1        1,7+0,3           <1,0             <1,0          <0,001
    Card an as. Games
                               39,8+0,1       1,9+0,1        1,3+0,2           <1,0             <1,0      0,0068+0,0010
    Over
    Putinka                    39,9+0,1       0,7+0,1        1,9+0,3           <1,0             <1,0      0,0078+0,0012
    The Russian Standard.
                               40,0+0,1       0,2+0,1        1,7+0,3           <1,0             <1,0          <0,001
    Original
    White. Lux                 40,0+0,1        <0,1          2,2+0,3           <1,0             <1,0      0,0011+0,0002
    Stolichnaya                39,9+0,1       0,9+0,1        1,5+0,2           <1,0             <1,0      0,0018+0,0003
    The kind. Hang-over
                               40,0+0,1        <0,1          1,3+0,2           <1,0             <1,0      0,0034+0,0005
    Off. Lux
    Lake Tanaj. Lux            40,0+0,1       0,3+0,1        1,8+0,3           <1,0            <1,0       0,0042+0,0006
    Governor's Kuzbass         39,8+0,1       1,9+0,1        2,8+0,4           <1,0            <1,0           <0,001
    Accent                     39,9+0,1       0,2+0,1        2,7+0,4           <1,0            <1,0       0,0038+0,0006
    ХХI a century              39,8+0,1       1,9+0,1        1,8+0,3           <1,0            <1,0       0,0038+0,0006
    Myagkov. Amber             39,9+0,1       1,2+0,1        1,4+0,2           <1,0            <1,0       0,0025+0,0004
    Gzhelka                    40,0+0,1        <0,1          1,1+0,2           <1,0            <1,0           <0,001
    Side                       39,9+0,1        <0,1          1,8+0,2           <1,0           1,0+0,2     0,0031+0,0005
    Five lakes                 40,0+0,1       0,4+0,1        1,3+0,2           <1,0            <1,0       0,0030+0,0004
    42-RUS                     39,9+0,1       0,2+0,1        2,7+0,4           <1,0            <1,0       0,0035+0,0005




1
    The alkali indicator is resulted in sm3 of 0,1 M НСl/100 sm3
       The author developed principles and techniques of introducing innovative initiatives, as well
as a model of state regulation of alcohol product distribution in the regional market.
       Figure 4 and Table 4 provide a brief illustration of the conceptual process flow chart (model)
of the state regulation of alcohol product distribution in the region (Kemerovo region case study).
       Input parameters. All input parameters are systematized into three levels depending on their
respective predominant influence on factors shaping the quality of alcohol products: factors related
directly to the quality of beverages, structure of the sales proposal (assortment properties of drinks),
factors affecting consumer assessment of the product quality, and other factors not included in the
three mentioned groups.
       In addition to various technical norms and specifications pertaining to the production and
distribution of alcohol products, the first group of factors includes a regional policy of food quality
assurance for products sold at consumer markets of Kemerovo region, including alcoholic
beverages.
         Apart from the Russian legislation, the second group of factors includes the regional concept
of consumer market development in Kemerovo region, which reflects the essential requirements of
public regulation of alcohol products flow from producers to consumers. It finds its place in the
process flow chart as tools (factors) that ensure the desired level of process output parameters.
         The third group of factors related to consumer demand for alcoholic products, includes
several fundamental documents of the international and federal levels, such as “Framework for
alcohol policy in the WHO European Region”, WHO Regional Office for Europe: Copenhagen,
Denmark, 2006; “What are the most effecient and cost-effective interventions in alcohol control?”,
WHO, 2004; WHO Global Status Report: Alcohol Policy, 2004; Alcohol in European regions,
WHO consumption, harm and policies, 2001; Russia’s development strategy until 2020; Priority
national project of the Russian Federation “Health” [3-6].
       Table 4 - Keys to the Figure 3
       Figure illustrations                                          Описание элемента
Strategy RF «2020»                 Russia’s development strategy before 2020
PNP RF «Health»                    Priority national project of the RF “Health”
”2010” Concept of Kemerovo         Concept of Kemerovo region consumer market development to 2010
region
“2008-2010” Regional Policy        Concept of the regional policy of quality assurance of food products sold at the
Concept                            consumer market of Kemerovo region for 2008-2010
QA                                 Kuzbass alcohol union “Quality assurance”;
SC                                 Supply chain tracking program
CM                                 Simulation of consumer models of alcohol product quality assessment at the point of
                                   sale
Ex                                 Differentiation of the regional element of excise rates
PP                                 Modelling of parity of requirements of participants of chains of deliveries of
                                   alcoholic production
Lic                                Licensing of commercial activities in relation to a particular product category
М                                  Merchandising program of a specific product category
PR                                 Public relations program to promote the demand for specific product categories
RA                                 Alcohol products advertisement restrictions
The note: the blacked out colour notes the elements developed personally by the author or at its direct participation
                             Process monitoring and improvement: “Sales mirror”
                                                                                                                                   Toolkits


 Strategy RF «2020»                                                                Licensing of the                   Lic         RA
                                                                                    points of sale                                Р
  PNP RF «Health»                                                                                                                    Ex
                                                                                           Consumer attitudes                     QA           PR
WHO Alcohol Policy                                                                            and motives
                                                                                                                                        PP
   Socially-hygienic                                                                                  Prices                      M
     Researches                                          Alcohol Drinks
                                                        Consumer Demand                                                                       PP
   RF Traditions of                                                                                   Alcohol Concentration
    Consumption                                                                                            in Drinks                                Ex
                                                                                                           The share of local                 QA          PR
                                                                                                              producers
  RF Legislation                                                                                                                                    M
                                                   Structure of Alcohol Drinks Sales                           Alcohol Products               SC
 ”2010” Concept of                                            Proposition                                        Assortment
  Kemerovo region                                (products assortment and efficiency)                             Indicators

   Other Documents                                                                                                                             Ex
                                                                                                                  Manufacture                        SC
“2008-2010”
Regional Policy                                                                                                                                QA         Li
                                                      Alcohol Drinks Quality                                         Deliveries
Concept                                                                                                                                                   c
                                                                                                                                                     PR
  Standards
                                                                                                                        Consumption            CM
Requirements

  Other
Documents
                              Process resourcing (financial, methodological support, educational, etc.);

            Fig. 3 - Conceptual Process Flow Chart (Model) of the Sate Regulation of Alcohol Product Distribution in the Regions
                  Note: The dark color marks the elements personally designed by the author or with his direct participation
                                                 7

      These documents define major underlying principles and methods of the state influence
exerted on the structure of consumer demand in the considered product category, and its volume
based on the per capita consumption of alcohol products.
      Output parameters. In accordance with the multi-level model of state regulation of alcohol
products distribution in the regional market, output parameters of the process flow chart (factors
determining the quality of the product group) are divided into three groups.
      The first group includes factors that determine the range of quality indicators of alcoholic
beverages, depending on the supply chain level: production - supply (distribution chain) -
consumption. According to the study, each of these levels includes its own specific indicators
that characterize the quality of alcoholic beverages, products or goods in commodity distribution
channels and points of sale. These levels of distribution chain define the hierarchical levels of the
range of quality indicators and, eventually, suggested tools for control, monitoring and
improvement of these indicators.
      Along with the generally accepted tariff methods of regulation of the structure and the
volume of commodity production, the sublevel of alcoholic products manufacture includes
licensing as a regulatory tool of the sublevel and regional differentiation of excise taxes.
        Among the most important concepts of merchandise knowledge there is a research
methodology of product assortment management in integrated distribution systems. Based on
this concept, we developed a mathematical parity model of requirements expressed by the
participants of the product distribution systems. The calculations are listed in the fourth chapter.
        Establishment of the non-profit organization “Kuzbass Aclcohol Union - Quality
assurance” was based on the modern concept of quality management, involving identification
and traceability of supply chains (ISO 9001; 15394:2000; 2742:2005). The goal of this concept is
to proof the legality, and thus, assure quality of all alcohol products sold in the consumer market
of Kemerovo region. The functions of the organization involve core principles of quality control
in the supply chain of alcohol products: product identification based on the monitoring and study
of documents which accompany the delivery of alcoholic beverages from authorized suppliers,
the division of product flows following various trade channels in each critical control point (in
compliance with the product quality control HACCP; ISO 22000:2005); documenting product
flows in order to provide information that adequately reflects the full path of alcohol drinks
from raw materials to finished products, the timing and geography of this flow; applied
technologies and materials, timing and results of the independent quality peer review of samples
from the specific product batch (physical, chemical and organoleptic properties).
      In order to provide a label reflecting all of the procedures, each package of alcohol product
is given an identification mark, as well as an identifier of a hidden latent image, as shown in Fig.
10. The result of the practical application of this concept is the reduced number of counterfeit or
poor quality alcohol products in the legitimate trade channels and increased loyalty of regional
consumers to alcohol products, controlled within the supply chain.
      Establishment and operations of Kuzbass Alcohol Union “Quality assurance” resulted in
significant reduction of rejected shipments of imported alcohol products, as well as the increase
of production and sales of local alcoholic drinks, and reduction of fatality caused by alcohol
poisoning (Table 5).
      According to the Bureau of Forensic Medicine, deaths from alcohol poisoning in Kuzbass
declined by 28% as compared to 2005 (1314 persons). This indicates that cooperation of the
government authorities on the regional level with autonomous industry associations specializing
in quality control of alcohol products has proved the effectiveness of the measures designed to
protect residents from counterfeit and poor quality products.
                                                         8




        Fig. 4 – Safety mark of the alcohol union “Quality assurance” and identifier of the hidden latent image
Table 5 – Performance efficiency indicators of Kuzbass alcohol union “Quality Assurance”
                                       Показатели                                  2006         2007        2008
Alcohol poisoning fatalities (persons)                                             1093          959         952
Number of rejected batches of alcohol products (batches)                            30            25          17
Manufacture, dl                                                                    1395         1896        2577
       In order to build the confidence of the distribution chain participants represented by the
local alcohol product manufacturers and ensure the transparency of the supply chain, a public
relations program has been developed, which constitutes one of the functions of the
abovementioned organization
         Based on the suggested multi-attribute model of consumer assessment of vodka quality,
members of the integrated shopping channels have an opportunity to control product properties
of the selected commercial brands of alcoholic beverages on the production level, as well
influence holistic perception of these properties by buyers at the points of sale.
         The second group of output parameters of the process flow chart includes factors that
determine the quality of alcohol products on the distribution level of the regional consumer
market. In accordance with Fig. 3 and Table. 4, these factors are: the structure of sales proposal
(saturation and efficiency of product assortment) that determines the quality of alcohol beverages
through product assortment indicators. Regulatory role of the government is needed in order to
achieve the target levels of the following group of indicators: mass concentration of ethanol in
alcoholic drinks; the share of locally manufactured products in the total assortment saturation of
the product group; total saturation of the considered assortment.
       As an instrument enabling the government to reach the target level of these indicators,
tools described in the output parameters group should be used, taking into account the specifics
of the area of distribution. Apart from the previously reviewed tools of the state regulation of
alcohol products distribution, the methodology of category merchandising should also be used,
allowing identification of the most state important quality indicators of products: the
abovementioned assortment properties, and social factors of input parameters in the described
process flow chart.
       The third group of output parameters includes factors which in accordance with Fig. 3 and
Table. 4 determine the consumer demand for alcoholic products: price, as the external quality
attribute, consumer attitude and motivation for the consumption. The range of instruments of the
state regulation of alcohol products flow on this level of the distribution chain consists of five
elements of the process described above. However, as it has been previously noted, state control
bodies or their authorized representatives should use these tools taking into account          the
peculiarities of each level of the distribution chain.
                                                 9

        Resourcing of the process represents a significant element of the considered process flow
chart. The owner of this process is the state. Sub-elements are defined as follows: financing of all
participants of the process within the above-described activities; methodological support of this
activity, designed as a set of tasks that are to be achieved within the framework of the
considered process flow chart.
        The last element of this process flow- model of the state regulation of alcohol products
distribution at the regional market is monitoring and improvement. In order to ensure alcohol
product quality assessment, “Sales Mirror” program was introduced in Kemerovo region, which
ensures monthly monitoring of the regional consumer market.
       The essence of the program is to collect and analyze information regarding sales dynamics
of the regional retailers, including those of the considered product group. Such monitoring began
in April 2009. It provides an objective analysis, the results of which are also covered by the
mass media. Process improvement is based on the results of the analysis of the abovementioned
factors.
       The developed model has been tested in practical management of alcohol product
distribution in the consumer market of Kemerovo region. According to the consumer survey, as
well as performance, efficiency and profitability analysis, this model has been proved to be
efficient and effective for consumers and retailers, and accepted for practical application in the
merchandise flow.
       All research work has been done under the Federal law on “State regulation of production
and circulation of ethyl alcohol, and alcohol products”, State policy of a healthy diet of the
Russian population till 2010, regional Kuzbass program “Achieving health through healthy
food”. All of these helped prepare a Concept of the development of the consumer market in
Kemerovo region to 2010 (approved by the Administration of Kemerovo region as of
21.12.2005, № 1436-r), Concept of the regional policy of food products quality assurance for
consumer markets of Kemerovo region during 2008-2010 (approved by the Administration of
Kemerovo region as of 20.01.2008 № 69-r), and also establish a non-profit organization
Kuzbass Alcohol Union – “Quality assurance” (2006). The model has been reviewed by the
expert quality assurance committee of the Administration of Kemerovo region, was greatly
appreciated by the experts and was further recommended for implementation within the interface
between Kuzbass vodka manufacturers and product suppliers, retailers and consumers.
       References:
        1.     Мазанько, Е.И. Факторы, формирующие потребительскую оценку качества
водок/ Е.И. Мазанько, Т.Ф. Киселева, М.А. Иголинская, А.А. Казанцев // Производство
спирта и ликероводочных изделий, 2009.- №2.- С.37-39
        2. Программы реализации приоритетных национальных проектов «Образование»,
«Здоровье», «Доступное и комфортное жилье – гражданам России» на 2009-2012 гг. К
заседанию Совета при Президенте Российской Федерации по реализации приоритетных
национальных             проектов           и         демографической             политике//
http://www.kremlin.ru/text/appears/2008/02/161159.shtml.- Added 24.12.2008
        3. О стратегии развития России до 2020 года. Из выступления В.В. Путина на
расширенном заседании Государственного совета// http://www.vremya.ru/197363.html .-
Added 11.02.2008 г.
        4. Framework for alcohol policy in the WHO European Region. WHO Regional Office
for Europe: Copenhagen, Denmark.- 42 p.// http://www.euro.who.int.- Accessed 2006
        5. World Health Organization. Global Status Report: Alcohol Policy. Geneva: World
Health Organization, 2004.- P. 46-47

				
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