MOSCOW BLOG: Quality versus quantity and the cost of shoes

By bne IntelliNews October 25, 2010

Ben Aris in Moscow -

When I first arrived in Russia in 1993, everyone knew I was a foreigner - thanks to my shoes. At that time, most Russians still wore shoddy plastic slip-on shoes that had dominated Soviet foot fashion, but they have since moved rapidly up the footwear food chain.

Good shoes were amongst the very first things the newly spawned traders imported to Russia, along with the more obvious items like toilet paper and jeans. Computers and luggage were also very early arrivals after the fall of the Iron Curtain. Russia was well behind in the technology race and imported container loads of computers as soon as they could. A representative of luxury luggage company Delsey explained his arrival in the early 1990s like this: "People usually buy luggage once in their life, so we have to move fast."

After Vladimir Putin took over in 2000 things really took off, as incomes soared 10-fold, whilst the advent of consumer credit in 2001 meant that Russians could multiply their salaries by buying on the never-never. They went on a shopping binge, loading up on the huge plasma TVs and tiny mobile phones they had been lusting after for years.

The game has already moved on to the big ticket items. Car purchases have exploded, and leading car-dealership Rolf (a $6bn company) says sales have already recovered to pre-crisis levels. More recently, the volume of mortgages taken out has been doubling every month since the summer.

Thanks to the crisis, investor attention has turned increasingly to the emerging markets, with China attracting most of it. That's not without justification; China beats all comers on a simple like-for-like comparison. Russia is the third-richest country in the world with $480bn of cash in the central bank, but this pales against China's $2.5 trillion. But what really catches business people's attention is the population of 1.3bn (Russia has just 142m people) and GDP growth of 10% per year (Russia will put in about 4.5% this year).

However, this broad brushstroke comparison misses a crucial point: China has the most people, but how many are actually consumers?

Behind the numbers

Consider some different figures: Russia's middle class makes up 68% of the population, according to investment bank Troika Dialog (a high estimate, according to other analysts), whereas China's constitutes just 13%. Russia's per-capital income is around $12,000 per year, whereas China's is around $4,000. The poverty rate in Russia is 13% (or about 18.5m people), whereas poverty in China is a massive 50% (or 600m people), according to some estimates.

The exact percentages of the middle class and poverty-stricken are disputed, but irrelevant (for our purposes at least). The point is that Russia clearly has a large consumer class on a par with China's, but more importantly, the growth of Russia's per-capita income is well over two to three times faster than its closest rival (Brazil) and streets ahead of China and India.

In simpler terms: Russia is an industrialised country of well educated people that is rapidly converging with its European peers, whereas China (as well as India, and to a lesser extent Brazil) is a largely agricultural society beset by massive poverty. The reason China and India are growing so fast now is that they are still at the very beginning of the catch-up process, whereas Russia is in the middle of it: the majority of Chinese are still wearing flip flops, while most Russians are trying to buy a new apartment.

Of course, China's size should mean it will win out in the long run, as most of those farmers will become phone-using, car-driving, TV-watching city dwellers eventually. Yet for the moment, if you want to sell something more expensive than shoes, Russia's relatively wealthy middle class can match or beat China. It will take generations for the Chinese to close this income gap - the average Russian will still be twice as rich as the average Chinese person in 2050, according to the World Bank.

Whilst commentators are focused on the macroeconomic numbers coming out of the emerging world, for business it's the microeconomic numbers that are important. What should really shock is that the Russian consumers are already starting to compete with their counterparts in the West.

The Moscow flagship stores of Sweden's furniture maker Ikea and French supermarket chain Auchan are already both the highest grossing and most profitable for their parent companies' in the world, according to AC Nielsen. Looking at the other end of the scale, the US now has more people living in poverty than Russia: poverty in Russia fell to 13.7% of the population as of June and is on a downward trend, while 14.3% were living in poverty in the US at the end of 2009, and this number is still rising. If you were a businessman, in which market would you invest?

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