Growing under pressure in Russia

Growing under pressure in Russia

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For Russia, the global economic downturn provided a reality check.

Before the crisis, double-digit growthmeant large profits despite some inefficiencies.

Today, as Russia emerges from the downturn and is becoming a more mature market in better shape than many, consumer products companies are dealing with the pressures facing most businesses in most places. These include:

  • Pressure on margins, on distribution and on trade policies
  • Pressure from consumers, from government and from head offices

There is a growing sense of clarity about the environment and about changes in consumer and customer behavior. Companies recognize that the shifts that took place in the downturn are now hard-wired.

Consumers are demanding more value for money from both premium and value-end brands, and more companies are trying to deliver it, which is increasing competition and squeezing margins.

But while consumer products companies in Russia still face enormous challenges, they are much more certain about what it takes to meet those challenges and to succeed in this complex marketplace.

In December 2012, we hosted an industry roundtable with Dr. Danny Thorniley, a leading authority on Russia and Eastern Europe, for country leaders of some of the world’s largest consumer products companies operating in Russia. A number of key themes emerged:

  • Most executives reported a good performance in 2012 in Russia. Both the premium and value-ends of the market are doing particularly well. Ukraine is difficult for some.
  • Managing global HQ expectations remains challenging. As one executive explained, “the top line expectations have tempered, but the bottom-line expectations have strengthened.” However, some executives felt that there was a sense of shared responsibility for results with global HQ as Russia becomes more significant.
  • Executives suggested that focusing on their corporate brand, work environment and flexibility was increasingly important to attract and retain talent. The sector expectation is that base salaries will track beneath inflation with the opportunity for companies to top up through bonus realization.
  • Russia has one of the most complex routes to market. It is creating pressure on resources and increasing costs and risks.
  • Traditional media remains important, but spending in some categories is declining as companies face profit pressures and shift spend to digital. One executive highlighted “bottom-line pressure could compromise category growth if brand-building investment declines as a result.” Irrespective of medium, creating an “emotional bond” with the consumer is paramount.
  • Executives agreed that the pace of accelerating sustainability initiatives will be slow due to relatively poor infrastructure and perceived benefit from consumers.

Despite the challenges, Russia still has a starring role in most companies’ revenue streams. There is still money to be made here, but businesses have to work harder, innovate and accept that the era of big margins with little effort is over.

At the meeting we sensed cautious optimism in terms of future performance, but also a nervousness that global HQ threatens to sacrifice their golden goose by failing to appreciate the depth of the challenges in Russia.

At meetings like this and in our day-to-day client work, two key questions remain:

  • How can we increase margins in this increasingly costly and complex market?
  • How can we reset unrealistic bottom-line expectations from global HQ?

Finding the right balance between realistic expectations and unrealistic, risky business will require managers near and far to develop a new understanding of the new Russia.

Economic snapshot 1

  • The Russian economy is slowing, but not as much as other markets.
  • Global trends finally brought down Russian exports, which were negative in four of the last six months as recent as January 2013.
  • In the medium and long term, shale gas could be a threat to the Russian economy.
  • The rate of inflation slowed in October/November, and year-end inflation finished at 6.6%.
  • Unemployment has stabilized at a low rate (5.3%), and many towns report labor shortages.
  • The ruble outlook is stable with moderate risks on both the up and down sides.
  • The 2012 harvest disappointed at about 71 million tons, down from the bumper crop of 2011.
  • Ukraine experienced very poor third and fourth quarters economically, and more western companies report deteriorating business.
  • The drop in estimates for GDP growth in Ukraine for this year has been very sharp, and 2013 will continue to be challenging.
Questions executives are asking
  • How can we develop a "win/win" relationship with retailers and distributors?
  • Do we have the right distribution model for our growing business?
  • Do we need to build a unique route to market to overcome market fragmentation?
  • What role should digital play in the marketing mix, and how quickly should we adopt it?
  • Where can we afford to cut costs without causing long-term damage?
  • How can we convince global HQ to have more realistic expectations on our profitability prospects?
  • Are the Government's pro-business sentiments genuine, and will its good intentions deliver the expected outcomes?
  • Is there anything we can learn from the recession? Is contingency planning worth the investment in time and money?

1 All facts in this section of the report are sourced from DT Global Business Consulting GmBH

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, the views should be seen in the context of the time they were expressed.