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Session Summary. Consumer Market: Unlocking One of Russia’s Greatest Strengths

February 4, 2010

Richard Smyth: The crisis is making companies more aggressive and competitive. Consumers have become more price sensitive, and this has affected discretionary products in particular. Anecdotally, the pet food market actually grew in 2009, while the chocolate market saw a double-digit decline. Producers have been faced with working capital issues and massive stock-outs in the supply chain.

Although most of these problems have been resolved, the crisis has reshaped companies’ operations. Two years ago, the key problems were finding sufficiently professional people and ensuring sources of raw materials. Now the key problems are protecting the bottom line through discovering additional efficiencies and gaining market share on the competitive market. Nevertheless, there are plenty of growth opportunities in Russia, and Mars still considers Russia as one of its key markets.

Rostislav Ordovsky-Tanaevsky Blanco: The situation at Rosinter has improved dramatically since March 2009, but back then there was a near collapse. The current situation can be described not as a crisis, but as period of change. The $70/bbl oil environment is beneficial in the short run but not supportive in the longer term, as it decreases the incentive to gain market share in the competitive environment. Mr Ordovsky-Tanaevsky Blanco believes that the world has a short memory and expects explosive growth to return from 2011. Despite high entry barriers (due to increased bureaucracy), the market is fairly open and not that competitive. Alongside low penetration of quality offerings, this puts Russia in a unique category in terms of companies’ expansion prospects.

Alexander Mechetin: The vodka market is unique, with domestic consumption exceeding global rates. It is declining in volume terms, but strong branding – the backbone of strong bargaining power while the market was expanding – became the bedrock of resilience in the downturn. The company’s well-balanced brand portfolio, with a loyal following, helped it increase market share, volumes growing 1% y-o-y (vs a 9% decline on the overall legal vodka market from 120 mln dl to 110 mln dl). Notably, the company saw 20% volume growth for Beluga, its super-premium brand, which was especially pronounced in 4Q09. In terms of strategy, the key direction in 1H09 was aimed at remaining resilient, while 2H09 was geared toward repositioning for growth. The company hired an additional 300 salespeople in 2H09, invested in working capital and expects further market share gains in 2010.

Burhan Tanik: The sector is unlikely to return to the pre-crisis growth rates, but increasing consumption in the region will drive future expansion. The company foresees a moderate sector recovery in 2011-12. In 2009, the management introduced a zero-base budget approach, with each cost item checked for sensibility, and this proved to be the right practice to support cash flow. The company is considering keeping this practice going forward and believes that it could be a competitive advantage in the lower-growth market.

Mikhail Kusnirovich: The company is focused on being more service-oriented, which bore fruits in 2009, when the retail chain managed to report healthy growth. Higher-income individuals were not affected to the extent that they postponed expenditure on luxury goods, but sentiment did change. Now people are more sophisticated in terms of service and offerings, and they are ready to spend. This contrasts well with Europe, where consumption has declined more significantly on the back of changes in macroeconomic fundamentals.

Stefan De Locker: Consumers’ reaction to the crisis varied from category to category, with baby food and a couple of coffee brands performing well but discretionary items less so. Consumer patterns have changed, and people are now opting for value for money. The company sees opportunities for producers to increase profitability by improving operating efficiency and following changing consumer behavior. The current situation is different from 1998, when volumes dropped 70% but recovered quickly. The situation is similar to that faced by the German food market in 2001-08, when profitability gains were mainly down to efficiency improvements. The company continues to invest in Russia and believes that ROI could be sustainable.

Sergey Mikhailov: The crisis had a positive impact on the meat industry, where imports account for 30% of the volume. Production costs followed the downward trend in grain prices (after two years of record harvests), while selling prices increased on the back of imported goods appreciation. Relatively low consumption is one long-term driver for the market, as Russians annually consume 60 kg of meat per capita versus 80 kg per capita in Soviet times. Furthermore, domestic producers could benefit from import substitution, the share of which remains high. The company noticed that capex is falling, and the group intends to capitalize on this by investing in new capacity.

Igor Krylov: The consumption of drugs did not decline during the crisis, and the market expanded 15% in ruble terms in 2009 to some $15 bln, 70% of which is the commercial segment. Although Pharmstandard kept its prices flat from November 2008, it managed to increase revenues 20% in rubles in 2009 and remains the No 1 producer in the commercial segment in both monetary and volume terms, with total volumes of 680 mln packs in 2009 (more than triple any foreign producer in Russia). Consumption stands at $50-60 per capita, which is far from even East European levels, and Pharmstandard considers this to be a long-term growth driver alongside the improving culture of healthcare in Russia. The market is still far from being regulated, and Pharmstandard mentioned marketing efforts alongside the development of innovative drugs as two of the company’s growth opportunities.


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