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Russian food and beverage industry survey. Factors affecting industry development. - EY - Russia

Russian food and beverage industry surveyFactors affecting industry development

Principal adverse factors affecting companies

Chief obstacles to expansion of a company's Activities

Changes in distribution system

Main methods of product transportation

Marketing budget in 2010

Main difficulties associated with VAT administration

A shortage of qualified personnel is another obstacle to business development, as indicated by 35% of survey participants.

In addition to State policies, our respondents also indicated other factors which may have affected the activities of food companies.

Changes in customer preferences

The economic crisis caused changes in customer preferences, which inevitably had an impact on the activities of food and beverage companies.

47% of respondents indicated that customer demand in such segments as alcoholic drinks, sauces, seasonings and canned foods shifted in favour of budget products as a result of the decrease in people’s real disposable income.

At the same time, 43% of survey participants indicated that consumers had begun to make more conscious choices and buy higher-quality and healthier products.

Adverse factors affecting industry development

The most serious adverse factor to affect the industry in 2010, selected by 68% of those surveyed, was the growth in prices for raw materials and other materials, which occurred as a result of the severe drought.

The second most negative factor, according to 55% of those surveyed, was the significant influence of trading networks. There were a number of cases on the Russian market in 2010 of large chains buying smaller competitors, resulting in greater consolidation within the industry and an increase in the amount of pressure exerted by networks on manufacturers.

Principal adverse factors affecting companies

A shortage of qualified personnel is another obstacle to business development, as indicated by 35% of survey participants. Low salary levels and low job prestige lead to a shortage of staff. Problems affecting the training of qualified personnel include inadequate financing of higher education establishments which train specialists for enterprises of the food and beverage industry.

Chief obstacles to expansion of a company's Activities

Distribution system

57% of manufacturers surveyed find it equally beneficial to sell products to retail networks and to large distributors.

For Russian and foreign companies which do not have a significant market share in Russia (23% of survey participants) it is more convenient to work with retail networks in view of the lower production and sales volumes.

In this respect, more than 50% of the annual sales volume of 30% of participants in the study is achieved using the enterprises’ own distribution networks. A further 15% of those surveyed indicated that between 26% and 50% of the sales volume is attributable to their own distribution network.

64% of companies are happy with their existing distribution system and do not plan to change it in the near future. Most of those companies do not have their own sales channels and use the services of outside distributors. Other companies which primarily used their own sales channels at the time of the survey plan to increase the proportion of their own distributors in the future (70% of respondents).

Changes in distribution system

Only 20% of those surveyed plan to increase the proportion of outside distributors. These include small Russian companies and subsidiaries of foreign companies which generally use their own sales channels.

Transportation methods

Transportation is one of the intermediate but important stages in the process of the sale of products to the end consumer. 52% of companies surveyed deliver products using their own transport subdivision. At the same time, virtually all survey participants (93%) hire specialized transport companies to deliver products.

Main methods of product transportation

Companies may resort to using the services of outside organizations where there are significant volumes of products to be shipped to a customer and an insufficient quantity of vehicles.

Co-Operation with retail networks

The manufacture of products under private retail labels is one of the most effective forms of co-operation. 61% of survey participants manufacture products under private labels – 39% using retail network labels and a further 21% using labels of other manufacturers.

For 56% of companies this is a worthwhile line of activity. In particular, according to the view expressed by one of the survey participants, manufacturing under private labels enables the achievement of full capacity utilization, the strengthening of partnerships with retail networks and the diversification of a company’s own product line at no extra cost.

Marketing expenses

The need to promote products and preserve and maintain current market positions makes it essential for companies to have a marketing budget, the amount of which is determined by an organization’s objectives for a planned period.

Marketing budget in 2010

In 2010 7% of surveyed companies were able to allocate less than 1% of annual gross revenue to the promotion of their own products, while 38% had a marketing budget that was not in excess of 3% of annual gross revenue. A small marketing budget indicates that the companies concerned do not have a strategy aimed at the aggressive promotion of their own labels.

52% of survey participants have a significant marketing budget, amounting to more than 3% of their annual revenue. This shows that the companies in question have policies that are actively aimed at strengthening their own labels. This course is primarily pursued by subsidiaries of major international players whose development strategy envisages the further strengthening of market positions.

VAT administration

Tax legislation and tax administration also have an impact on the financial position of enterprises.

67% of respondents experience difficulties in collecting the primary documents needed for VAT reimbursement, which has a negative effect on the level of companies’ working capital.

Main difficulties associated with VAT administration

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