“There is no longer a red light telling investors to stop. What we now have is a flashing yellow light saying. “Wait before proceeding.”
A Russian distributor
Memories of the Russian financial crisis of 1998 and its after effects are still fresh in the minds of western food producers. Sales collapsed as purchasing power plummeted after the August 1998 rouble devaluation. A four-fold reduction in purchasing power amongst Russian consumers made food imports prohibitively expensive, and the volume of food imports dropped almost 70%. The market was plunged into deep depression.
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Fast forward to today. Russia is experiencing a rare surge in economic performance. The economy had surprised observers by posting 3.2% growth in GDP for 1999, and a further 5% growth is forecast in 2000. Since spring 1999 consumer buying power has grown 13% and retail sales were up 8% in the last six months.
To the further delight of foreign food producers, the government of President Vladimir Putin is set to overhaul the nation’s customs tariff regime, aiming to both streamline the hideously complicated system for charging customs duties, and root out the corruption that plagues the customs process. These plans are seen as a major step toward improving the business climate and as a potential way of regaining the confidence of western food manufacturers.
Positive developments are clearly noticeable in the food sector:-
- In 1999 the food industry attracted investments worth US$1.6bn, with foreign food manufacturers such as Danone, Nestlé, Pasa and Kraft Foods galvanising activity in this area;
- Sales of many imported food products are rising to pre-crisis levels and wholesale companies report that their sales have doubled since the crisis;
- The rouble devaluation provided a major boost to domestic industry, lifting it decisively out of its slump in output and improving the price competitiveness of Russian food products.
As a result of these developments, those foreign food manufacturers who took a “wait and see” position are now in a rush to retrieve their business plans “from the backburner” and re-launch their Russian operations in full swing.
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By GlobalDataIn the process of retrenching their activities, one of the questions manufacturers are posing is “what should our approach to distribution be?” Distribution has always been crucial for food manufacturers’ success in Russia. For some it paved the way to market leadership and control, for others it was instrumental in poor performance and ultimate demise.
Over the last two years the distribution environment in Russia has undergone significant change, and the pace of change continues to accelerate:
- Following the 1998 crisis hundreds of less competitive wholesale distribution companies went out of business, resulting in a tighter, more focused, more professional wholesale sector.
- Consolidation within the wholesale sector is intensifying through a growing number of mergers, acquisitions and partnerships. The emergence of a Club of Wholesale Suppliers, including distributors such as Reljef, Stupeni, Salmon, Mistral and Algol, exemplifies the trend towards increased cooperation among wholesale companies to exercise greater bargaining power over food manufacturers and secure healthy profit margins. Acquisition of regional and local distributors is increasingly seen as a means of national expansion for Moscow-based large distribution players.
- As profit margins in the wholesale sector have considerably declined, distributors are pursuing advantage from a wider activity base through involvement in retail distribution and manufacturing. It is widely reported that a number of large scale wholesale companies have plans to establish proprietary networks of retail outlets in the near future.
- At the point of sale, domestic food retail chains are rapidly expanding and stores such as the Seventh Continent, Perekryostok and Ramstore are branching out with new outlets.
- To gain greater share of retail distribution, food retail operators are looking to form closer relationships. For example, the Seventh Continent and Perekryostok, the largest food retail chains in Russia, are considering merging their operations.
- In Moscow the retail sector is booming with hypermarkets (such as Ramstore) and large shopping malls hosting food and other retail outlets, food courts and cinemas under one roof (for example, Garden Ring Shopping Centre) rapidly expanding.
- The first domestic discounter chains have emerged. Such discount operators as Kopeika, Diksi, Avoska and Mini-Perekryostok are growing fast and enjoy popularity amongst lower and middle income consumers.
- Foreign food retailers have started dipping their toes into Russia. Spar, a multinational supermarket chain, and its Russian partner Rusmed are planning a local pilot programme, with the intention of opening 30 local stores in the next three years.
Despite these positive developments in the distribution system, Russia still has a long way to go before it becomes as attractive to foreign food companies as its eastern European counterparts. The proof for this is abundant:
- Generally speaking, the food supply chain remains multi-layered and fragmented, with outdoor wholesale/retail markets controlling 65% of retail distribution.
- The Russian chained food retail operators are in infancy, accounting for a meagre 1% of total retail food sales compared to 28% in the Czech Republic and 50% in Hungary.
- Russia is still waiting for the arrival of the multinational food retailers that are actively penetrating Eastern Europe. The flawed tax system, procurement problems, bureaucratic red tape and corruption are quoted as the main barriers to the market.
- By and large, wholesale operators lack customer focus and end consumer orientation.
The implications of this for international food companies are plain. Distribution will continue to represent a challenge at least in the short term, and manufacturers will be required to take closer control of distribution to allow increased influence over the marketing, positioning and targeting of products. Better feedback from sales will give greater understanding of the market. Extensive changes in distribution structures will continue well into the next five years, enabling proactive international companies to participate in the food market in ways previously beyond their reach.
Details of reports from Promar International click here.
Promar International is a strategic marketing and business consultancy specialising in the food industry. Promar’s experience in Russia runs back to 1986; we have assisted a wide range of food companies in tackling complex issues and developing strategies for the region. For further details please telephone Helen Vassina on *44 (0) 1635 43363 or e-mail hvassina@promar-international.com
