A growing middle class and per capita income are seen as key attributes of an attractive emerging market.
Russia has both. 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%.
However, the recent economic slowdown in Russia – government, IMF and World Bank forecasts for 2013 GDP range from 1.5-1.8% – mean trading conditions have become tougher.
Some analysts point to rising GDP per capita as an opportunity for FMCG companies. However, stubbornly high inflation – in part fuelled by food prices – means Russian consumers are more closely looking at price.
There is growing evidence trading conditions in Russia have got tougher. Unilever yesterday warned its third-quarter sales would come in below market expectations due to a slowdown in emerging markets – and according to Sanford Bernstein analyst Andrew Wood “specifically mentioned” Russia as one of the countries in where consumer incomes were being squeezed.
Ian Luyt, MD at Russia-based food and agribusiness advisory firm Novirost, says inflation meant consumers had become “much more price sensitive”. Quality, he tells just-food, remains important to Russian consumers but price is coming more to the fore.
“We’re seeing more promotions and more focused promotions from food retailers. Russian consumers are very quality and brand aware but now perceptions of the linkage between quality and price are much stronger and growing. We expect much stronger emphasis on this linkage – also further growth in private labels and other value propositions, again with strong quality linkages.”
Emphasising what Luyt calls the “price-quality linkage” should be a key strategy for FMCG companies operating in Russia. “There is plenty of choice in most products in this market and, in tighter consumer spending environment anticipated, the key will be to seek competitive advantage through differentiation, and price-quality is one of few options to address this.”
Nonetheless, companies in Russia still have faith they can tap into demand for more premium products among the country’s wealthier consumers. Elsewhere in this briefing, small and mid-sized UK firms spoke about the “high end” market in Russia as an area of opportunity. European dairy giant Arla Foods, which wants to triple its sales in Russia, says it is benefiting from a middle class that “grows and grows and grows” in the country.
Per Hong, a partner at management consultants A.T. Kearney, says manufacturers, looking for growth in Russia, could tap into demand for premium brands. “Russian consumers are still status-oriented. It has an expanding middle class [and] an emphasis on material needs are important. You can segment from a consumer trend point of view into more premium types of product.”
Hong also argues FMCG firms could also develop products that speak to a fervent patriotism that exists among Russians or target less-affluent consumers.
“There’s an orientation towards being very Russia-centric. There’s a very strong sense of Russian nationalism. Companies that are able to appeal to both high levels of quality as well as that core sense of Russian heritage will embue that trust,” he says. “What you see for example is companies like Coca-Cola and PepsiCo that have been looking to develop kvass, which is a very traditional Russian drink where they have been developing local flavours but with a sense of this brand quality that comes with it. There’s lots and lots of that types of examples that you start to see in the marketplace.”
Analysts also suggest looking outside Russia’s obvious larger cities like Moscow and St. Petersburg for opportunities, even if consumers there can have lower average incomes.
“You also see a trend towards developing products, particularly companies that have an established presence here and have a long, strong, local presence – I’m thinking companies like PepsiCo and Unilever – are also developing products that are more tailored to that tier-two or tier-three consumer likely to be situated in the regions,” Hong explains. “Having smaller pack sizes, more customised price points, with the Russian flavours and the overt branding and marketing dollars behind it are big growth areas that can continue to be professionalised. That’s where you’ll see much of the future growth in branded products – in addition to the more attractive consumer segment that we’re already targeting with many large multinationals here present and trying to exploit.”
There are, Hong says, 13 cities in Russia that have populations of over one million people; a further 39, he adds, have populations of 500,000. Such cities can be targets for FMCG companies, although perhaps most easily for those already present in the country.
“We’ve been working with a number of clients ourselves that have been looking at their regional strategy, quickly expanding to the south where there is a lot of wealth,” he says. “You are able to supply from existing logistics structures in Moscow. Companies are now investing in different distribution infrastructure to be able to serve clients moving out to the Urals and even further afield. As modern retailers move further afield, other food production companies will very quickly follow suit. In fact, they already are – they’re already working through distributors to be present but investing in further disciplined infrastructure in penetrating those markets further.”
Perhaps a desire for scale could lead to consolidation, particularly with trading conditions relatively tougher than there were before the financial crisis. Luyt believes there will be more deals in the consumer goods sector in the medium term.
“We are going to see further consolidation in the consumer goods sector and very strong emphasis on efficiency improvements – procurement, inventories, product mix, in-store merchandising, supplier relationships,” he says.
To read the rest of our briefing on Russia, including interviews with UK SMEs looking to build a business there and with dairy giant Arla Foods, click here.