FMCG in Russia: SMEs eye Russian potential
By Katy Askew | 30 September 2013
With trade liberalisation expected to flow from Russia's recent move to join the World Trade Organisation, international food companies are increasingly attempting to capitalise on the potential offered by Russia's grocery retail market. As just-food learnt when we caught up with some of the UK exhibitors at the World Food Moscow trade show this month, it's not just multinationals that are making a push to grow in Russia. Small and medium-sized enterprises are also attempting to cash in on the aspirational shopping patterns of Russia's expanding middle class. Katy Askew reports.
Of the BRIC markets, Russia is often seen as something of a poor relation. China is the growth powerhouse, Brazil benefits from a supportive government and open society and, while India is admittedly a regulatory basket case, it boasts significant demographic potential as the only country with a population nearing the size of China.
A recent survey - the Hurun Global Rich List - found Moscow is home to the highest number of billionaires in world. However, perceptions of the country's prosperity have largely been shaped by how deeply Russia felt the global economic downturn and the glacial speed at which Russia's economic health has rebounded in the years since the 2008 financial crash.
Nevertheless, Russia remains the largest consumer goods market in central and eastern Europe. According to research firm Research and Markets, the total size of the grocery retail market in Russia exceeded US$250bn in 2011, with the food and alcoholic drinks markets dominating.
UK food manufacturers are trying to take a bigger slice of total Russian food sales. According to UK government data, in 2012, Russia fell out of the top 20 markets for UK food and soft drink exports. Sales fell 12.6% to GBP92m. However, in the first half of 2013, Russia returned to the top 20, buying GBP49m of UK food and soft drink products, up over 5% year-on-year.
Significantly, for the small and medium-sized enterprises exhibiting at this year's World Food Expo in Moscow, the growth of the Russian grocery sector is skewed towards the mid-to-upper end of the market, driven by the rising number Russian middle class consumers.
According to Euromonitor International, of all the BRIC markets, Russia has the highest share of households with an annual disposable income over US$10,000, at 86%.
Research and Markets estimates consumers in the "moderate income" wealth category contribute 35% of grocery value sales. As a result, the researchers conclude: "The most important factors affecting grocery retail sales are "indulgence", "personal space and time", "quality seeking" and "better value for money", each of which influence more than 15% of the total sales."
For the UK SMEs out in force at the World Food Moscow event, the growing middle class is a significant pull factor attracting them to the country. Many of the UK SMEs operate a low volume, high unit price business model - and an affluent middle class is therefore a prerequisite for success.
So too is a culture open to new taste influences and experiences, Kate Nicholson, export manager at upmarket condiments group Hawkshead Relish tells just-food.
"The Russian market has huge potential for high end artisan cuisine, with the growing Russian economy and cultural awareness. Russian are very open to seeking new concepts and want to buy into that," she says from Moscow.
While Russia retains a significant rural population, the demographic shift that has seen the ongoing process of urbanisation in the country also makes the city-dwelling population increasingly accessible to international food companies.
For cheese maker Richard Green of Coombe Castle, the sheer demographic scale of the opportunity makes Russia the place to be. "On any given day the population of the Moscow area is approximately 20m people - that's four million more than the entire population of the Netherlands," he emphasises.
Both Coombe Castle and Hawkshead Relish make distinctly British food products. However, both companies have found that there are strong overlaps between consumer taste preferences in the UK and Russia.
"The Russian palette is very similar to the UK and they have been eating cheddar, made in Germany, for years," Green says. "[Dairy Crest's] Cathedral City is in nearly every supermarket so the day-to-day purchase power is there. We offer far more specialised cheeses which will appeal not just to the high end market but also the everyday shopper."
While the UK dairy exporter's current Russian footprint is "nothing to write home about", Coombe Castle hopes to substantially beef up its presence in the market.
Meanwhile, Hawkshead's Nicholson too sees parallels between demand more broadly in Europe and in Russia. "Hawkshead Relish is extremely fortunate that we produce over 120 preserves which incorporate savoury and sweet. Our range has some flavour combinations which are not unfamiliar to the Russian menu; this lends itself well to a brand introduction as well as immediate listings. However, just like the European speciality market there are the niche outlets that want to inspire their customer. Whilst we have some very traditional condiments we also develop new culinary creations which are welcomed by this type of establishment and their clientele."
For meat importers, an apparent liberalisation of trade restrictions to meet Russia's WTO commitments is no doubt a positive step. For example, Russia provides additional in-quota market access for fresh and chilled beef from 33,330MT in 2012 to 40,000MT in 2013 and additional in quota market access for poultry from 341,330MT in 2012 to 364,000MT in 2013.
Furthermore, earlier this month, the UK government secured a trade deal that lifted restrictions on British beef and lamb exports to Russia. The UK government argued the agreement could be worth GBP100m over three years.
Jean Pierre Garnier, export manager at Eblex, the organisation that represents beef and lamb farmers in England, says Russian importers at World Food Moscow were "eager" to seek English beef and lamb suppliers.
"[It] was a very good event, with importers eager to speak to us as a new source of lamb and beef. We have found that there is a good level of demand for lamb, offal - particularly tongues and livers - and premium beef," Garnier tells just-food.
Russian protein manufacturers have struggled to remain profitable for successive years under the weight of rising feed costs and depressed pricing. As a result, the country's livestock herd has shrunk.
The resulting imbalance between import and export levels affords international meat companies with a significant opportunity, Garnier suggests. "The country is expected to remain a net importer of beef and lamb for the foreseeable future so there is considerable potential for growth in our exports there."
For all the opportunity afforded by the Russian food market, SMEs are all too aware that a number of challenges also lie ahead if expansion in Russia is to prove a fruitful endeavour.
For the meat producers represented by Eblex, the greatest barrier to growth in Russia is complying with local regulations, Garnier says. "The biggest hurdle is to get more plants export approved for Russia. This is not an easy process as meat hygiene practices and residue testing are very different."
Similar issues are raised for dairy exporters hoping to expand in Russia, Coombe Castle's Green reveals. According to him, the biggest challenge is "red tape, and miles of it".
"For dairy exporters it is a minefield of certificates and testing. The testing regime that has to be followed and also the labelling requirements have been the biggest challenges."
Meanwhile, SMEs must also face the logistical difficulties raised by the fact that Russia is, geographically speaking, the largest country in the world. Hawkshead, which supplies Michelin Star resturants in the UK as well as the likes of the Orient Express, finds that transportation costs in particular can hit competitiveness.
"Transport channels and associated costs are for us the greatest obstacle. This can really impact on the shelf price; whilst the nature of our products denotes a natural premium these extra costs can hamper our competitiveness when competing with our European competitors," Hawkshead's Nicholson reveals.
Another thorn in the side of would-be importers comes in the form of Russian customs charges, one importer tells just-food on the condition of anonymity. "There are a lot of customs charges. Russia joined the WTO last year. But it is clear that a challenge for us, in terms of having the right level of profitability, is the custom duties that you need to pay when you import products into Russia."
And, of course, the slowdown in the Russian economy this year - and the prospects for another tough year in 2014 - means the market will prove a challenge for exporters.
Russia is not the easiest market to gain access to or operate in. Nevertheless, with strong demographic drivers, cultural ties and taste cross over, the Russian food market remains a tempting prize - and one that could prove bountiful for those exporters who persevere in the country.
Companies: Dairy Crest
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FMCG in Russia: SMEs eye Russian potential