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ArmInfo’s Interview with Ara Grigoryan, Executive Director of Yerevan Brandy Company
by Arthur Yernjakyan
How do you assess the activity of the Yerevan Brandy Company in the calendar year 2012? What success did the company register? Did the sales grow as compared with the previous year?
I think that the year 2012 was one of the most successful years over the long activity of the YBC. As compared with the crisis-affected years, in 2012 the YBC sales increased by 50% to about 4 mln liters. In addition to the growth, the brand ArArAt is the indisputable leader in its segment by the results of authoritative analytical reports. This cannot help making us happy.
Are there such cases when the demand for your brandies leaves the supply behind?
The demand now leaves behind the supply, but given such high growth rates, it is necessary to think about the required volume of spirit. More than 20 mln absolute liters of spirit has been stored at the YBC. Half of these reserves is not eligible for brandy production, as no "Armenian brandy" can be made of spirits with maturation ranging from 0 to 3 years. Sometimes the enterprise comes across a situation when the demand leaves the supply behind, and the 3-star brandy is made of spirits of bigger maturation. In order to maintain the "age" and quality of the brandies, only one deviation is acceptable, i.e. using older spirits than specified in the recipe. As a rule, amid big growth of sales, some problems with the range of spirits may emerge.
With the consent of Pernod Ricard, the company’s stockholder, starting from spring 2013 the YBC is to sign 9-year grape procurement contracts with the farmers. You talked about these plans at a press conference last year. Isn’t it fraught with additional economic risks for the company given the unfavorable economic situation in the world?
Nothing ventured, nothing gained! There are certain risks, indeed, but I would like to assess perspectives and not to predict risks. Yes, we start signing 9-10-year grape procurement contracts with farmers. We hope that the current sales growth rates either will be retained or won’t decline much. The biggest factor to ensure this prospect is to contribute to further growth of raw materials consumption.
Four years ago, when I came to work in Armenia, I was asked to purchase grapes almost every day. Over the past year the situation has cardinally changed and now the question is where to get the grapes. I am sure that the grapes will not be enough for all the needs of Armenian brandy production.
Fortunately, there are many uncultivated lands in the country and many people who want to work and earn. We want to give them an opportunity to start planting new vineyards. Therefore, we will make 9-10 year deals. Negotiations are currently underway with banks for financing of farmers under grape procurement contracts. The number of long-term contracts will be increased gradually. To ensure raw-material base, YBC plans to create also its own experimental vineyards on not large areas (15 ha). We search for people who would work on those lands and we will donate those lands to them after a while, when we will get back our investments. We don't want to overload ourselves also with grape growing. It is not our profile. We just want to demonstrate classic and modern methods of grape growing. We are currently studying labor payments, the area to be allotted per farmer, etc. What we must do is to show how it is necessary to work. I think that as soon as we do it, our colleagues and opponents will follow our example.
In 2012 the Yerevan Brandy Company was going to purchase 24 thsd tons of grapes, which is by 3 thsd tons more than in 2011. In 2012 the company raised the purchase prices for farmers by 10 AMD. Have you managed to procure the targeted volume of grapes?
We procured even more than 24 thsd tons, about 25.5 thsd tons. This year we are going to procure some 30-35 thsd tons. According to the tradition, this will officially be announced when the time comes.
The Parliament of Armenia adopted amendments to the Law “On excise taxes” that came into effect in early 2013. In accordance with the law, the persons acquiring 40 and higher degree brandy spirit from the brandy producers without pouring it into bottles are exempted from excise taxes. What can you say about that? What will these amendments give us?
These amendments were adopted with the consent of all producers of Armenian brandy. The thing was that if a factory sold brandy spirit to another factory, no excise tax was imposed on the spirit, and if the brandy was sold, for instance, in casks and cisterns, not in bottles, it was necessary to pay 50% excise tax from the sales. This did not let the factories exchange raw materials. Suppose, someone has a big order for brandy sales but has not got enough spirits for production, so he applies to another producer to sell him spirits. Theoretically, it is not hard for the Yerevan Brandy Company to sell a cistern of spirits from its immense reserves, and it can help someone to carry out a big order. After the introduction of the amendments, the producers can exchange spirits and finished brandy. It is very important to us. In fact, it is the first step towards creation of an institute of primary processing of wine material in Armenia. In 5-6 years companies specializing only in brandy spirit production may be created in Armenia. Europe has an industry of so-called primary processing. These companies do not need to bottle brandy, make brands, conduct market research; their function is to carry out primary processing. He added that a similar thing was practiced in Soviet times. Many enterprises were engaged in purchasing and primary processing, while it was only the Yerevan Brandy Company that could blend the brandy.
Another amendment concerns the excise tax rate for cognac, brandy and rum. For this category of drinks the excise tax rate was 50%, but no less than 500 AMD per bottle. The new legislation suggests retaining the 50% interest rate and setting the lowest limit in compliance with the maturation. For instance, the excise tax rate for 1-3-year-old brandy will be 3,000 AMD per liter, for 4-5-year-old brandy - 3,500 AMD, and for the brandy with 6-year maturation and higher - 6,000 AMD, etc.
Will this lead to brandy price growth?
The tax rate growth cannot help increasing the prices, though it will be reasonable growth for ArArAt in case of these amendments. We will revise the brandy prices in 2013, but the prices will meet the range of our ordinary annual change within inflation limits - 5-6%. As regards the legislative changes, the Government tried to regulate the given sphere and to prevent the sale of 20-year-old brandy at the price of 3-year-old ArArAt, for example. Such things are widely practiced and they write on the labels whatever they wish - 20 years, 50 years, etc. Now that the law is adopted, they will pay an excise tax commensurable with 20 years of real maturation for the brandy having "20 years" on its label.
This will not lead to any revolutionary changes in the market, but in 3-4 years it will be no longer profitable to write 30 years on the 3-year-old brandy. I wouldn't say that it will be impossible to cheat the consumers, but anyway, it will cost them more.