A Focus on Russia

Posted by europanel on Nov 02, 2017

Russia: Between recovery and uncertainty

 

2017 has been a year of economic recovery for Russia. After being hit by a 2 year long recession, the Russian economy is back in growth; consistently growing above +2% for GDP year-on-year  for the past 6 consecutive quarters. This has led to new foreign investments.
Growth peaked at +2.5% for Q2 2017 and is expected to grow steadily, potentially reaching around 4% by 2030.

This trend could lead to new opportunities for growth for FMCG companies, however it will be a long road.

 

Improvement in health but plenty of issues remain

 

2017 started with good news for Russia as the average life expectancy reached 72.5 years for the first time in the country’s history. This is driven by males and is associated with a decrease in mortality from major diseases and in the consumption of vodka, beer and cigarettes.

Government-led initiatives pushed a healthier agenda on the Russian population after decades of alcoholism-related deaths, which peaked in 2012 with a staggering 30% somehow related to drinking.

However, bigger demographic hurdles remain and present major structural challenges for Russia’s growth.

These challenges range from low-fertility rates, high-rates of HIV and drug-addicts to a still 10-year-lower life expectancy for men vs the rest of Europe, that cripples its economy.

One of the main issues that slows Russia’s advancement is that in the next five to six years they “are going to lose approximately 800,000 working-age people each year” (Economy Minister Maksim Oreshkin) due to an ageing population and declining birth rate.

Even if Russia manages to turn the situation around, the results will take a few years to show.

This situation is more worrying considering that work efficiency and labour-immigration is declining; with an ageing workforce, who struggles getting up-to-date with new working technologies and a strong anti-migrant atmosphere.

One of the many challenges for Russia is to fill jobs in a country
where the workforce is shrinking drastically

 

Within the food categories, the largest increase is observed in Grocery, Sweets and snacks

 

New potential for growing categories

Spend on food still accounts for almost 80% of Household spend and has been slightly decreasing since the early 2000s. As a result, the non-food categories have been able to grow faster; with the highest value growth observed in Pet Care, Personal Care and Home Care between 2015 and 2016.

This has led to more innovation in those categories.
Within the food categories, the largest increase is observed in Grocery, Sweets and snacks; particularly night-time snacks, and consumption increased in fresh fruits, vegetables and eggs. This is following the governmental push towards healthier lifestyle.

 

A few of the growing trends are:

  Overall, some sub-categories are more promotion-reliant such as chocolate tablets, chocolate in boxes, strong Alcohol, champagne, coffee, laundry and baby diapers. For these sub-categories, around a third of sales are being sold on promotions, making it a tougher competition.   Modern Trade share continues to grow rapidly; discounters have been the most successful among grocery channels, with +20% of value growth 2015 to 2016. E-commerce also continues increasing with +72% of value sales, particularly for Personal Care, Pharma & Pet Care. The online shopper profile is younger, upmarket & urban families.
  Decrease of canned goods consumption (-26% for canned fruits, -5% for canned vegetables) as consumers tend to make their own conservation products. This has driven a purchase of products used for conservation such as oil (+7%) and sugar (+8%).   “Datcha” mode is used to make savings as consumers are growing their own fruit & vegetables for fresh consumption and conservation purposes. Similarly, there has been an increase in home baking goods – which is a huge opportunity for products like Margarine and Additives. On the other hand, there has been a decline in consumption of bakery products (-1.7% in volume).

 

 

Global players playing the local field

 

The context of tense diplomatic relations and sanctions taken against Russia forced the ruble to depreciate, making imports more expensive on top of decreasing oil prices. Therefore, this created a mentality shift for people to substitute imported goods for domestic goods. However, big FMCG companies, such as Danone still enjoy growth at over 2%, mainly because of the glocal strategy they adopt. Indeed, over 80% of the Danone Russia portfolio is centered around developing strong local jewels, made in Russia and for the Russian market, and allows them to have strong growth with such brands while supporting its global brands.

 

Opportunities for the 2018 World Cup

 

With over one million foreign tourists expected to flood the country, facilitated by a temporary governmental lift on visa, the 2018 World Cup promises to bring a boost in sales, especially for the alcohol and liquor segment, which is not restricted to the import sanctions taken by Russia recently. Beer is particularly expected to experience an increase in sales, as Russia is a very big beer drinking country.

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Best wishes,

The Europanel Thought Leadership Team