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Exporter Guide

FOOD & BEVERAGE IN RUSSIA Market Profile June 2011

This document is one of a series of free information tools for exporters produced by New Zealand Trade and Enterprise. New Zealand Trade and Enterprise provides a wide range of standard services and sophisticated solutions that assist businesses through every stage of the export process. For information or advice, phone New Zealand Trade and Enterprise on 0800 555 888, visit www.nzte.govt.nz, or contact your New Zealand Trade and Enterprise client manager.


CONTENTS 1

2

3

2/

MARKET STRUCTURE 1.1 Market Overview

3 3

1.2

Market Drivers

3

1.3

Market Potential

3

1.4

Import Trends

5

1.5

Key Players in the Market

7

1.6

Regulatory

8

1.7

Sustainability

10

MARKET ENTRY AND DEVELOPMENT 2.1 Market Entry Strategies

10 10

2.2

Points of Differentiation

11

2.3

Long term strategic issues for exporters to consider

12

2.4

Distribution Channels

12

2.5

Pricing

12

MARKET RESOURCES AND CONTACTS

Exporter Guide | RUSSIA | Food & Beverage| June 2011

13


1 MARKET STRUCTURE 1.1 Market Overview Russia is the largest country in the world by landmass and has the world’s ninth largest population of 140 million people as of 2010.i The population is unevenly distributed across the country, with the highest density around Moscow city.ii Due to low birth rates, the population is expected to decline to 139 million in 2011.iii Despite the declining population, Russia’s economy is growing. Russia’s GDP was US$1,548 billion for 2010 and is forecast to grow 4.4 percent in 2011.iv GDP per capita is expected to increase to US$12,398 in 2011.iv While low income consumers currently outnumber the wealthy, there is a growing middle class and overall incomes are rising gradually. Most high and middle income consumers are located in the two largest cities, Moscow and St. Petersburg.i Inflation rates have been falling in the past few years, but remain a challenge for the Russian economy. In 2010, inflation was 9.9 percent.i For food and beverage products, inflation for the year ended January 2011 was 14.2 percent.v Russia currently imports around 40 percent of its food consumption. In particular, over half of the meat and milk products in large cities are imported.iv Food and non-alcoholic beverage spending accounted for 28 percent of consumption in 2010.iv The food retail market in Russia was valued at US$225 billion in 2009 and is expected to grow at a compounded annual growth rate (CAGR) of 20.5 percent for the next 4 years.x Volume consumption per person for meat, fish and vegetables are all expected to rise.vi

1.2 Market Drivers Despite falling population numbers, food consumption is increasing in Russia. Russia is expected to be one of the top five grocery markets in the world by 2015.ii The food retail industry is forecasted to be around US$792.7 billion in 2014.x Key drivers of growth include rising incomes, as well as the following factors:

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Development & Infrastructure: The mass grocery retail industry is constantly developing to become more efficient, less fragmented and more accessible to customers. Additionally, the government is planning to develop transportation infrastructure which will help the efficiency of food and beverage distribution.iv

Food Processing: Due to significant capital investment in the past few years, Russia now has a strong food processing industry and there is increasing demand for quality raw materials and ingredients. Food processing companies are starting

Exporter Guide | RUSSIA | Food & Beverage| June 2011


to report insufficient domestic supply of ingredients and will likely turn to imports. Particular sectors that are lacking in domestic supply are meat, bakery, confectionary, juice and diary.iv 

Tourism: Russia has a variety of natural landscapes such as mountains, seas and rivers which have the potential to attract tourists. The Russian government will also be launching a program to increase domestic tourism. Additionally, Russia will be hosting the Olympic Winter Games in 2014 and the Football World Cup in 2018. The expected rise in tourism will boost food and beverage consumption in the Hotels, Restaurants and Institutions (HRI) sector.iv

1.3 Market Potential Following the recovery from the financial crisis, Russians have been spending substantially to catch up with a large backlog of demand. The food retail market in Russia is forecasted to grow around 20.5 percent per annum for the next few years. There are specific types of products that are expected to perform particularly well.x Food Products 

Meat: Due to the lack of domestic supply, Russia is one of the world’s major meat importers. Russia imports over two million tonnes of beef, pork and poultry meat annually. Russia also has a population of over 20 million Muslims who have a preference for lamb. This is a segment that offers enormous potential for New Zealand meat exporters.

Fish and Seafood: The domestic Russian fish catch has grown in recent years. But due to high demand, there are many opportunities in this sector for New Zealand fish and seafood suppliers.

Convenience & Fast Foods: As Russian consumers lead busier lifestyles due to urbanisation, they are demanding more convenience products and fast foods. Canned, frozen and chilled food products all experienced growth rates of over 12 percent in 2009 despite the economic recession.iv

Healthy & Organic Foods: Russia’s population is aging and becoming more health conscious so the demand for healthy and organic food products has slowly increased in urban areas. Products such as yoghurt, muesli and low-fat alternatives have been growing faster than the overall food market.iv

While convenient or healthy food products can be sold at a premium, Russian consumers are price conscious and have become more conservative with spending since the global recession. Consumers generally are brand conscious but they will still switch products if

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Exporter Guide | RUSSIA | Food & Beverage| June 2011


prices change. Despite this, marketing and branding are becoming increasingly important to attract customers.iv Beverage Products Most beverage products decreased in sales volume in 2009 but inflation caused the overall sales value for many products to rise. Beverages that are rising in both volume and value sales include tea and functional drinks.iv The Russian government is intending to reduce the number of wholesale licences for alcohol. This may cause difficulty in importing alcoholic beverages into Russia as some existing wholesalers and distributors will lose their licence. Wine: Even though Russians in urban areas are increasingly purchasing wine, wine consumption is still quite low. The per capital consumption of wine in 2009 was 8.3 litres (whereas in the UK, this figure is 28.4 litres). The wine consumed is mainly from Europe, particularly France and Italy. New World Wines (from Chile, Australia and Argentina) are also becoming more popular. Upscale hotels and restaurants in the metro areas are specifically looking to offer internationally recognised wines, particularly well known brands and icons.vi New Zealand wine is considered exotic in Russia and is a niche product that is growing. The volume of New Zealand wines sold in Russia grew by 34 percent in 2010. New Zealand mainly exports white wine into Russia, which is generally not expensive. Only 12 percent of white wine is sold for more than RUB 215 (NZ$9.80).vi

1.4 Import Trends New Zealand exported NZ$252 million worth of food and beverage products to Russia in 2010. Food and beverage exports to Russia grew by 44 percent in 2010. Exports of fresh bovine meat increased by 470 percent in 2010 however, exports of this product are still NZ$10 million below pre-recession levels. There are some export products that are still declining, but are falling at a slower rate than during the recession.vi Butter, which accounts for 70 percent of New Zealand’s food and beverage exports to Russia, grew by almost 69 percent in 2010. Exports of butter to Russia increased even during the recession period.vii

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Exporter Guide | RUSSIA | Food & Beverage| June 2011


The top products that New Zealand exported to Russia in 2010 were:vi 2010 Exports ($NZ millions)

Change from 2009

% of NZ’s Food & Beverage Exports to Russia

Butter

177

+ 68.7%

70%

 Finland (28.7%)  NZ (27.2%)  France (7.9%)

Sheep & Goat Meat

21

- 1.3%

8.4%

 Australia (46.7%)  NZ (32%)  Moldova (10%)

4.6%

   

Ukraine (27.8%) Germany (25.6%) Finland (10%) NZ (0.6%)

4.3%

   

Norway (28.7%) Iceland (11.5%) UK (10.4%) NZ (1.2%)

3.2%

   

Brazil (47%) Uruguay (12.4%) Paraguay (10.2%) NZ (0.2%)

2.1%

   

Switzerland (24.8%) Netherlands (23.6%) Germany (14.3%) NZ (3.3%)

2%

   

Poland (20.7%) Belgium (16.4%) China (9.6%) NZ (0.2%)

1.7%

   

Germany (21%) USA (15.5%) Argentina (12.4%) NZ (0.9%)

Product

Cheese & Curd

Fish (Frozen & Whole)

Bovine Meat (Frozen)

Malt Extract

Apples, Pears & Quinces (Fresh) Offal (Bovine, Swine, Sheep & Goat)

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12

11

8

5

5

4

Exporter Guide | RUSSIA | Food & Beverage| June 2011

-19.8%

- 6.4%

+ 469%

- 6%

-17.9%

+ 42%

% of Russia’s Food & Beverage Imports


1.5 Key Players in the Market Retail Channels The retail market in Russia is highly fragmented. Hypermarkets, supermarkets and discount stores currently hold 43.8 percent of market share. But these modern retailers only account for a small fraction of the total number of retailers.viii There are only 30 large modern retail store for every one million inhabitants (whereas for Russia’s neighbour Poland, this figure is 80).ix Convenience stores and stores located at gas stations hold 34.9 percent of market share. Food and drink specialists such as butcheries and bakeries have 20.3 percent.x These smaller stores are typically independently owned and operated. The food retail industry has been consolidating because the economic downturn stimulated acquisitions of smaller retailers by large companies.iv However, this consolidation has a limit. A new law passed indicates that retail chains which have more than 25 percent market share in a region or city are not permitted to open additional branches in that area. The leading food retailers in Russia currently are: 

Metro AG: A German retailer that operates 2,195 stores in Europe, Asia and Africa. Metro AG had revenues of US$91.1 billion in 2009. The company operates hypermarkets under the brand Real.x

X5 Retail Group N.V: X5 Retail Group N.V operates 1039 discount stores, 275 supermarkets and 58 hypermarkets. In Russia, X5 operates under the brands Pyaterochka, Perekrestok and Karusel. X5 Retail Group N.V had revenues of US$8.7 billion in 2009.x

Magnet OAO: A Russian company that operates under the brand Magnit. The company operates 3,204 convenience stores and 24 hypermarkets in 1,048 different locations in Russia.x Two thirds of Magnet OAO’s stores are in locations with populations of less than 500,000 where the company faces little competition.i Magnet OAO also operates 9 distribution centres.x

Sedmoi Kontinent OAO: A Russian company that operates supermarkets and hypermarkets mainly in larger cities. In the past few years, Sedmoi Kontinent OAO recorded on average 7 percent increases in customer numbers and 22.5 percent increases in sales.x

Both of the world’s largest retailers have withdrawn from Russia after unsuccessful business deals. In 2008, Wal-Mart opened a Russian office to identify potential business opportunities but has since then closed the office after its acquisition target Kopeyka (a

7/

Exporter Guide | RUSSIA | Food & Beverage| June 2011


discount supermarket chain) was acquired by X5 Retail Group N.V. The second largest retailer Carrefour, a French company that operates hypermarkets around the world, opened a store in Russia during 2009 but pulled out after not being able to reach a deal with Sedmoi Kontinent OAO.iv Hotels, Restaurants & Institutions (HRI) Before the global recession, the HRI sector in Russia was growing at rates of 10 – 12 percent. In 2009, restaurant sales contracted by 3 percent to US$10.53 billion.iv The most affected businesses during the recession were restaurants in the higher price segment, which faced declining sales of 30 - 50 percent. While the sector has now returned to its pre-crisis growth, Russians have become more conservative about their foodservice spending.xi In Russia, the development of chain establishments by international players has been significant. These companies are able to offer lower prices and open new outlets more easily than smaller businesses. One of the major players Rosinter Restaurant Holding (which specialises in casual dining), increased sales by 16.9 percent in the first half of 2010.iv The fast food market is the fastest growth sector with annual growth rates of 20 – 30 percent. In 2010, the fast food sector was valued at US$5.6 billion. McDonald’s currently holds 70 percent of the fast food market. However, it now faces competition from Burger King which recently entered Russia in 2010 and Subway, which doubled its number of outlets during 2010.iv The main developments in the HRI sector are taking place in the largest cities, Moscow and St. Petersburg. Additionally, there are other key areas are also experiencing high growth. These include tourist cities on the Black Sea such as Sochi, which is hosting the 2014 Olympic Winter Games.

1.6 Regulatory Information provided in this section is for reference only. When negotiating supply contracts and before beginning actual export, companies are advised to consult closely with their importer or distributor. Russian regulation on importing and customs can change frequently so it is important to check reliable and up to date sources.xii In 2009, Russia, Kazakhstan and Belarus created a Customs Union which has been developing regulatory standards for imports. The Union intends to complete a regulatory system by 2012 that will be applied across all three countries.xii Currently, as the Union

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Exporter Guide | RUSSIA | Food & Beverage| June 2011


makes decisions, the Russian government make adjustments to its regulations accordingly.xii More information can be found at: www.tsouz.ru. Duties and tariffs There are several taxes imposed on imports. Import duties are generally between 5 – 30 percent depending on the product.iv There is also a value added tax (VAT) on imports. The VAT is usually 18 percent but some food, health and children products are taxed only at 10 percent. Lastly, customs charges are usually around 1.25 percent.iv More information can be found at: www.customs.ru. Industry standards Food imports into Russia require a Certificate or Declaration of Conformity. The trend is that Declarations are replacing Certifications however the process to get either is currently similar. Declarations and Certifications are granted after inspection of samples and documentation.xii More information on obtaining a Certificate or Declaration can be found at: www.gost.sgs.com. To receive the Declaration or Certificate, exporters will need additional permits depending on the origin of the product:xii 

Animal Origin: An Import (Veterinary) Permit is needed.

Plant Origin: If the product is classified as having high phytosanitary risk, an Import Quarantine Permit is needed.

Products such as fodder crops and feeds require both permits. Permits are granted by the Russian Federal Service for Veterinary and Phytosanitary Surveillance (VPSS). The process of gaining either permit involves inspections of products and relevant documentation.xii More information can be found at: www.fsvps.ru. Additional safety regulations are outlined in Federal Law and the following regulatory documents: 

Sanitary Rules and Regulations (SanPiN)

National State Standards (GOSTs)

Hygienic Requirements For Foodstuff Safety and Nutrition

Labelling requirements Labelling requirements are outlined in Federal Laws and National State Standards (GOSTs). In general, the following information is required in Russian on labels:xii 

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Product name, type, grade and category (whichever are applicable)

Exporter Guide | RUSSIA | Food & Beverage| June 2011


Name, country, address of the producer, packer, exporter and importer

Net weight, quantity or volume

Ingredients, nutritional value (depending on the product) and additives/flavourings

Date of processing, storage conditions and expiry date or shelf life

Identification of regulatory or technical documents and a Conformity stamp

Any biotechnology involvement or components

More information on labelling can be found at: www.gost.ru.

1.7 Sustainability While Russians are not yet particularly concerned with sustainability and environmental issues, they are slowly becoming aware of them. It is estimated that 44 percent of Russians consider global warming a serious issue and 66 percent believe that environmental protection is more important than economic growth.xiii However, sustainability as a purchasing and lifestyle consideration is not yet a mainstream trend. More environmentally friendly products such as organic foods are expected to have increased demand. However, it is the health aspect rather than sustainability or environmental factors that Russian consumers are willing to pay more for.vi Additionally, even though organic products are expected to grow, the majority of Russian consumers are still currently unwilling to unable to pay the premium (which can sometimes to be up to 5 times more than the non-organic alternative).xiv Furthermore, there is not yet a national organic certification system.

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Exporter Guide | RUSSIA | Food & Beverage| June 2011


2 MARKET ENTRY AND DEVELOPMENT 2.1 Market Entry Strategies Russia has the world’s largest landmass so there is disparity amongst the different regions. It is recommended that companies concentrate on one particular region or city as the same entry strategy is unlikely to be successful in multiple areas. The following market entry strategies are recommended. Market Research It is important to research on market prospects for the product in terms of preferences, incomes, competition and sales channels. Consulting firms are able to assist with market research.iv Local Importer Russia has a complex business environment with a high level of bureaucracy. Corruption is also something that can occur. Because of these factors, it is important to work with a local importer who is familiar with local market and procedures. It is also important to maintain personal contact with the local importer to ensure a trustworthy business relationship. Because of Russia’s complex business environment, performing due diligence such as verifying references and credit checking can be important. However, it should be noted that credit reporting is a new practise in Russia, so information may be limited.iv Due diligence can also be difficult to perform due to transparency issues. Marketing and Promotion Marketing and advertising are important to the success of a product in Russia. However, marketing effectively can be a challenge as one single strategy cannot be applied to all regions in the market and statistical data is difficult to retrieve. It is advisable that exporters co-operate with their local business partner on how to promote their brand and product. In the wine segment, for instance, it is important to support in-store promotions with discounts (for example, buy one get one free) or gift promotions. It is also worthwhile to use relevant magazines for promotional purposes. Advertising and other marketing activities can be done through local media agencies. Trade events are another recommended method of promoting products. The World Food Moscow exhibition is held annually and attracts 60,000 visitors, mainly wholesalers and retailers. Other important expos include the Prod Expo in St. Petersburg and Peterfood, the most significant expo for northwest Russia.

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Exporter Guide | RUSSIA | Food & Beverage| June 2011


Packaging and Branding Russians do shop by brand and tend to chose well-known Western brands over local brands. Introducing innovative mid tier brands with smart packaging and sizes has been a common strategy for suppliers. Although it is still currently uncommon, private labelling is growing among the major retailers. Private labelling allows retailers to maximise their margins and offer low cost products to consumers. There is a considerable opportunity for private labelling due to the economic disparity among the Russian society.

2.2 Points of Differentiation Although most Russians are conservative purchasers, marketing and branding are starting to become important purchasing considerations. This is particularly true for high income consumers at the premium end of the market. There is opportunity for New Zealand companies to position their products as high quality as well as leverage off New Zealand’s clean and green image. As in most other markets, it is essential to have a clear unique selling proposition and to be highly committed to the Russian market.

2.3 Long Term Strategic Issues for Exporters to Consider Russia has a growing middle class and the overall population is becoming more affluent. In the long term, these trends mean that consumers will be demanding more premium and high quality products. There are significant regional disparities both in socio-economic and business factors. Exporters should be careful to tailor their approaches to their targeted regions to be continuously successful in Russia. There can be a high level of bureaucracy and a lack of transparency in Russia. Due to these factors, it is advisable that exporters work with a reliable business partner. In the long term, this could be in the form of a partnership or joint venture. Partnerships are typically recommended as the better option as joint ventures can be difficult to structure and are perceived as risky.xv In the medium or long term, exporters may want to consider establishing a local office in Russia to conduct business. Recommended locations are Moscow (most retail companies have head offices here), St. Petersburg (a port city which goods pass through) and Vladivostok (the main gateway to East Russia).iv

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Exporter Guide | RUSSIA | Food & Beverage| June 2011


2.4 Distribution Channels Unlike in Western markets, Russia’s distribution infrastructure is still developing. Selling directly to retailers is uncommon in Russia so it is highly recommended that exporters work with a local distributor. It is more conventional to give one distributor exclusive buying status, but some companies use multiple distributors in order to target multiple regions successfully. Most distribution companies are based in the largest cities Moscow and St. Petersburg. It is important to select a company that has a developed distribution network in the targeted region and has been successful in the past. Other factors to consider are storage facilities and whether the company has had successful experience in working with Western companies.iv

2.5 Pricing Food and beverage prices in Russia vary depending on location due to differences in income and costs of living in different areas. In general, wholesale mark-up is usually 12 – 15 percent and retail mark-ups tend to be 35 percent or higher.iv An important aspect to pricing would be whether or not there is sufficient local supply in Russia for the product. If Russia is self sufficient on a particular product, exporters will face higher price competition. Recently, there have been pricing concerns over new law that came into effect in 2010. Under this legislation, the Russian government is entitled to fix price caps on staple foods when prices are rising. Retailers are now also faced with shorter terms of payment.

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Exporter Guide | RUSSIA | Food & Beverage| June 2011


3 MARKET RESOURCES AND CONTACTS ORGANISATION

WEBLINK

Russian Federal Service for Veterinary and Phytosanitary Surveillance

www.fsvps.ru

Customs Union of Republic of Belarus, Replubic of Kazakhstan and the Russian Federation

www.tsouz.ru

The Federal Customs Service of Russia

www.customs.ru

The Ministry of Industry and Trade

www.minprom.gov.ru

National State Standards (GOST)

www.gost.ru

The Sanitary Rules and Norms (SanPiN)

www.rospotrebnadzor.ru

Federal Service (Rosalkohol)

for

Regulation

of

the

Alcohol

Market

www.fsrar.ru

TRADE EVENTS

WEBLINK

World Food Moscow

www.world-food.ru

Golden Autumn

www.goldenautumn.ru

Prodexpo

www.expocentr.ru

Ingredients Russia

www.ingred.ru

Peterfood

www.peterfoodfair.imperiaforum.ru

Disclaimer: This publication is provided to you as a free service and is intended to flag to you market opportunities and possibilities. Use of and reliance on the information/products/technology/concepts discussed in this publication, and the suitability of these for your business is entirely at your own risk. You are advised to carry out your own independent assessment of this opportunity. The information in this publication is general; it was prepared by New Zealand Trade and Enterprise (NZTE) from publicly available and/or subscription database sources. NZTE; its officers, employees and agents accept no liability for any errors or omissions or any opinion/s expressed, and no responsibility is accepted with respect to the standing of any firm/s, company/ies or individual/s mentioned. New Zealand Trade and Enterprise is not responsible for any adverse consequences arising out of such use. You release New Zealand Trade and Enterprise from all claims arising from this publication. New Zealand Trade and Enterprise reserves the right to reuse any general market information contained in its reports.

i

Source: Deloitte & Planet Retail, Hidden Heroes Emerging Retail Markets beyond China, Link: www.planetretail.net

ii

Source: IGD 2011 Global Market and Retailer Forecast, Link: www.igd.com

iii

Source: CIA, The World Factbook, Link: www.cia.gov

iv

Source: USDA Foreign Agricultural Service, Russian Federation Exporter Guide, published December 2010

v

Source: Economist Intelligence Unit, Russia: Consumer Goods and Retail Report, published February 2011

vi

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Source: Wine Intelligence Report Russia, published December 2010

Exporter Guide | RUSSIA | Food & Beverage| June 2011


vii

Source: World Trade Atlas & International Trade Centre, Link: www.intracen.org

viii

Source: IGD Country Presentation Russia, published February 2011

ix

Source: AC Nielsen, published June 2010, Link: www.nielsen.com

x

Source: Datamonitor, Food Retail in Russia, published June 2010

xi

Source: USDA Foreign Agricultural Service, Food Service Report, published March 2011

xii

Source: USDA Foreign Agricultural Service, Russian Federation Food and Agricultural Import Regulations and Standards, published December 2010

xiii xiv

Source: Pew Global Attitudes Project, Global Attitudes Survey, published July 2009 Source: Euromonitor International, Ethical Packaged Food: Does It Really Have A Future?, published August 2010

xv

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Source: PwC, Doing business in Russia, published 2011

Exporter Guide | RUSSIA | Food & Beverage| June 2011

Market Profile Russia Food Beverage. 2011.NZTrade&Enterprise  

Market Profile Russia Food Beverage

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