Russia XXL

By bne IntelliNews February 29, 2012

Ben Aris and Anna Krachenko in Moscow -

If there existed an annual European Consumer Olympiad, then from this year forward Russia would be winning gold medals (or perhaps golden toasters would be more appropriate) for having the largest markets on the continent.

Russian incomes have risen 14-fold over the last decade and sales in virtually all consumer categories have followed suit. As the economy recovers, Russia is now the 11th largest consumer market in the world, according to Euromonitor International, and is already the second or third largest in Europe in most categories. "Russia has become a middle-class country," Citigroup's chief Russian strategist, Kingsmill Bond, says confidently. "Rising wealth levels over the last decade have turned Russia into a middle-class country for arguably the first time in its history. We expect this fact increasingly to be reflected in its politics, and see the current [democracy] protests as the start of a long process of change."

Bond estimates Russia's middle class is now over 60% of the population. Other surveys put that number a bit lower, but the consensus is still around the 50% mark and half of Russia's population see themselves as middle class, according to a recent survey. Key to this is that income per capita now stands at $900 per month (in purchasing power parity), which is about half the Western European average, but more evenly distributed than in many other countries - the top three deciles all have incomes of over $1,000 per month.

Over the past decade, retail trade in Russia has grown at a blistering pace, increasing six-fold to reach a total value of $621bn in 2011, according to the Federal Statistics Service, and creating 5m new jobs in the process. And retail sales are still growing strongly, rising 7.2% in 2011 versus 6.3% in 2010. That compares favourably with retail sales in Germany, Europe's biggest consumer market, which grew by just 1.1% and 1.3% in 2010 and 2011.

Of food and phones

Food retailers contributed about half to Russia's $621bn total turnover, but the launch of modern retail formats has been a catalyst for the transformation of other segments of the consumer market.

The mobile phone market is one of the great successes of the Russian reform story and the country became the largest mobile market in Europe way back in 2004. But from this year on, Russia is expected to start conquering consumer category after consumer category. In 2011, Russia became the largest market for milk and children's goods, and this year it is due to become the biggest dairy market. In 2013, the country will take the top spot for advertising and apparel.

No wonder, then, that Russia has seen a spate of mega-acquisitions by multinationals from 2010. And experts predict there will be more as international companies wake up to the shopping power of the Russian consumer. By the time Prime Minister Vladimir Putin finally quits politics in 2020 (assuming two more stints as president), Russia should be the biggest consumer market in Europe full stop.

The reasons for the frenetic growth are simple. The paucity of goods available during communism means that demand in every product category - from jeans, to phones, to cars, and so on - is still nowhere near being met. Most consumer products simply didn't exist before 1991 and Russians haven't yet finished acquiring them after imports began in the 1990s: a survey by ACNielsen last year found that 71% of Russians would spend any spare cash against 3% who said they would save or invest it. Second, with the banking market still relatively underdeveloped, Russians have almost no debt to speak of. This makes some 70% of their income disposable against an average of 40% in Europe, according to German market research company GFK.

Combine high disposable incomes with rising salaries, and over the last few years the average Russian shopper enjoys almost the same shopping power as the average Western European: the disposable share of Russia's $15,000 per-capita income (on a Phoenix Capital basis) is $10,500, compared with Europe's per-capita income of $32,700, of which $13,080 is disposable.

Back in 1999 on the eve of his first stint as president, the then-prime minister Vladimir Putin said Russia's economy could overtake that of Portugal by 2015 if it grew at an average rate of 8% a year. Today, Putin is again prime minister and again on the verge of becoming president, and Russia's economy has long since overhauled Portugal to become the fifth largest in Europe, and is now fast closing the gap on Germany, Europe's largest.


Mobile mania

Mobile phones: biggest since 2004, worth annual $30bn

Telecommunications reform is the great unsung success of the Putin administration. Shortly after he took office for the first time at the turn of the millennium, Putin sponsored the so-called Gref plan, supervised by the then-economy minister German Gref, and the first set-piece reform was a makeover of Russia's pathetic telecom sector. The regional companies were broken up and redistributed into seven "super-regions", or okrugi , and the mobile phone sector full liberalised. As the fixed-line system was still a shambles, mobile phone companies launched into a market of ravenous demand and VimpelCom (which operates the Beeline brand) went into profit in its first year of commercial operation in 1994. Since then, the growth of the sector has been exponential. VimpelCom has been joined by two more national players, MTS and Megafon, and customers have gone from a few well-heeled Mafioso willing to pay the $5,000 a month subscription fee at the start, to pretty much everyone in the country today. Mobile phone penetration was 215% at the end of 2011 (equivalent to over 300m phones), making Russia's mobile market nearly four times bigger than that of Italy. Actually, investment bank Troika Dialog and research firm ITU say Russia overtook Germany to become the largest mobile market back in 2004, when the number of subscribers doubled from 36.5m to 74.4m. By 2011, total revenue had topped $30bn and profits continue to grow strongly as the various operators add more valueadded services like mobile TV and email. Conversely, the biggest Western European mobile markets are all reaching saturation, analysts say.


Cigarettes: biggest from 2015, worth $20bn

Nothing epitomises Russia's rapid transformation to a free market better than the red packs of Marlboro stacked in the kiosks on nearly every street corner throughout the country. The immediate pleasure of a quality smoke and the relatively low price of cigarettes meant Russians almost universally abandoned the bitter Soviet products like the Belamorskaya papirosa (an unfiltered, smelly black tobacco cigarette) or more upmarket brands like Apollo from the word go. Today, Russia is the second largest tobacco market in the world after China in terms of the number of smokers. Russians are the heaviest smokers in Europe: 60% of men say they smoke on a daily basis, putting Russia far ahead of the Greeks where 40% of men say they smoke, according to the World Health Organization. Sales grew exponentially following the fall of the Iron Curtain and rose by 31.6% over the last decade to 382bn sticks by 2009, according to Euromonitor International. However, Russia is still not the most valuable tobacco market in Europe and at $14.3bn in 2010, according to, it still lags the UK where the total value of the tobacco market was $19.7bn in 2010. The reason for this discrepancy is the huge difference in prices: a pack of smokes in Moscow costs about $1 whereas the same pack in London is about $9.50. Russian sales probably peaked in 2008 and could start falling, although revenues should continue to rise. Despite their famous disrespect for a healthy lifestyle, Russia acceded to the WHO Convention on Tobacco in 2008 and has started to introduce restrictions and higher duties on tobacco.

Milking it

Milk: biggest since 2011, worth $14.6bn

In December 2010, PepsiCo announced it would pay $3.8bn for control of dairy products and juice maker Wimm-Bill-Dann and in one stroke became the biggest food-and-beverage business in Russia. It was a savvy move, as whatever else happens to the economy, people will always drink milk. Russia became the biggest milk market in Europe last year in terms of both volume and value, or 31.8m tonnes and $14.6bn respectively, according to the US Food and Drug Administration. The next biggest market is now Germany with 29.8m tonnes worth $10.4bn. And there is still a lot of room to grow: demand for milk currently exceeds supply and Russia imported 7m tonnes of milk in 2011 and is forecast to have to import 10m tonnes in 2012, according to 3A Business Consulting.

Big cheese

Dairy (ex milk): biggest from 2015, worth $12.1bn

Food is still king when it comes to shopping in Russia, making up a much larger share of the checkout bill than in the West. "Food retail is the biggest and the fastest growing segment in Russian retail," says PMR retail analyst Katarzyna Twardzik. "And on this score Russia can already compete with the leading countries of Western Europe." Russians are slowly going upmarket, swapping the traditional kolbasa (sausage) for prosciutto on the kitchen table. Despite the progress, basic foodstuffs still dominate the business and dairy is the most important product group, prompting leading US food manufacturer PepsiCo to spend $3.8bn to acquire Wimm-Bill-Dann in 2011 to become the biggest food-and-beverage business in Russia. Russian dairy retail is already the third biggest market in Europe, but is also the fastest growing at 8% a year. The total volume of sales is expected to reach 4.7m tonnes worth about $9.3bn by the end of 2012. The number of cows restricts the tonnage of raw milk production, but the value of sales should continue to rise as consumers buy more puddings, yogurts and digestion- aiding drinks, according to KPMG. By 2015, these segments will make Russia the biggest dairy market in Europe worth $12.1bn-$13.4bn, according to KPMG.


Chocolate: biggest from 2022, worth $15.1bn

After dairy, chocolate is the second fastest growing food and beverage item and Russia is already the fourth biggest chocolate market in Europe after Switzerland, Norway and Germany. Sales are expected to rise 11% in terms of value this year from $4.9bn in 2010, and by 2015 hit $7.4bn, or about 12% of global sales. The biggest danger to this growth is from competition from the sale of crisps and other nonchocolate snack alternatives, according to Euromonitor. This is one product group title Russia will struggle to capture: the 4.1 kilograms of chocolate per person that Russians eat a year is still way behind market leader Germany, which consumes a massive 11.1 kg per person a year worth about $16.8bn, although sales are expected to fall by 2% a year over the next five years, according to Euromonitor. If these trends continue, then it would take until 2022 for Russia to overtake Germany when the market would be worth $15.1bn, according to bne estimates.


Clothes, footwear and accessories: biggest from 2013, worth $72.3bn

Clothes were among the very first arrivals after the collapse of communism; the queues at Rifle, Russia's first dedicated jeans shop just round the corner from the Bolshoi Theatre in Moscow, used to be several hours long when it opened its doors at the start of the 1990s. Unsurprisingly, with an almost non-existent clothes, footwear and accessories (CFA) sector, Russia imports most of these products to meet the voracious demand and the branded stores that line Tverskaya, Moscow's main thoroughfare, are amongst the highest earning in the world on a square-metre basis. Today, CFA is big business - it's second to food retail, but twice the size of beer and mobile phones, as Russians love to look smart if they can afford it. And CFA will only grow as the share of food in the average shopping basket is expected to continue falling from 29% in 2011 to 26% by 2015, leaving Russians with more to spend on clothes. The fastest growth is in the mid-value range of goods (sports and casual wear) and if the market maintains its current growth rate, Russia will overtake Germany, the biggest market in Europe, in two years' time, reckons the consultancy PMR. The value of this segment was RUB1.704 trillion ($56.8bn) in 2010 and is expected to continue growing at about 10% a year to reach RUB2.263 trillion ($72.3bn) by the end of 2013.

Child's play

Children's goods: biggest since 2011, worth $11.3bn

In one subset of CFA, children's wear, Russia already overtook the rest of Europe last year. While the overall size of the population continues to shrink (albeit more slowly than in the 1990s), the fertility rate has recovered and began to rise in 2009, according to the state statistics agency Rosstat. Putin's economic and political stability has provided Russians with a future and couples that put off the decision for a decade are taking the plunge and starting families. A wave of post-Soviet babies has fed through to the children's good sector and sales of baby clothes, baby food, toys and accessories have exploded as chains like Detski Mir (Children's World) stepped in to fill the niche. The toys sub-sector is probably the most promising in terms of business development, with the market expanding by 76% over the last five years, driven by French and German products. Last year, Moscow took a 25% share of sales catering to the country's 22m children under the age of 14, says PMR's Twardzik. The value of the children's goods market should have overtaken that of Germany, formerly the biggest market, last year to reach $11.3bn, according to the RBC Market Research consultancy. By contrast, Germany posted $10.5bn of sales in 2009, but is only growing by a compound annual growth rate (CAGR) of 1.5%, while the UK market grew by 2.5% in the same period, and both Italy and Spain are in decline, with -0.5% and -4.2% respectively.

Made up

Cosmetics: biggest from 2019, worth $14.7bn

Russia is the fourth fastest growing cosmetics and toiletries market in the world, with sales of $11.9bn in 2011 and forecasted sales of $13bn for 2012, against Germany, Europe's largest market, with sales of $16.3 in 2011. "Consumer spending on cosmetics in Russia is growing more rapidly than in Western Europe. This has created a booming cosmetics and beauty industry, with salons featuring in most areas of Moscow. There are 52m Russian women between the age of 15 and 64 who are spending three-times as much on perfumery and cosmetics as they did in 1995," say analysts from Euromonitor. The biggest sub-sector is make-up, which is already a $1.6bn a year business. Russian women spend an average of 12% of their income on make-up, which is twice as much as their peers in the US or Western Europe, says research firm Comcon. According to the Russian perfumery and cosmetic association, the market is due to grow at an average 6% a year in 2012-2017, while Germany is expected to grow by about 1.5%. This means Russia should become the largest European market in about 2019 with $14.7bn of sales, according to bne estimates.


Advertising: biggest from 2013, worth $4.5bn

All this mass market shopping has naturally fed through to the advertising business, which is dominated by the multinationals flogging food, soaps and shampoos like anywhere else on the continent. Russia's total adverting spend in 2010 was $4.2bn - about half of that in Western Europe in terms of share of GDP - and has been growing by 25-30% a year in the last few years. The crisis took the edge off the ballistic expansion; the total ad spend in Russia fell 18% in ruble terms in 2008 and by more than 40% in dollar terms, but it had recovered all the ground lost by the end of 2011, says Anton Kudryashov, former CEO of CTC, Russia's biggest commercial broadcaster. TV advertising typically accounts for a third of the total ad spend in the West, but in Russia half of every ruble spent on advertising goes on TV ads. "In terms of ad spend, Russia is already the ninth biggest market in the world, the fifth largest in Europe, and if current growth continues, it will be the largest in Europe as soon as 2013," predicts Kudryashov, who estimates the market's value will be worth $4.5bn by then.

Big beer

Beer: biggest from 2014, worth $30.3bn

Beer is another well-developed sector with heavy foreign investment and Russia is already the second largest market in Europe: Danish beer-maker Carlsberg already relies on Russia for 40% of its revenue. Russians are not Europe's biggest beer drinkers per head, a distinction claimed by the Czechs, who consume a whopping 158.6 litres per person a year, according to Euromonitor. Still, as living standards improve, Russians are drinking less vodka and switching to less potent tipples like beer. (Beer is already the most popular drink in the more progressive northern capital of St Petersburg at 95 litres a year per person). Overall, Russia ranks well down the beer drinkers' list at number 28 in the world, consuming a mere 58.9 litres a year per person. It will be a few years before Russia overtakes Germany as Europe's largest beer market. The crisis hit the sector hard and production fell in 2010 by 5.1%, according to official data, although in terms of value it still managed to put in a gain of 16% to RUB598bn ($19.9bn) that year. That still leaves a biggish gap with Germany where beer sales were worth $25.4bn in 2011, according to Euromonitor, but Germany's market is only growing at a CAGR of 3%. If beer drinking in Russia continues to gain popularity at its current rate, then the country should overtake Germany to become the biggest beer market in Europe as soon as 2014, when it's worth $30.3bn.

Little water, big market

Vodka: biggest from the ninth century, worth $18bn in 2011

Unsurprisingly, Russia has been the biggest market in the world for vodka for over a thousand years since they invented the stuff in the ninth century. Today, the market is worth $18bn a year against the US' $12bn of sales in 2011, the second largest market. Unlike most of Russia's other retail products, vodka is one of the few that is actually seeing its sales shrink as the government finally introduces western-style duty. Vodka consumption has already tumbled from an astronomical 27 litres per head in 2005 to 11.9 litres in 2011, and is expected to fall further to 8 litres in 2015, according to Renaissance Capital's Natasha Zagvozdina. "We expect a 10% year-on-year vodka consumption decline driven by a 30% excise tax hike. This is a downgrade from our previous forecast of a 5.6% consumption decline in 2012," says Zagvozdina. "However, we forecast the market's value, net of tax, to grow 3.6% on year in ruble terms, and to provide higher margins for producers, which should transfer excise tax to consumers and add some additional price increase on top of it." The amount of vodka that Russians drink will fall, but the market's value will continue to rise as drinkers switch to the "good stuff": total sales are expected to reach $21bn in 2013 and $23bn in 2015, or a CAGR of 6.6%.


Consumer electronics: biggest from 2015, worth $85.7bn

iPads and iPhones are everywhere in Moscow. They have become a status symbol for a post-Soviet generation that is now moving into management and taking over the running of the country from their Soviet-educated parents. Germany remains the largest Western European market for consumer electronics and had a good year in 2011 after sales rose 8% to top ¤47bn ($60.2bn). But Russia is already in second place, even if it suffered a bad few years during the crisis: according to data published by GFK-Russia, the size of the combined consumer electronics and household appliances markets in Russia was $40.6bn in 2008, but that halved to $21.5bn in 2010, largely due to a freeze on consumer credit by the banks. However, in 2011 the market was recovering rapidly and sales should return to their pre-crisis highs by the end of this year. If Russia returns to its previous pace of growth and the rest of the world maintains its average of 5%, then Russia will become the biggest consumer electronics market in Europe by 2015, worth $85.7bn, according to bne estimates.

Very driven

Cars: biggest from 2015, worth $80.3bn

Nothing says prosperity like having a luxury car and most Russians are desperate to exchange their domestically produced jalopies for a foreign brand. Since the advent of consumer credit in 2001, car sales have boomed and Russia briefly became the biggest car market in Europe in the middle of 2008 when it put its nose in front of market leader Germany by selling 1.65m cars against Germany's 1.6m in the first six months of the year. But the crisis killed the business (the freeze on credit by banks made new cars unaffordable) and sales contracted to 1.4m units for the whole of 2009 worth $28.1bn. As the recovery gathers momentum, Russian car sales have bounced back strongly, up 39% in 2011, according to the Association of European Businesses. There is still clearly plenty of growing room: in Russia there were 244 cars per 1,000 people in 2010, against Germany's 515, France's 497 and the UK's 494. As a result, sales in Russia are expected to grow at 8-14% through to 2020, according to Boston Consulting Group Forecasts for the size of the market and the speed of its development vary, but within a fairly narrow band. The director of the Economic Development Ministry, Dmitry Levchenkov, forecasts Russia will sell 3.5m units a year by 2018, while the Association of European Business and director of the automotive and agricultural machinery department at Russia's Ministry of Industry and Trade, who is in charge of investment into the automotive sector, both reckon Russia is on course to sell 4m units by 2015, which would make Russia the largest car market in Europe.

Online, on fire

e-commerce: biggest from 2019, worth $103.2bn

Russia overtook Germany as having the greatest number of those surfing the web in Europe in 2011 and the explosion in internet usage is driving e-commerce. Russia is well suited to online shopping, as websites are the simplest and cheapest way for retailers based in Moscow to reach the far corners of the world's biggest country. Catalogue sales were already booming based on the same principle. In 2009, Russia was already the second largest e-commerce market in Europe with $19bn in sales, but it still has some catching up to do with Germany, the European leader, which saw $27.5bn of sales in 2011, according to Germany's e-commerce market is growing at 17% a year, while Russia's has been growing by around 22-30% a year. If, as expected, the growth of Russia's market accelerates to 30% as things like credit cards become more widely available, then Russia will overtake Germany as soon as 2019 when the market will be worth $103.2bn, according to bne estimates.

Home buyers

Mortgages: worth $47.5bn in 2011

Most of Russia's consumer sectors are developing fast and in some cases are already mature, however, financial services are still in their infancy. The introduction of express and unsecured consumer loans by Russky Standart got the ball rolling in 2001 and such credit was used to pay for a third of all retail sales during the boom year of 2008. Since then, retail credit has dipped, but still accounted for 16% of all sales in 2010. In the last few years, a new financial product has come onto the market and, thanks to the state's support, is growing exponentially: mortgages. With an 80% owner/occupier ratio, Russia has more homeowners than any other country in Europe by a long chalk, thanks to the giveaway of property following the collapse of the Soviet Union. Today, that real estate is worth some $3 trillion, according to bne estimates, or a bit less than twice the entire value of the economy. But without a functioning mortgage market, this money is stuck in concrete. Russia's mortgage sector first appeared in 2003, but since the summer of 2010 it has been doubling in size every 12 months or so. The number of outstanding mortgage contracts grew 80% to 449,210 between January and November 2011, according to the state mortgage agency (AIZhK). This year, banks are expected to sign contracts to take the total up to between 550,000 and 680,000. And AIZhK predicts the size of the market will continue to climb to reach 741,000 contracts by 2015 and then 868,000 by 2020, which makes Russia among the fastest growing mortgage markets in Europe. Still, home buying is in its infancy: the total Russian mortgage portfolio is estimated to be $47.5bn as of December 1, according to the Central Bank of Russia, compared with the UK with $1.871 trillion as of the third quarter of 2011, according to the UK's Financial Services Authority. China's mortgage business is already four times bigger than Russia's and growing just as fast. Despite the fast growth, it will be another generation before Russia starts catching up with the rest of Europe on this score.

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