Food and beverage market in Russia

Date
21 November 2016

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Russia's middle class is creating dynamic growth in the country's food retail and consumer food-service sectors. Much of the growth is occurring in urban centers, with Moscow and St Petersburg leading the way.

However, the current economic crisis in Russia is having a significant impact on the business environment. The crisis has particularly affected consumer spending – consumers are not only buying less but, are also becoming savvier about finding better value for money by buying cheaper products or goods discounted through promotions. Companies are therefore having to adjust their business models in order to cater to this changing consumer behavior. [iii]

Despite the crisis, the food and beverage market in Russia still holds good export potential for New Zealand companies. However, the business environment is complex and prior in-depth market research is vital for companies interested in expanding into this region.

Market structure

  • Russia is the largest country in the world by landmass with a population of close to 143 million people. Three-quarters of the population live in urban cities with over 10 percent of the population concentrated in Moscow and St Petersburg.
  • The Russian economy is heavily reliant on oil and gas exports which account for around 55 percent of total exports. The economy is therefore very sensitive to changing oil prices and external demand for fuel. 
  • At the end of 2014, the Russian economy slipped into recession, which was marked by a combination of several factors: significant limitation of capital inflows (investment, credits), import restrictions, falling oil prices and the devaluation of the ruble. The main factor in the current slowdown is the decline in consumption, under the influence of a sustained contraction in real wages. A sustained reduction in demand is expected to slow down inflation, which is forecast to halve in 2016 to approx. 6%. (i) The majority of analysts predict low positive growth in 2017, although a return to high levels of growth (7-9%) is unlikely in the short term. 
  • According to Russian President Vladimir Putin’s Decree on August 6, 2014, imports of a long list of meat, fish, fruit, vegetables, and dairy products were restricted from the United States, European Union, Australia, Norway, and Canada in retaliation for the application of Western economic sanctions. Iceland, Montenegro, Albania and Liechtenstein were added to the list of affected countries in August 2015 and Ukraine will be added if an economic agreement is signed between Kiev and the European Union as is planned. (i)
  • New Zealand has not imposed economic sanctions on Russia, and is not part of Russian countersanctions (food ban).
  • Moscow and St-Petersburg are the two largest restaurant cities in the country, with over half of all consumer foodservice chain outlets located in these cities. Most growth is in the fast food, coffee shop and casual dining segments. The number of cafes, restaurants, and other food outlets in Russia currently stands at around 88,000, while the total number of restaurant chain outlets is around 10,500. McDonald's, Subway, Rosinter Restaurant Holding, Arkadiy Novikov Restaurants, Ginza project, Markon, Coffee House, and Shokoladnitsa are the largest restaurant chains in various foodservice segments in Russia. Most businesses prefer buying whole foods that are later prepared on site for sale. Although they are interested in innovative and quality products, they also are sensitive to price.

Growth drivers

  • A growing middle class due to rising income is fuelling the demand for packaged food, as well as more casual dining options in the foodservice industry. The strong credit growth has also propelled consumption purchases. Despite the presence of wide income disparities, this growing middle class of consumers feel more financially secure and are more willing to spend on food products, with a focus towards health-conscious eating and convenience food. Young people are the main consumers of healthy meals while busier lifestyles are driving the preference for convenience products, frozen processed food and ready-to-eat meals for working professionals.
  • Despite a decline in population, food consumption is increasing and this trend is expected to continue as the government plans to invest in the development of domestic tourism and transportation infrastructure. The hosting of world events like the Olympic Winter Games in 2014 and the Football World Cup in 2018 will further boost food and beverage consumption. A lack of domestic food production, particularly in meat, bakery, confectionary, juice and dairy will also increase imports of these products. New Zealand companies will be able to take advantage of the opportunities offered by Russia's growing reliance on food imports to fulfil domestic demand.
  • According to Euromonitor, annual retail grocery sales are expected to stay at 85 billion USD over the next four years, with supermarket and hypermarket chains currently comprising close to 50 percent of overall grocery retailing. Modern grocery retailing is outpacing the growth of traditional grocery retailers. The two main grocery retailers are X5 Retail Group (over 3,800 outlets) and Magnit (over 5,000 stores). Combined, they account for over 20 percent of total value sales. Growth has taken place in the strategic development of different store formats and expansion into rural regions. The Russian grocery retail market is quite competitive with a large number of players, and high variation in food prices. [iv]
  • Before the current economic crisis domestic consumption was largely driven by rising wages and consumer confidence in the economy, especially as unemployment and inflation declined. The appetite of Russian consumers for high quality foodservice products as well as retail packaged food products is still increasing, despite overall economic indicators.

Import trends

  • Russia has traditionally been one of the largest global importers of food, particularly meat, sugar and dairy products, although the Russian Government’s ban on imported food products from a number of some Western countries has significantly reduced the value of food imports since the ban was put in place in August 2014. While the government is looking for alternative sources of food imports, it also has various programmes in place to increase domestic production towards the goal of self-sufficiency (including poultry, pork, meat and dairy). Indeed, this is also a source of business opportunity – providing equipment and know-how to assist Russia meet its self-sufficiency goal.
  • The desire for food security in Russian strategic thinking has grown and it is stressed that independence in food production and the necessity of improving the effectiveness of state support are required to achieve this objective. The Russian government formulated the Food Security Doctrine which laid out a series of steps – including increased investment, widened access to finance, and other forms of financial and institutional support – that were intended to reduce the share of imports in Russian food consumption. The ultimate objective of the Food Security Doctrine is defined as sustainable development of domestic food production and raw materials sufficient to ensure the food independence of the country. In particular, the government suggests that food security can be achieved accelerating the modernization of the agro industrial and fishery complexes and further developing the infrastructure of the domestic market. (v)
  • Russia's food and beverage imports had been growing steadily before the Ukrainian crisis in 2014. Since 2014 food and beverage imports have been on a rather sharp decline due to the devaluing ruble, decline in real incomes and the introduction of Russia’s embargo on food imports. Meat offal is the highest earning export category with Brazil supplying close to 50 percent of exports in 2015. Brazil’s share of exports in this category was only 20 percent in 2012.
  • New Zealand's food and beverage exports to Russia are worth close to US$100 million, with dairy products accounting for over 40 percent of total food and beverage products. There has been a notable drop in exports of dairy, fruit and vegetable products and meat offal into Russia in recent years, mainly due to the unfavorable exchange rate, the economic situation in Russia and some restrictions imposed on certain Fonterra dairy plants by the Russian veterinary agency. However, there was a 10% increase in New Zealand exports to Russia in the first half of 2016 compared to the same period last year, mainly led by dairy products (following the easing of some temporary veterinary restrictions). [ii]
  • One of the sectors where New Zealand F&B companies are performing well is wine. There are more than 40 New Zealand wineries exporting to Russia, mainly to Moscow and St. Petersburg, and New Zealand was one of the few countries from which wine imports to Russia actually increased in 2015. Russian import statistics suggest that there was approximately $5 million USD worth of New Zealand wine imported to Russia. This still represents less than 1 percent of Russian wine imports. Although the Russian wine market is very much price-driven, New Zealand wine has been quite successful in occupying a relatively higher priced niche than a number of other countries who are exporting large volumes, such as Italy and France.

Market entry and development

Market strategy

  • There are vast regional differences throughout Russia, so a 'one market' entry strategy is unlikely to be successful in multiple areas. It is important to focus on one region or city, and it is imperative that exporters conduct market research on the product's prospects in terms of preferences, incomes, competition, and sales channels before entry.
  • Moscow and St-Petersburg are the two largest and wealthiest cities in Russia with the highest purchasing power. However, competition in the F&B space in these cities is also strong.
  • Russia's business environment is complex with a high level of bureaucracy, and at times, the occurrence of corruption. Therefore, working and maintaining good personal contact with a reliable local business partner, who is familiar with local market procedures, is highly recommended. Although the performance of due diligence and credit checks is recommended, these may be difficult due to limited information and transparency issues. In terms of distribution, some companies have used multiple distributors to target multiple regions. Important factors to consider when choosing a distributor include the company's past success in working with Western companies, and the extent of their existing distribution network and storage facilities.
  • Marketing and advertising is important for product success in Russia since consumers are becoming more brand conscious and are choosing Western brands over traditional brands. Although this trend is not as strong now as three years ago since there is some tension in Russia’s relationships with the West and some people tend to support the local manufacturers more. Collaboration with a local business partner in product and brand promotions is advisable. The use of local media agencies, advertisements in magazines, and participation in product trade events such as the World Food Moscow exhibition, are good avenues. Private labelling is also growing among retailers.
  • With the increasing popularity among Russian consumers to consider branding in their purchase decisions, New Zealand companies have the opportunity to leverage off our 'clean green' image by positioning their products as high quality and safe.

Regulatory information

Since becoming a WTO member in 2012, Russia has started reducing import tariffs and quotas on a wide range of agricultural products. More information on tariff reduction and market opportunities can be found in the USDA Foreign Agricultural Service GAIN Report on market opportunities in Russia.

Russia remains a complicated market in terms of the regulatory environment, financial structure, and in terms of its market size and diversity. It is helpful to review the following list of reports and information before entering the market:

The Russian Government has introduced legislation that grants it the right to cap prices on staple foods. Food and beverage prices also differ in different regions throughout Russia due to different income levels and costs of living, therefore, it is important to be aware of this when setting the price of your product. Transfer pricing web reports are usually made available by accounting firms like PWC. KPMG and Ernst and Young.

There are import duties, value added tax (VAT) and custom charges on imports. More than information can be found at Federal Customs Service English website.

Russian regulation on importing and customs, English website.

Food imports into Russia require a Certificate or Declaration of Conformity. For more information visit the SGS website on GOST R certificate and declaration services.

Particular products such as fodder crops and feeds require permits granted by the Russian Federal Service for Veterinary and Phytosanitary Surveillance (VPSS).

Additional safety regulations are outlined in federal law and the following regulatory documents:

  1. Sanitary Rules and Regulations (SanPiN)
  2. National State Standards (GOSTs)
  3. Hygienic Requirements For Foodstuff Safety and Nutrition

Labelling requirements are outlined in Federal Laws and National State Standards(GOSTs) and can be found at GOSTs English website.

In market partners and distributors are usually well aware of necessary registration, certification and labelling requirements.

Market resources and contacts

Government

Trade events

Sources

[i] HRI Sector Adapting to Slowing Economy and Ruble Depreciation
[ii] www.trademap.org New Zealand food and beverage export statistics into Russia.
[iii] http://www.pwc.ru/en/publications/crisis360.html Russia’s current economic downturn: a 360° view
[iv] www.euromonitor.com Russian retail, actual volume and forecast.
[v] http://www.scrf.gov.ru/documents/15/108.html Security Council of the Russian Federation. Food Security Doctrine (in Russian)

 

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