Nyet to Cigarettes and Beer Threatens Russia’s Kiosks

Mikhail Shvedko keeps his eight street-side kiosks in the Russian city of Lipetsk stocked with cigarettes and beer for passers-by wanting to catch a buzz. With the government planning to bar him from selling both, Shvedko says he’ll be out of business.

“There’s nothing I can do other than shout curses against the government,” said Shvedko, 50, whose shops employ 30 people and count on smokes and brew for half of total sales. “They are passing anti-people laws that ruin small businesses.”

In an attempt to stamp out smoking in the world’s second- biggest tobacco market, Russia this week submitted a law to parliament that would prohibit cigarette sales at the nation’s 175,000 kiosks and small shops. The rule is part of an anti- smoking effort that would outlaw tobacco advertising as soon as the law is passed -- possibly by yearend -- and bar smoking in public places from 2015.

An earlier law blocking the sale of beer at kiosks will come into effect on Jan. 1, 17 years after a similar rule for vodka.

Kiosk owners say the new regulations will put as many as 1 million people out of work and threaten an industry created from communism’s collapse as entrepreneurs scrambled to sell newly available goods.

Photographer: Alexei Boitsov/ Bloomberg

Young Russians drink beer on a busy street in Moscow, Russia. Close

Young Russians drink beer on a busy street in Moscow, Russia.

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Photographer: Alexei Boitsov/ Bloomberg

Young Russians drink beer on a busy street in Moscow, Russia.

Developed Retail Network

If Russians can no longer buy cigarettes at kiosks and other small stores, they will likely do more shopping at supermarkets run by the likes of OAO Magnit (MGNT), X5 Retail Group (FIVE), OAO Dixy Group, (DIXY) and Metro AG, according to Boris Planer, chief economist at Planet Retail in Frankfurt.

A ban will be “a heavy blow for kiosks in urban areas,” said Planer, who said Russian politicians are “trying to push as much retail as possible into modern and controlled areas.”

As the economy and incomes have grown, Russia’s food retail market has expanded an average of 17 percent annually since 2007, 14 times faster than in Germany, according to data compiled by Alfa Bank. While a ban on sales of smokes and brew at kiosks could give a lift to supermarkets, the benefit will be barely felt at chains such as Magnit, where sales have been increasing by more than 30 percent a year, VTB Capital estimates.

Under the leadership of Vladimir Putin and Dmitry Medvedev, Russia has cracked down on smoking and drinking. About 400,000 Russians die each year from diseases linked to smoking and half a million are lost to alcohol-related causes.

Kiosks and small stores account for as much as 40 percent, or about $7.8 billion, of Russian tobacco sales and 20 percent, or $3.6 billion, of the nation’s beer spending, according to Nielsen. The Russian food retail market was worth about $310 billion last year, with less than half coming from modern retail chains and the rest from markets, kiosks and other independent outlets.

’Main Evil’

The government is singling out kiosks and other independent retailers because it claims they make tobacco and beer easily available to young people, who can’t legally buy either before age 18.

“Kiosks are the main evil as teenagers can buy tobacco there because it’s difficult for authorities to control these small outlets,” Deputy Prime Minister Olga Golodets said on the sidelines of a government meeting on the tobacco ban. “That’s why we are limiting tobacco sales to supermarkets and large stores, which are easier to monitor. I hope society will agree and support this.”

Kiosks hold a special place in the retail history of modern Russia. The Soviet Union had a narrow assortment of goods and few stores, and even in cities multi-story apartments rarely had retail space on the ground floor.

Communism’s Collapse

After the end of communism in 1991, entrepreneurs started informal imports of goods like jeans, chewing gum, chocolate, cigarettes and liquor. With little formal retail space available, they started building kiosks along the streets. Today, these constructions about the size of a shipping container are ubiquitous, offering beer, smokes, and snacks.

With so many kiosks and slightly larger street-side stores called pavilions -- which also sell staples such as sausage, bread, and cheese -- Russia’s formal retail market remains underdeveloped. The country has less than 500 square meters of trading space per 1,000 citizens, just over a third the level in Germany, according to the Coalition of Kiosk Owners.

The smoking ban isn’t the first effort to limit growth of kiosks and pavilions. The governors of St. Petersburg and Moscow have fought them in recent years on the grounds that they’re a haven for tax cheats, they block sidewalks, and they’re ugly. The number of kiosks in Moscow has fallen from 14,000 in 2010 to 8,500, according to the city government. St. Petersburg cut the number of kiosk by 60 percent since 2004, to about 4,000.

’Excessive’ Measures

Carlsberg A/S (CARLA) estimates that about two-thirds of kiosks and pavilions will disappear without beer sales and that their volume will go to supermarkets, said Evgeny Schevchenko, the vice-president for sales at Baltika Brewery, Carlsberg’s Russian unit.

Philip Morris International Inc. (PM), British American Tobacco Plc (BATS), Japan Tobacco Inc. and Imperial Tobacco Group Plc have been fighting the proposed law that includes the kiosk ban. The companies have asked for smoking sections in bars and restaurants, a continuation of sponsorships by tobacco brands, and fewer restrictions on where smokes can be sold.

“We view measures such as cigarette sales bans in kiosks as excessive,” said Alexander Lioutyi, head of corporate affairs at cigarette maker BAT Russia. “This will lead to a disappearance of tens of thousands of small businesses.”

To contact the reporter on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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