Conserving value in a maturing Russian market
Russia remains attractive for consumer products companies, but executives need to take a disruptive approach to all aspects of the business to secure long-term profitable growth.
In the brand new order, the Russian market is changing and maturing in many ways. Companies are positive about the future in Russia, but “business as usual” is no longer enough. New thinking and a step change in the way business is conducted are required.
In July 2013, we hosted an industry roundtable for country leaders of some of the world’s largest consumer products companies operating in Russia. A number of key themes emerged:
- Most executives in Russia faced a slowdown in the first half of 2013, and have been caught in a “budget trap.”
- Managing global HQ expectations remains challenging. Facing sluggish growth in developed markets, global HQs are looking to squeeze additional profit from Russia, which is now tougher as the market slows and costs increase.
- Retailers are pursuing volume growth on an unprecedented scale. On-shelf availability is becoming an issue in some categories because of the increase in promotion.
- Executives are under pressure to adapt to the changing needs of the Russian consumer, highlighting the split of the middle class and differences across regions.
- Executives need to address the basics by focusing on portfolio, pricing and distribution. They need to be more granular in understanding the consumer and take different approaches to their business.
Executives need to work harder and smarter to compete effectively. Over the last 18 months, they have made some changes to their business. However, the environment has become even tougher in the last six months. Executives now recognize the need to take a different, more disruptive approach to all business aspects.
In addressing these issues, executives are asking themselves a key question: “How do you manage the short-term demands on the business without damaging its long-term future?”
Finding the answer will be critical to long-term success.
- Russian GDP is trending downward and will probably finish 2013 at about 2.3% to 2.6%. Next year, we expect moderate improvement to about 3.2%, presuming stable global outlook.
- Inflation dipped under 7% in June. We expect to see inflation at 5.9% in December this year and at about 5.7% by the end of 2014.
- Retail sales are running at 3.5% growth, and we expect an average of about 3.8% this year and over 4% next year.
- Nominal wages were among the highest in the world six months ago at 15% but have now fallen to about 11%.
- Unemployment stayed close to record-low levels at 5.4% in June.
- Since 2011, consumer confidence indicators in Russia have recovered to about -6, which means Russians are among the most “confident” in Europe.
- The ruble bounced down this summer, and will probably stay in a softer corridor of about 32.2 to 32.8 to the US dollar for the next 6 to 8 months. However, it could come under more downward pressure in the medium term as shale gas developments kick in.
- The oil price looks set to average US$98 to US$104 per barrel over the next 12 to 24 months, which should ensure that Russian GDP stays within the parameters noted above.
- Russia’s budget deficit last year was -0.02% and is running currently at -0.2%.
- How do you manage demands from global HQ to grow volumes and profits without damaging your future?
- The next phase of growth is the regions — do you centralize or decentralize?
- How can we develop a win/win relationship with retailers and avoid potential brand value destruction from excessive promotional activity?
- Should we fight the trend toward private label or participate with retailers?
- Where can we find the motivated and skilled workforce with the right mindset that the business needs?
- Should we build in-house data analytic capability to deepen our understanding of the maturing consumer?