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  1. Analysis
March 11, 2022

Less choice and higher costs – the Russian packaged food market in a time of war

Market watchers point to a large degree of pragmatism and lateral thinking learnt from the crises of the past.

By Andy Coyne

With a growing number of international food manufacturers either ceasing to supply the Russian market, or scaling back their presence in the country, and sanctions impacting the local economy, local packaged food firms and consumers have tough choices to make.

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The food and grocery sector thrived during the pandemic, largely due to the shutdown of the food service industry and the sector’s subsequent necessity, panic-induced bulk purchasing, and spending more time at home. The market has grown as a result of inflation. Consumer unwillingness to go out and socialize, and the reopening of several hospitality facilities, helped maintain the demand for groceries, particularly online, in 2021. As consumer behavior changes, we consume more food and drink at home, and inflation increases basket sizes. GlobalData predicts that the sector will continue to hold a higher share than had been predicted prior to the pandemic. This is true despite the fact that the food and grocery sector's share of overall retail will decline from its peak in 2020. This report will discuss market forecasts and key themes in the global food & grocery industry in 2022 and beyond. It covers:
  • Market drivers and inhibitors
  • Five-year forecasts and the impact of COVID-19
  • The performance of the online channel versus offline
  • Major trends in the market including rapid delivery, ambient retailing, supply chain disruption, and inflation
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by GlobalData
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While Russia is self-sufficient when it comes to food, the reaction to, and the economic turbulence created by, its invasion of Ukraine will mean less choice and fewer brands on shelves for Russian consumers.

Manufacturers operating in Russia will have to focus hard on costs and cut down on their product lines if they have been dependent on imports which are either now unavailable or too expensive to bring in.

Multinational manufacturers have been quick to condemn Russia’s action in Ukraine and some, such as the Scandinavian food firms Orkla, Fazer and Valio and Canadian French fries giant McCain Foods have stopped supplying the market entirely.

Others, such as Mondelez International, have scaled back their operations but feel morally obliged to provide the Russian people with what they see as essential or basic items.

It is a fast-moving picture and some companies are changing their approach within a 48-hour period.

Swiss chocolate maker Lindt & Sprüngli, for example, said on 8 March: “We are supplying {Russia] as far as we can in line with other companies. The stores are open.”

Two days later, Lindt suspended its activities in Russia, closing its eight shops in the country and stopping shipments of its products to local retailers.

French major Danone is maintaining a watching brief. CFO Juergen Esser said earlier this week: “We are monitoring very closely the evolution of the consumer demand to anticipate any signs of down trading. As of today, demand is very strong. In fact, you know that we are offering very essential food, dairy, early life nutrition to the population.”

Uncertainty reigns. Grégory Sanson, CFO at Bonduelle, the French group that has three factories in Russia selling packaged vegetable products, told Just Food that, “in this turbulent environment, [it is] hard to articulate trends”.

Supply-chain impacts

Turbulent is the word but it is reasonable to expect more international food businesses to limit their exposure to Russia in the coming days and weeks, especially if the situation on the ground in Ukraine gets worse.

It doesn’t mean Russian consumers will be facing empty shelves but they will have less choice, fewer global brands in evidence and are likely to face higher prices.

Alexander Kiselev, the co-founder of Russian plant-based meat company Welldone, says it’s “a troubling time right now”.

He says: “We produce a lot of our ingredients ourselves but a lot of companies are sourcing ingredients from elsewhere and importing is challenging.

“Supply by sea has shut down now so companies have had to shorten their product lines. They cannot provide all varieties.

“Many distributors have stocks of raw materials so we will have to see what happens in a few months’ time.”

Moscow-based Kiselev paints a picture of an industry where the supply chains handling imports of ingredients or packaging through locally-based distributors may change.

“They are not produced here because we were integrated into the global economy and there was no point doing it ourselves when imported products were from people with greater scale and more expertise,” he says.

“Local companies will start to produce things themselves. The quality might be compromised, at least in the initial stages.”

But he suggests local businesses have shown their ability to adapt to changing circumstances in the past, when faced with sanctions.

“The same thing happened in 2014 [when Russia invaded and subsequently annexed the Crimea],” he says.

“Imports from Europe, for example cheese, were shut down and initially there was a lack of diversity with no brie or camembert. Then local producers started to make it and now most of those types of cheese are made locally.

“It’s very expensive to import now because of the exchange rate. It doesn’t make economic sense to import things.

“Big brands have been quite visible on the shelves even though there are local brands in every category. But [their departure] has created space for local brands and other foreign brands that are not pulling out.”

In terms of Welldone’s immediate priorities, Kiselev says: “We will develop contingency plans and cut costs. Right now, it is about focusing on that rather than improving technology or new products.”

Russian resilience?

In tough economic conditions, consumers are bound to focus on cost.

Kiselev says: “It depends on how big the economic struggle will be. People economise on food only after things like cars.”

But he accepts “we need to make the products more affordable for consumers”.

Market watchers are conscious of the problems food manufacturers and consumers are facing in Russia and don’t seek to downplay the scale of those. However, at the same time, echoing Kisalev’s cheese anecdote, they point to a large degree of pragmatism and lateral thinking learnt from the crises of the past.

On the Western sanctions imposed on Russia, Alexander Sinyanskiy, a Moscow-based adviser on the country’s food market, says: “Of course, sanctions impose some restrictions on business, especially on the food business. But we survived the collapse of the Soviet Union in 1991, the most severe default in 1998, when the dollar-rouble exchange rate became one dollar to 30 roubles in a couple of days. Then there was a banking crisis in 2009, then there were sanctions after Crimea in 2014, then, in 2018, there were restrictions from Covid.

“Therefore, the current sanctions, globally, will not affect the food industry in Russia. We are too tired to be afraid of everything in recent years. There will be little difficulty in finding new suppliers and foreign partners. There are officially 193 states in the world, 48 countries have imposed sanctions against Russia. This means that Russian businessmen will work with the remaining 145 countries.”

He also suggests Russia will find a way around problems cause by big logistics firms pausing shipments to the country.

“It is not yet clear what the difficulties will be,” he says. “There are dozens of international transport companies. I know that many companies in Russia are now developing alternative delivery methods and signing new contracts with foreign shipping and cargo companies.

“Logistics from Europe to Russia has been disrupted, most countries will fundamentally not work with partners from Russia. It is morally very difficult. But I can say again that, thanks to various bans during Covid, business in Russia will now find solutions faster.”

Oleksandr Volik, a Ukraine-based project manager at Civitta, an Estonia-headquartered consultancy focused on markets in eastern Europe, believes sanctions will cause significant problems.

“Sales and profit margins are likely to go down. The food market size in constant prices – and maybe even in volume terms in the longer term – is going to contract. Also, the horeca sales channel will shrink now. McDonald’s, KFC, Starbucks have already announced their intention to suspend operations,” he says.

He also sees logistics as being a key area of concern. “Currently, there are additional checks on containers going to Russia in many European and US ports to ensure that sanctioned items are not delivered to the country, which lowers the speed of delivery significantly.

“Additionally, some global operators like Maersk are refusing to work with Russia. Some claim that cross-boundary deliveries are effectively impossible now. Companies which rely on any foreign raw materials’ inputs will likely face issues,” he says.

Rocked by the rouble?

The collapse of the rouble should also be a concern, Volik explains.

“The national currency is rapidly losing its value versus the dollar so the purchasing power of Russian consumers is disappearing at a very high speed,” he says.

“The next logical step for Russian consumers would be to remove non-essential goods from their baskets while downgrading to the value price segment for essential goods, at least partly. Producers will likely respond with lower-quality products to save on rising raw material costs or decrease the package size, though it will not help solve the poor situation altogether.”

Sinyanskiy believes the collapse of the rouble is the biggest problem Russia’s food industry faces.

“We can confidently say that due to the weakening of the rouble, a lot of goods and food in Russia will increase in price in the very near future. So far, everyone in Russia is trying to use stocks at the old prices,” he says. “Customers will not be ready to immediately pay 50% more for groceries in food stores.”

He adds: “Due to the increase in prices in stores, ordinary buyers will choose less premium food.”

One big problem Russian food manufacturers face is replacing packaging, much of which was imported into the country from countries such as Germany, Poland and France. This trade has now largely closed down.

Sinyanskiy sees a solution. He says: “After the ‘Crimean crisis’, many Russian food companies refocused on packaging suppliers from China. I think it will be the same this time. Chinese packaging materials are cheaper than European ones but, of course, they lose in quality. However, now Russian food companies have no choice.”

Volik also sees non-European markets coming to the fore in trade with Russia.

He says: “One of the profound impacts last time was that, after the Crimea annexation, Russia started to replace its imports from the EU and allies with other partners, like Belarus for poultry, China and Brazil for pork, South American countries for fish and beef.

“At the same time, due to rising prices, consumption of the sanctioned products had experienced a decrease. But, again, last time there were neither heavy sanctions in place nor such an active exodus of companies from the market.”

But despite a pragmatic approach now baked into the food industry, Volik is in no doubt about the plethora of problems Russian food companies face.

Banking sanctions and restrictions on the Russian banking sector’s access to the Swift inter-banking system could be one of the biggest, he suggests.

“Any export/import-related payments are at risk due to sanctions imposed on selected Russian banks, namely due to their disconnect from Swift,” he says.

“This creates a challenge for companies doing business with foreign counterparties or for subsidiaries of multinationals present in Russia.”

For all that, local food manufacturers might consider fewer international brands to be an opportunity for them to occupy the additional shelf space available.

Retailers themselves may also look to fill the gaps.

Volik says: “Given the exodus of Western brands, retailers could use this opportunity to put some private-label brands on the shelves, substituting now absent Western brands. The overall economic downfall will push local suppliers to consider private-label as well.”

But he believes these new alternatives will most likely end up being at the value end of categories.

“This will happen for sure. We are currently talking about the largest to-be economic recession in Russia, so consumers will not have any alternative option rather than downgrade to value products.”

Related Companies

Free Report
img

What’s the forecast for the food and grocery industry?

The food and grocery sector thrived during the pandemic, largely due to the shutdown of the food service industry and the sector’s subsequent necessity, panic-induced bulk purchasing, and spending more time at home. The market has grown as a result of inflation. Consumer unwillingness to go out and socialize, and the reopening of several hospitality facilities, helped maintain the demand for groceries, particularly online, in 2021. As consumer behavior changes, we consume more food and drink at home, and inflation increases basket sizes. GlobalData predicts that the sector will continue to hold a higher share than had been predicted prior to the pandemic. This is true despite the fact that the food and grocery sector's share of overall retail will decline from its peak in 2020. This report will discuss market forecasts and key themes in the global food & grocery industry in 2022 and beyond. It covers:
  • Market drivers and inhibitors
  • Five-year forecasts and the impact of COVID-19
  • The performance of the online channel versus offline
  • Major trends in the market including rapid delivery, ambient retailing, supply chain disruption, and inflation
Assess developments within this sector to help your business thrive in 2022 and beyond.
by GlobalData
Enter your details here to receive your free Report.

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