Russia: expect a slower recovery

Date : 06 August 2015
Russia: expect a slower recovery

IGD Senior Retail Analyst Miloš Ryba looks at the three key factors that are developing the Russian grocery market in 2015; a drop in purchasing power, increased regulation in the retail market and ongoing investment by foreign grocers.

Self-sufficient Russia

Russia has officially extended a ban on the import of fruit and vegetables from Europe for one more year, believing this will boost food security, stimulate domestic production and competition, and consequently diversify the Russian economy.

The Russian government has started to support domestic agricultural production, by providing new farmers with credits of up to RUB1.5 m (USD27,100). This initiative was heavily promoted in the Russian media, making farmers more confident they will see a return once the sanctions are lifted.

The list of products subject to the latest food embargo by the Agriculture Ministry includes flowers, canned fish and confectionery products. According to the Ministry’s Head, Aleksandr Tkachev, the confectionery industry in the country is quite well-developed, while fish production and processing has been developing rapidly.

Having said that, suppliers from Greece, Hungary and Cyprus might soon see their products back on Russian shelves as the government is considering removing these countries from the list.

What’s more, the countries’ leading retailers quickly dealt with the import ban introduced in July 2014, so can take confidence from past experiences;

  • Magnit and X5 Retail Group managed to replace banned products within six months
  • For Auchan only 500 products out of the 50,000 typically sold in their hypermarket format were impacted
  • Auchan has already sourced replacements for 300 of their 500 SKU’s affected by the current ban

Shoppers hit harder than in 2009 crisis

  • According to a public survey conducted by the Public Opinion Foundation in May 2015, 51% of Russians say they have reduced their spending in order to manage their budgets. Hardest hit are fruit, cheese and sausage categories
  • According to the National Financial Research Agency, the share of citizens with no savings reached 30% in 2015, in comparison to 17% during the crisis of 2009
  • 54% of Russians are not saving due to price inflation (in comparison to 40% in 2009), 40% because of wage reductions (43% in 2009)
  • 9% of Russians think that they will get the opportunity to start making savings next year vs. just 5% of those surveyed in 2009

This time around there are also fewer people looking to spend before they feel the effects of inflation and in general sentiment is more positive.

Government to further regulate the retail market

Cap on gross margins

In February 2015, the government amended laws regulating the retail sector. Changes included:

  • A reduction in the amount of supplier bonuses allowed, to 10% of the value of the goods
  • Shortening the supplier payment window
  • Imposing fines to retailers for violating regulations

A bill passed by Russia’s lower house of parliament in May aims to keep retail prices under tight control and make it easier for local producers. In particular, the planned legislation caps the average bonus suppliers pay to retailers to 3% of the goods’ value, a significant drop from the current 10%.

If back margins are limited in this way, retailers may look to strengthen front margins to offset the loss.

Fixed front margin

In order to keep inflation under control, Russia’s chief prosecutor has ordered investigation of the country’s largest retailers, checking whether mark-up levels are justified and if banned foods are still offered. In other words, the government is placing very tight control on retail margins, especially for food.

Manufacturers looking for cheap raw material

Price pressure is also impacting manufacturers, who had to increase the price of their products in the face of raw material costs as the Russian Ruble lost its value. Some manufacturers turned to alternative strategies like using food preservatives to keep prices within retailer and government expectations.

International retailers still interested in Russia

Despite the growing number of challenges in the Russian grocery retail sector, the largest foreign retailers, Metro Group and Auchan, consider Russia a strategic market for expansion. Whereas Metro Group plans new cash & carry openings, Auchan will allocate more funds to the development of its Atak supermarket format.

Carrefour’s franchise Majid Al Futtaim sees opportunities in tier two cities like Kazan and plans to launch its first store in 2015/2016. Meanwhile, the Finnish Kesko Group, as well as Rewe Group, will explore opportunities in Moscow and potentially other key Russian cities, while SPAR International has announced new licence agreements in the Moscow region over the next 12 months.

Expect slower recovery

The government’s strategic focus to diversify the Russian economy and stimulate domestic production could lead to slower recovery than in the 2009 crisis as the buying power of Russian consumers shrinks.

Demand for cheaper alternatives like private label products could increase, and so retailers with a developed portfolio of own brands, like Auchan and Metro C&C, may benefit from the market situation. Discount oriented concepts like X5 Retail Group’s new Pyaterochka facial are likely to drive revenue growth. On the flip side, performance of hypermarkets like X5’s Karusel and O’key could slow as shoppers will prefer to do smaller shops more frequently.

For more in depth insights into Russia’s retail market, check out the country profiles section on Retail Analysis. 

Miloš Ryba

Miloš Ryba

Senior Retail Analyst