Growth in Russia is in the toilet

By bne IntelliNews October 20, 2014

Ben Aris in Moscow -


Russia's ruble is tanking and economic growth has stalled. The economic news could not be much direr. But even in the worst economic climate there is one product that people will always need – toilet paper.

"For the tissue paper market there has been practically no crisis, as we are a affordable product and, after bread and milk, probably the third most essential item in the average shopping basket," Mark Reznik, CEO of Syktyvkar Tissue Group (STG), one of Russia's biggest maker of quality toilet paper, tells bne.

One of the most remarkable differences between the current crisis and the last big one in 1998 is that the Russian population has so far been largely sheltered from the pain. Russia's macroeconomic picture is bleak, but at the street level wages have continued to rise by about 10% a year since 2008, supported by the slowly shrinking working population, which has also led to record low post-Soviet unemployment rates. It has only been in the last half a year that consumer spending has started to slow and Russians became worried enough about a currency devaluation to start buying dollars again.

The toilet paper business turns out to be a case study in the microeconomic impact of the crisis on Russia's development. At this level the picture looks much more like business-as-usual, which has also supported Russian President Vladimir Putin’s sky-high popularity.

STG comprises a group of private Russian investors who bought out the Syktyvkar paper mill in 2005 in the Komi Republic, one of the regional capitals of Solzhenitsyn's Gulag Archipelago. They thoroughly modernised the 25-year-old plant and launched their flagship Veiro branded top-end two- and three-ply toilet paper into an increasingly competitive market.

By 2005 Russia's boom was well under way and many Russians had already moved beyond buying little luxuries, such as imported cigarettes or cured meats, to bigger ticket items like washing machines and cars. Changing up from Soviet-era single-ply to more luxurious products like Veiro was a no-brainer for most people. Quality toilet paper was already in high demand, yet the market still has a long way to grow. "In America the people consume about 25kg of toilet paper a year, whereas in somewhere like Germany it is 15kg. In Russia people only consume 3kg a year, but we think the market should be closer to Eastern Europe where they consumer about 8kg a year. There is a huge growth potential – the market should at least double or triple in size in the coming years," says Reznik.

From the launch in 2005, production soared from 14 tonnes of tissue a year in 2005 to 44 tonnes in 2013 – enough to make 240m rolls of toilet paper. Production increased five-fold, but revenues have gone up ten-fold, from RUB299m ($7.5m) to RUB2,419m ($60.4m) over the same period. "The increases are due to the factory's modernisation and the growth of the underlying market, which has increasing by 10-12% a year over the last decade," says Reznik.

Roll out the rolls

By 2008 STG's factory was running at close to full capacity and the company began to look at raising money to build a second facility. At first, STG tried unsuccessfully to sell shares in an IPO to raise the investment cash.

After the 2008 collapse of Lehmann Brothers, the Russian stock market index recovered from its low of about 500 in the spring of 2009 to over 2,000 by 2011, approaching its all-time high of 2,488 set in May of 2008. It seemed like a good time to float the company on the local Moscow Exchange. "We had done the paperwork and were ready to list on MosEx. There was an interest in the press and also amongst potential investors. MosEx was keen to see the IPO happen as they were promoting [small business] IPOs on its exchange," says Reznik. "The reason we didn't go public was a market collapse."

STG were hoping to raise RUB500m ($12m) from the sale of a 25% in the company, but the management pulled the IPO at the last minute as the market began to fall heavily in May 2011, as fears of a third wave of the crisis in Europe emerged. This spilled over to businesses, which cancelled investment plans and battened down the financial hatches. The economy has been just ticking over ever since. Business confidence has yet to recover and the fight in Ukraine has only made things worse; the RTS has been range bound, trading between 1,100 and 1,400. STG's decision to pull its IPO was the right one.

But the company still wanted to raise money so it hired boutique investment bank Velles Capital to find a partner. Eventually a 30% stake was sold to VIY Management, a private equity fund co-founded and managed by Andrei Yakunin (the son of Russia Railways boss Vladimir Yakunin), which also recently bought into chocolate maker French Kiss.

At the same time STG took a loan from Gazprombank and used the capital to build a second plant in the Yaroslav Oblast, a few hundred kilometres from Moscow, Russia's biggest regional toilet paper market. "It was a brownfield development, on the site of a former mechanical parts factory. But that meant it came with power, railway links, all the infrastructure you need," says Reznik. "Raising the money from the bank was not hard. They can see there is a real project from an existing company, which has revenues and collateral to put up. We could have taken the loan from anyone," says Reznik. "In the end we preffered to go with a private equity fund that also softened the leverage." 

Wiping clean the competition

However, STG is not the only group to identify toilet paper as a lucrative market. STG's Veiro rabbit finds itself vying for attention on shop shelves with Kleenex's cute Labrador puppies and Turkish producer <etsa Tissue Corp. cutsie lambs. (For obvious reasons all the toilet paper makers use cute animals for their brands, as they can’t very well put attractive bottoms on the packages.)

As of the end of last year STG has the second largest market share (7%) after SCA's 20% that trades under Zewe brand and is Europe's biggest producer of toilet paper.

The other large players include NChKBK (Naberezhnochelninsky Kartonno-bumazhny Kombinat National Enterprise), a Soviet-era factory that continues to churn out the pink pre-1991 style single-layer cheap toilet paper, but has a 12% market share. And half the market is still made up of small legacy toilet paper makers left over from the Soviet era that have done little to change their ways.

The market share of the single layer toilet paper makers is still big, but is falling as average incomes rise: in 2013 single-layer toilet paper accounted for almost half the market; two-layer paper was 45%; and only 8% was the top-of the-range three-layer paper. But Reznik says the single-layer business should shrink to about 25% by 2020 as competition increases and prices fall in the next few years.

All the main players are investing in new production, and new players such as Hayat from Turkey and Arkham Ticcuo, Ukraine's leading tissue producer, are expected to enter the Russian market shortly, eating into the share of the single-layer producers. As a result, the market will likely suffer from an oversupply for several years, says Reznik, that will peak in about 2018 and drive margins down into the low teens from about 23-24% now. "The overcapacity will kill off the small firms left over as a legacy of the old system, which account for just under half of total production now," says Reznik. "By the end of last year their share had fallen to 44% and we expect it will be 26% in 2016."

A private future

Outside competition is going to get stiffer, but the real threat to STG's margins will come from inside Russia. Russian retail is rapidly organising with the leading supermarket chains rolling out new branches without pause, as like the toilet paper makers they have also been largely unaffected by the crisis.

The main retailers are increasingly introducing "private label" brands for generic products like packets of pasta, cans of corn or toilet paper. The thing with toilet paper is that it is easy to make and no matter how many layers of paper you use or how cute your animal is, at the end of the day if the supermarket's own version meets some basic quality standards, it will always win on price: in Germany 80% of toilet paper sold is already sold as the private label of the leading supermarket chains and the range in the rest of Europe is between 30% and 60%. In Russia the share of private label is currently 10% of the total market, one of the lowest shares in Europe, but that is growing by 12% a year, says Reznik.

The private label segment will inevitably eat into STG's profit margins in the long term, but its rise also presents a new business opportunity.

The company doesn’t produce its own paper pulp, but buys the raw cellulose it needs from the market: STG uses 70% of this raw cellulose for its own tissue production, but the other 30% is already used to manufacture private label tissues for corporate customers – mainly in the hospitality and medical industries. The private label business currently accounts for 9% of STG's revenues, but Reznik expects this to rise of 25% by 2020. "We expected to retain our current market share of our own brand toilet paper, but in the long term the private label production will obviously become a more important part of the business, even though the margins there are lower," says Reznik.

“The launch of this new facility represents a key milestone for the company, which continues to demonstrate very strong results despite a challenging wider market environment,” said Dmitry Schuetzle, Managing Director of VIYM, which acquired a stake back in 2012 on behalf of a pool of international investors.  “This will not only help the company to increase its level of productivity, and to expand its annual production capacity by more than 50%, but it will also help to expand significantly its product range in a market segment that has colossal scope for further growth in Russia and the CIS.”


Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.