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Monday, July 15, 2013

Liviko Turning Japanese : We Don't Really Think So

Liviko's Venture into Asia : One Big Hangover for the Taxpayer


A Typical Friday Night
You can break out the seljanka and aspirin, but even that probably won't cure the hangover caused by this waste of taxpayer money. Liviko recently announced that they will be closing their office in Japan, and shifting all sales to go via a distributor for that market. In other words, they will be going back to the same strategy they had for the Japanese market before they opened an office there -- using a distributor. They claim this is more productive and cost-effective, which we interpret to mean their venture to open an office in Japan did not go as planned.

First, a bit of background. Liviko is the producer of a number of alcoholic beverages, most notably that sweet, sweet nectar of the gods known as Viru Valge. They have a dominant position in the Estonian market, and it would be hard to find an Estonian who has not tried Viru Valge at one time or another. They're like the Coca Cola of the vodka industry, though we suspect a lot more Estonian children were conceived as a result of Viru Valge compared to Coke.

Now we will admit, Liviko was founded way back in 1898, so it's not quite a startup, except perhaps to the oldest person in the world, who happened to be born that same year, though we doubt she remembers being born nor the founding of Liviko. The reason we're writing about this is it's a good example of wasteful corporate welfare.

Selling Alcohol to the Japanese


At first glance, this may seem like a great idea and very lucrative. Liviko has had great success selling their product in Estonia and neighboring markets. Why not sell to Japan? It's the third largest economy in the world. Surely they'll be lining up to buy the esteemed Viru Valge, right?

Maybe. Let's look at a few factors that make this difficult:
  • Branding. Viru Valge has no brand recognition in Japan. It's not like the Japanese will flip on the latest James Bond film and see our favorite spy ordering his trademark martini made from Viru Valge. So Liviko would have to spend massive amounts on marketing to build brand awareness. Since this is a consumer product, marketing costs are even higher as this is more likely to involve mass marketing campaigns.
  • Competitive Industry. The beverage industry is highly competitive. You can't just walk into a retailer and say "Hey, sell my product!" Where are they going to put it? It's not like they have an empty space on the shelves. So they'll have to kick out some other product to put in your product, and sometimes there is a cost for this (known as a "slotting fee"). This isn't as common in Estonia, but if you go to a major grocery store in larger countries, walk down the cereal aisle and notice which brands are on the shelves at eye level. It's likely they paid for that positioning.
  • Transport Costs. Beverages are heavy, and thus expensive to transport. Their cost relative to weight is also low. Consider how much one case of vodka weighs -- that amount of vodka probably costs 100-200 euros. Now, think of that same weight but in mobile phones -- it's probably worth 100,000 euros for the same weight, and yet both cost basically the same to ship. Major beverage companies know this, which is why Coca Cola sets up bottling plants all around Europe, instead of doing it all in one country. It's a long journey from Estonia to Japan.
  • Cultural Differences. It's one thing to export to Latvia or Russia. The cultures aren't that different from each other. Japan is a whole different situation. It's so unique that there are entire websites devoted to how weird Japan is (possibly NSFW). For example, many Japanese women do not drink in public, as that would make them a "bad girl".
  • Japanese are Allergic to Alcohol! Anyone who has been to Japan is probably thinking we're crazy writing this, as there are plenty of drunken Japanese salarymen out in the Roppongi district of Tokyo every night. We are being a bit dramatic, but in fact it is estimated that 30-50% of people of Japanese descent have the ALDH2 gene which makes it difficult for their body to metabolize alcohol. Ever seen a person of Japanese, Korean, or Chinese descent get all red-faced after having a drink? It's not your good looks and they're not blushing - it's known as Asian flush syndrome. Our point here is that it can be difficult to sell a product to a market where half of your customers are going to have some type of reaction by consuming it, and by "reaction" we don't mean increased confidence.
With all that said, it's still not impossible to sell in Japan. It's just difficult. Liviko has the experience and a good product, so maybe they can pull it off.

Time for Some Corporate Welfare!


But of course, to pull off such a feat, tiny, little Liviko will need help from the taxpayer, right? Apparently, that's what Liviko thought, and Enterprise Estonia agreed, and gave them 439,168 euros!

Did Liviko need the money? Well, their total profit for the last 2 years was over 3.5 million euros!

Why does a large corporation making millions of euros in profits need help from the taxpayer?

We heard a rumor that Liviko's next big project will be to sell vodka in Saudi Arabia, and Enterprise Estonia is eager to fund it. They'll start their promotions during Ramadan :)