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Selling Consumer Goods in Russia

NIS Consumer Products Report
February 6, 1996
Produced by:
U.S. & Foreign Commercial Service
15 Novinsky Bulvar, Moscow, Russia
Despite its local challenges, Russia remains one of the world's last unexplored frontiers for the sales of consumer goods. A number of Western consumer goods companies -- Master Foods, Proctor and Gamble, Coca-Cola, and Pepsi, to name the obvious ones -- have penetrated the Russia market outside its major cities, and found the Russian consumer market to be lucrative yet elusive. Tables at the end of this discussion provide basic data on the Russian consumer.

Russia versus America -- Some Contrasts

Consumer goods distributors in America expect well-defined distribution channels, relentless competition, and million dollar advertising budgets. Distributors in Russia, by contrast, encounter primitive, erratic distribution channels, sporadic competition, and word-of-month advertising. To sell in Russia is to work in a system that differs greatly from what is seen in the West. Although Russia boasts of large numbers of gastronome and increasing numbers of joint venture or Western-style stores in major cities, most consumer goods distribution -- particularly outside of Moscow and St. Petersburg -- takes place through less formal channels. Penetrating these channels is often the key to success or failure for an American operating in the Russian market.

Goods Distribution under the Soviets

In the old Soviet system, goods were to be distributed "to each, according to his need." Profit was the surplus value extracted from the worker by the capitalist, and the middleman (or "posrednik") was viewed as a unnecessary evil. The Soviets tried to abolish profit by regulating prices. Five year plans and government departments set targets for industrial production. The government then distributed these goods at fixed prices in state stores. The State operated several types of store, and each major city had at least one or two of each. Gastronoms distributed basic foodstuffs. Other stores stockpiled domestic products for the home. Small factories made sausage, or candy, and then market it in a small nearby shop. In very large cities, enormous department stores attempted to sell almost everything.

In Soviet-era Russia, when demand exceeded supply, lines in front of stores got longer, and people at the end of the line did without. Goods went to those customers willing to wait in line longest, with the best informal connections in a store or factory, or best able to push to the head of the line. To survive, the Russia consumer learned to buy anything available, hoard it, then barter with contacts and neighbors for other needed goods. The legacy of Soviet Russia remains in the present behavior of many Russia consumers.

The Gastronom: A Soviet Era Legacy

The Soviet-era gastronom, still in operation today, illustrates the Soviet system in action. During this commercial officer's first week in Moscow, he first tried shopping in a gastronome across the street from his apartment. The gastronome was a large, box-shaped building with a battered metal door. The floor was covered with mud, and the walls needed painting and washing. The store had seven counters, each attended by a middle-aged Russian woman dressed in a white smock. The cheese or meat at each counter might be wrapped in a thin brown paper, or simply left lying in the open air. Most customers, middle-aged or older Russians, were bundled up in thick coats and carried aged plastic or paper bags.

To buy something in the gastronom, the customer first goes to a counter to identify the price of the desired good. Then, he waits in a long line at a cashier's window to buy receipts, a small slip of paper with the price of each desired good. Next, the shopper must wait in the line for each product he wants to buy -- first, the egg line, then the bread line, then the meat line. In Soviet times, prices and availability were both low -- though this has changed markedly in the last three years.

The Informal Market under the Soviets

A significant informal system supplemented the formal Soviet system. The formal system relied on state plans, not market forces. The informal system, more or less tolerated depending on the ideological strictness of the current regime, provided some market adjustment to the formal system. Frustrated by state stores, Russians would quietly make their own products, obtain goods from overseas, or divert factory or collective farm production. Russians would buy and sell these semi-black market goods at farmer's markets, flea markets, on the street, and through clandestine exchanges between friends and neighbors. Because so much of the market economy under the Soviets existed outside of the law, Russians often have complex ideas about the morality and legality of market transactions. The idea of a legitimate market system, with legally enforceable deals and contracts and publicly known prices and guarantees, is still relatively new here.

The Entry of Western Goods -- Wholesale Distribution

With the Yeltsin era reforms, more Western goods entered the Russian market. With the entry of Western goods and the movement toward the free market, the Russian informal market became more structured and sophisticated, though it does not yet resemble a Western product distribution system. The present Russian distribution system still rests on the old Russian informal market system, though it also incorporates the old Soviet-era gastronome, Western joint ventures, and an emerging class of Russian retailers. To achieve success, U.S. companies must be prepared to work with a wide array of local and regional distributors using a bewildering array of distribution methods. Western companies are attempting to distribute products through traditional Western means. Some work through emerging Russian distributors. Others establish their own distribution system. Still others establish their own retail outlets. Each system has advantages and disadvantages.

Companies should expect to invest considerable time and money in training and maintaining their distributors. Russian distributors are comparative novices in business, and some take on any product that is offered to them. Companies will find that a neglected Russian distributor quickly becomes a non-distributor.

The Long-Distance Truck as Wholesaler

According to several Western firms, a key to selling outside of Moscow is finding the man with the truck. Some independent truckers do long distance drives from one Russian city to another. Their major contract may be with one company, and they may find room in their truck for other goods. The truck may owned or leased by a chain of kiosks in a distant city. Sometimes, the truck driver acts as an independent entrepreneur, willing to pay cash for a small supply of Western products to sell in a distant city.

Retail Distribution

Russian retail distribution includes a fascinating array of the old and the new.

-- The Gastronom in the 1990s

The Soviet-era gastronome and other Soviet-era shops continue to be vital retail outlets in many Russian cities. Many have privatized, though most are still run by their Soviet-era managers. A growing number of these stores are now (sporadically) distributing Western goods to supplement their earnings from local products. The first Western products to penetrate these stores have been Master Foods (Mars bars, Whiskas pet foods, and Uncle Ben's sauces), Coca-Cola and Pepsi, Eastern European juices, European chocolates, and European wines and hard liquors. A growing number now have Kodak film processing facilities. These established stores continue to be a good way to reach the Russian consumer. Pensioners and middle-aged Russians flock to these stores to purchase locally produced goods. Often, these consumers will also buy low-cost Western products.

-- Rynoks

Another legacy, dating back to the middle ages, is the farmers market (or rynok). These rynoks are not unlike farmer's markets found in the United States or Western Europe, though the scale is sometimes larger, and the markets generally grubbier. Farmers gather in more or less formal rynoks, usually found near major train or metro stations. In cities outside Moscow, there may be one or two major rynoks -- some held each day, some held once a week. In Moscow, a conservative estimate would be over two dozen rynoks held throughout the city on a given day. At a typical rynok, trucks of produce back up along a road and produce is sold from the back of the truck. Farmers set up small tables, or sell fruits and vegetables out of piles of cartons. Often, craftsmen and artists, seamstresses and bakers, join the rynok to sell what they have made. Some rynoks may specialize in clothing, like one outside Kievskiy Bokzal; another, Izmalovo, specializes in arts and crafts for tourists. Rynoks can either be former organizations, where vendors must pay a fee or percent to an organizer; or they may be simply informal meeting places. A major change in rynoks over the past year is the rapid introduction of imported fruits and vegetables. Instead of ugly vegetables from south Russia, Russian consumers can buy bananas from Hawaii, and tomatoes from Greece.

-- The Babushkas

Another feature of 1990s Russia is the babushka trader. When products were scarce, lines were long. People willing to wait in line (or people with contacts) got goods. An informal system emerged: the patient could buy low to sell high to the impatient. When the first McDonald's opened on Pushkin Square, a dozen hustlers would wait in line for hours to buy a dozen hamburgers they would sell at double or triple the price to the hurried. Today, thousands of Russians (mostly widowed pensioners whose pensions have been eroded by inflation) buy low to sell high in subway or train stations, or on the street. (This kind of selling is technically illegal in some places: babushkas keep large bags and thrust their goods into them when the militia pass through.)

-- Counters

Even in the winter months, Russians sell goods by laying them out on a counter. Sales counters can be found on busy streets and most Metro stations. Most frequently, counters are places to sell newspapers and magazines, glasses, flowers, and theater tickets. It is even possible to buy a Russian tariff schedule at several outdoor counters in central Moscow.

-- Kiosks

During the early 1990's, a primary vehicle for movement of Western consumer goods was the kiosk. During this period, Soviet era stores were reluctant to carry Western goods. Box-like kiosks, built of metal and glass, sprung up to sell Western cigarettes, liquors, candy bars, and other goods. While the Moscow government is trying to reduce the number of kiosks to bolster the performance of traditional stores, in most outlying cities (and in many Moscow neighborhoods), the kiosk is still the principal purveyor of Western products. Kiosk operators may be independent, but more typically they are owned by a local kiosk entrepreneur, who may control as many as a quarter of the kiosks in a city or district. Kiosk operators need to make substantial payments to city governments and to the mafia, which is part of the reason for their high prices. Kiosks sometimes operate 24 hours a day. They tend to cluster in large groups, often of 20 or more, linked together near metro and train stations.

While early kiosks offered only luxury consumables (Mars Bars, chocolates, and liquors), other kiosks have branched out into different areas. Baskin-Robbins established a chain of Baskin-Robbins kiosks. An Australian pie company now distributes through kiosks throughout Moscow. One line of kiosks, located on major highways, sells oils and fluids for cars. We have seen bookstore kiosks, souvenir shop kiosks, flower kiosks, and many compact discs and video cassette kiosks.

Kiosks can be very profitable, and yet the kiosk business is violent. Very often, one may go to buy something at a favorite kiosk to find it a blackened ruin. The owner is left sifting through the ashes to find what lone bottles of vodka or bar of chocolate can be salvaged. Kiosks may be attacked by rival kiosk owners, by mafia thugs who wanted a higher payoff, even by the police.

-- Moscow 1995: Neo-Kiosks

Though the kiosk is an ugly contraption, recent kiosk evolution has brought more palatable design. One early method was to group eight to ten kiosks together into a kiosk row. The kiosks would share a common motif or theme, and perhaps share a large overhanging sign. More attractive kiosk rows of these sort are found in central Moscow near GUM and Red Square. These upscale kiosks offer Italian leather goods, expensive boots, fur coats, and even computer video games and software. Another innovation, spurred perhaps by increasing difficulty with the Mafia and regional officials, is the mobile kiosk. Whereas typical kiosks are stationery, the mobile kiosk can move from place to place overnight to escape difficulties.

The last great innovation is the superkiosk. The superkiosk is the size of a living room, and it boosts wide glass windows and counters and tables and chairs. Near Red Square, wealthy Russians can shop in well-lit superkiosks that resemble small East Side boutiques. Several superkiosks have been converted into small cafes, which offer caviar, vodka, salad, and other staples of the Russian diet.

-- Western Stores and Joint venture stores

A growing number of joint venture stores are serving the Moscow and St. Petersburg markets, and some (notably the Penguin chain) now operate in other major cities. These stores provide large Western products, at greater than Western prices. The stores are usually clean, and often refuse payment except in Western currency through credit cards. The joint venture stores cater to expatriates and wealthy Russians in Russia's major cities.

Reaching the Russian Consumer

Each U.S. company must find its own path to the Russian consumer. Market evidence indicates that, outside of Moscow and St. Petersburg, the Russian consumer still has little chance to buy most western goods. Western companies that have succeeded have done so through a combination of improvisation and innovation, combined with a substantial investment of time and a tolerance for early mistakes.

Basic Data on the Russian Consumer

(Sources: GOSKOMSTAT and the Russian Chamber of Commerce and Industry)

Population (in millions, 1994 data)

Total 148.4
Male 69.8
Female 78.6
Urban 73
Rural 27
City Sizes (1994 data)
Total number of cities 1,059
Population over 1 million 12 cities
50,000 to 100,000 171 cities
20,000 to 50,000 361 cities
10,000 to 20,000 254 cities
under 10,000 104 cities

Largest regions (population in thousands, 1994)
Moscow City 8,793
Moscow Region 6,664
Krasnodar Territory 4,940
St.Petersburg 4,883
Sverdlovsk Region 4,667
Rostov Region 4,401
Bashkortostan Republic 4,055
Tatarstan Republic 3,744
Nizhny Novgorod Region 3,683
Chelyabinsk Region 3,617
Consumer expenditures (1993, percent of expenditures) foodstuffs 46.3
non-food consumer goods 42.4
alcoholic beverages 3.1
services 8.2
Ownership of durable goods (number per 100 families, 1993)
TV sets 115
radios 103
audio tape recorders 62
refrigerators and freezers 95
washing machines 80
vacuum cleaners 53
clocks and watches 614
sewing machines 55
cars 23
motorcycles 23
bicycles 55
cameras 37
trailers/mainfp.trailer 19-February-1996