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  1. Analysis
August 27, 2010

Analysis: Confectionery industry weathers difficult Russian market

Rising raw material prices and the downturn in the economy has resulted in weak growth in the Russian chocolate market and a loss of consumer confidence.

Rising raw material prices and the downturn in the economy has resulted in weak growth in the Russian chocolate market and a loss of consumer confidence.

The country’s economy slumped the most on record during 2009, with GDP falling 7.9% as the global economic crisis, the falling price of oil and rising unemployment levels took their toll.

As a result, growth is expected to decelerate to reach a CAGR of 2% in volume terms by 2014, while constant value will remain stable at a CAGR of 4%, according to Euromonitor.

“People only spend money on chocolate if they have confidence in the future,” Philip Wegh of Russian chocolate maker Krupskaya Confectionery told just-food. “So if someone has either lost their job or think they’re going to lose their job then they are either not going to buy chocolate or they’re going to buy less expensive loose sweets, which are big here in Russia, because they’re trying to conserve for the future.

He added: “It’s all about the economy. You don’t need chocolate to survive but you spend money on chocolate and it’s sort of reflecting your confidence in the future.”

Yet for US food giant Kraft, it was “the unusually hot summer season” in central Russia that the firm believes contributed to a decrease in the consumption of its chocolate products.

The same was true for Nestle. “The very long and high temperatures this summer affected consumption in Russia quite a lot,” said Bruno Emmenegger, managing director of confectionery for Nestle Rossiya, “which is certainly due to a very exceptional weather situation.”

But while the sliding economy has had a major impact on many businesses during the recession, increased commodity costs means Russia has not been “firing on all cylinders”.

“The Russian economy is really being helped by high export oil prices and as long as the price of oil stays high then I think those profits will eventually filter into the Russian economy,” Wegh says.

“But basically Russia is firing on only one cylinder right now with just oil exports,” he adds. “However, I still think that’s enough to get things going in Russia at least.”

Kraft, which holds the third largest share of the Russian chocolate market behind local player Rossiya (12.4% share) and Mars (8% share), with a 7.6% share, says it continues to “closely monitor” developments in commodity costs.

“The Russian Government has recently cancelled or reduced import duties for raw materials as well as for packing and manufacturing equipment used in the confectionery industry that had a positive influence on the market growth,” David Steer, president of Kraft Foods Russia told just-food.

“But on the whole, with the investment we’re making in our brands and our factories in Russia, we believe we can manage reasonable input cost changes within our current financial guidance for the year,” he adds.

And it is investment that confectionery companies need to make if they are to remain competitive in such a difficult market.

Multinationals like Nestlé, Mars and Kraft Foods have adopted successful strategies by developing international brands and acquiring national players to strengthen their brand portfolios.

Nestlé increased its value share from 15% to 17% in Global Brand Owner (ultimate brand owner) terms in 2008 after the acquisition of Ruzskaya Konditerskaya Fabrika.

Last month Mars Inc announced plans to launch its second and largest confectionery factory in Russia in 2012, and in July last year Kraft Russia indicated its intention to spur growth in the market by investing in innovation.

However, in the current economic environment, where customers are keen to cut expenses, one successful strategy has proven to be through relaunching products, particularly in the premium chocolate segment.

Local player Obiedinenye Konditery, a leader in the middle and low price segment, relaunched its premium brand Einem last year in a bid to establish itself in the premium segment, an area that has seen a slowdown in growth.

But Wegh believes that while there will always be room for premium chocolates in the Russian market, more shelf space is being made for mainstream and “economy-type” chocolates.

“This basically has already happened during the crisis,” Wegh says. “A lot of people stopped buying premium and the shelf space automatically shrunk for those guys and it’s probably going to stay the way it is. You will still have premium players but it’s going to be a smaller category, and that means fewer players in the segment.”

However, when the economic situation improves, the trend toward premiumisation, which in Russia includes boxed, individual wrapped and high cocoa content chocolate, is likely to return, according to Euromonitor.

And Kraft believes the Russian consumer is “hungry for new ideas, new tastes and experiences”.

The firm recently launched a double-layered filled chocolate under the Milka brand, Crispello chocolate balls under the Vozdushny brand, and Cote d’Or pralines in a bid to woo the Russian consumer.

Wegh believes it is this “double-layering” that is the key to innovation in the Russian chocolate market.

“There is now more and more movement towards what we call ‘one-shot technology’, which allows you to deposit both the outer chocolate shell and the inner at the same time,” Wegh says. “It allows you to have maybe multiple coloured chocolates, like white and dark chocolate with a swirl, and it allows you to put different layers inside a chocolate as a filling.

“This is the future and if you want to be in the premium segment then you need to be there with the technology. If companies don’t make this investment then they’re at a disadvantage,” Wegh insists.

There is no doubt that chocolate confectionery is likely to remain one of the most popular indulgence products, even as cautious Russian consumers look to reduce their spending.

Growth is predicted to increase 10.6% in volume terms between 2009 to 2014 and reach RUB258bn in sales by 2014 compared to RUB217bn in 2009, according to Euromonitor.

Steer believes the market is seeing the first signs of recovery as decline rates begin to decrease.

For Krupskaya Confectionery however, it is the fourth quarter that will be the real indicator of recovery.

 “We started to see a little realisation in June and with very hot weather in July and the first part of August, which has kind of decimated chocolate sales so it could be that the economy was recovering but chocolate wasn’t,” Wegh says.

“So I think it’s really going to be the fourth quarter that will tell the tale. If we see growth in the fourth quarter then that means that the Russian economy is bouncing back.”

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