BISNIS - NIS Consumer Products Report

AUG 95

**NOTE: Enclosed is a DRAFT of an article to appear in the BISNIS Bulletin. I welcome your editorial comments. - Bill Raisner raisner@usita.gov

Consumer-Ready Food and Beverages Remain a Promising Market in Russia

The potential of the Russian market for consumer-ready food products became readily apparent in the first quarter of 1994 when U.S. exports of these products increased more than 300 percent over the same period the previous year. Recent predictions that the July 1995 imposition of tariffs and other tax increases on Russian food imports ranging from 15 to 30 percent would cast a shadow over the market have not materialized. A number of factors including macroeconomic policies maintaining consumer purchasing power, the inability of domestic producers to meet demand and a gradual improvement in wholesale and retail distribution networks all point to expanding opportunities for U.S. companies. The greatest threats to U.S. exports in this sector actually come from Western European and Asian-Pacific competitors, calling on U.S. companies to engage in more aggressive marketing strategies to secure a larger market share.

Consumer Purchasing Power

Reflecting the Russian consumer's continued dependence on the informal economy, average real income increased 8 percent in 1994 despite a dramatic 17 percent fall in wages. Russian macroeconomic policies have bolstered these gains by successfully holding inflation between 8 and 11 percent since the first quarter of 1995. Moreover, a dramatic appreciation of the ruble relative to the U.S. dollar since June 1995 and a Russian Government commitment to hold the ruble at a rate ranging from 4,300 to 4,900 rubles to the dollar has laid a foundation for continued imports despite the new tariffs. Recent reports that the rate of increase in food prices actually fell in July and August bear out this conviction. Finally, while potential state credit emissions for agriculture and other industries may cause a moderate surge in inflation this fall, newly replenished foreign currency reserves should provide the Government with the means to maintain macroeconomic stability.

Weakness of Domestic Competition

Overall Russian food production has fallen dramatically since the collapse of the Soviet Union with a decline of 17 percent per year in 1993 and 1994. Food processors, suffering from outdated equipment and cutbacks in state subsidies, have been particularly hard hit. Russian meat production in 1994, an area where imports have surged, fell by 32 percent from its peak in 1990. This growing inability of domestic producers to meet Russia's food needs, combined with the failure of Government protectionist measures to significantly increase import prices and generally accurate consumer perceptions that foreign products are of superior quality provide added impetus to food importers. In some cases, domestic food producers have been able to attract foreign capital as a means of upgrading, most notably in the confectionery and soft drink industries. But progress is sufficiently slow in this area that importers are unlikely to be affected within the next several years.

Improvement in Distribution Networks

The gradual privatization of the Russian wholesale and retail industries provides yet another incentive to food importers. By mid 1994, 76 percent of Russia's retail trade had been privatized, an increase of 9 percent over the previous year. A recent study conducted by the Commercial Service of the United States estimated that there are currently 9,000 private retailers for consumer goods and food products in St. Petersburg alone. Progress in the wholesale sector has been slower but nonetheless significant. By the end of 1993 approximately 42 percent of the wholesale sector had been privatized. Considerable progress was made over the course of 1993 and 1994 leading to the privatization of nearly 1,700 state-operated wholesalers and the creation of an additional 6,500 private wholesalers. According to the same report, above, there are nearly 5,000 wholesalers in the St. Petersburg region. An indication of the value of this progress to food importers is evidenced in the fact that as of mid 1994 only a quarter of Russia's overall market for consumer goods imports lies in the Moscow region. The remainder of the market is well dispersed over Russia's 24 largest population centers.

Meeting the Challenge of Foreign Competition

Despite these promising signals, U.S. companies have been remarkably slow to take full advantage of the Russian consumer-ready foods market. According to estimates by the Foreign Agriculture Service (FAS) of the U.S. Department of Agriculture, U.S. products comprise only 15 percent of total Russian imports of consumer-ready foods. Western Europe makes up the bulk of the remainder for European Russia, whereas Asian-Pacific and Australian importers are most active in the Russian Far East and Siberia.

Proximity is a key disadvantage to U.S. companies in this respect. Russian importers facing domestic interest rates as high as 200 percent, are often reluctant to wait the 5 or 6 weeks needed to source products in the U.S. when they can obtain similar products from European and Asian suppliers in less than a week. In some cases, U.S. companies can compensate for this by cultivating brand name loyalty through more aggressive advertising. Marketing efforts including tips on product preparation are becoming increasingly critical to success as Russian consumers relatively unfamiliar with foreign food products are faced with an ever widening range of choices. U.S. companies that acknowledge these factors early on can take advantage of general Russian perceptions about the superiority of American products to solidify their market position.

Greater flexibility in financing could provide another key to success. A recent FAS trade mission to the Russian Far East recently concluded that Asian-Pacific importers were offering decidedly favorable financing terms compared to their U.S. counterparts. Companies which are willing to offer credit or sell on consignment will have a significant advantage, although a greater degree of market research will be necessary to modify the obvious risks. Furthermore, an increasing number of U.S. companies are setting up their own exclusive distribution outlets and, in some cases, production facilities to bypass these problems. Pepsi Cola and Baskin Robbins which began investing in the early phases of Russia's economic reform program have been followed by a crop of others taking advantage of recent improvements in Russia's investment climate.