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(Last updated: 2 Feb 2012)
Trends and opportunities
The market
Russia’s large urban population, with over 10 million inhabitants in Moscow and 13 other cities with more than one million people, has been the driving force behind a significant expansion of retail and consumer markets, especially since 2000. Many Russian consumers are passionate about global and prestige brands after lacking consumer choice during the Soviet era. According to Business Monitor International (BMI) and Troika Dialog analysis, the Russian market is the biggest in Europe for mobile phone usage and washing machines and the second largest in Europe with regards to car sales.
The Russian retail market can be described as sophisticated, responsive to rapid changes in consumer demands and highly differentiated, with targeted retail shops and business models adapted to meet the different income levels of various social groups. The middle class in Russia is estimated at approximately 10-25 per cent of the 140 million population, depending on the criteria used.
Russia has 35 million households with income above US$15,000 per annum, of which 20 million have income exceeding US$25,000.
Russia’s richest consumers are known for their expensive and exotic tastes, evidenced by a strong emphasis on prestigious designer brands, luxury goods and lavish spending. Many marketers view the prospects of the Russian market optimistically and foreign consumer goods suppliers active in the market traditionally report excellent results.
The 2008-09 global financial crisis impacted sales of mid-tier luxury goods and many wealthy Russian families cut down their spending on expensive holiday travel and fashion accessories. However, most Russian consumers generally traded down in product category and price, rather than cancelling their spending altogether.
While Russia does have a lucrative top-tier market and a growing middle class, the country is also beset by great disparities in wealth as well as regional inequality in buying power. A majority of Russians live with very low incomes, especially elderly people who live on fixed and quite often inadequate pensions. Despite sustained economic growth through the 2000s, about 20 per cent of the population still lives below the poverty line.
Moscow and the surrounding region comprise 45 per cent of the country’s GDP and per capita income in the capital greatly exceeds the national average. While Moscow and St Petersburg dominate as the major sales destinations, Russia’s regions are considered to be promising new markets, particularly in regions with industry or resources wealth. An increasing number of shopping malls have been opened in larger regional cities such as Samara, Ufa, Yekaterinburg, Krasnoyarsk, Khabarovsk and Vladivostok. Crocus Group, which has opened Russia’s largest shopping and entertainment centre in Moscow, plans to build two more such malls. Investment in new projects is estimated at US$1.1 billion.
Consumer credit is relatively easily available for the majority of the adult population, which significantly increases the number of Russians purchasing consumer products. According to Ernst and Young, disposable income trends remain strong in Russia: a Moscow middle manager earns US$24,000 annually and his/her disposal income is around US$10,000 versus his counterpart in Texas with annual income of US$60,000 and US$7,500 disposal income after all the deductions (ie. mortgage, social payments, student loans, etc).
Clothing and footwear
Spending in this sector was among the first to be reduced by Russian consumers in response to the economic crisis. Many previously premium-segment consumers moved to the middle market and demand for luxury clothing and footwear moderated. According to PMR estimates, clothing and footwear market was worth US$56 billion in 2010. The Russian clothing, footwear and accessories sector demonstrated nearly 11 per cent increase in 2010.
The Collection Premiere Moscow Clothing Fair (March 2010) showing a six per cent increase in visitor numbers over 2009. Approximately 1,200 labels from 30 countries were represented.
Russian women and young consumers prefer to buy modern and branded clothing. However there is a new trend in purchasing habits, with more women and young buyers choosing comfortable and casual clothing. This is affecting industry performance by stimulating a growth in mid-tier retail sales. The low- and middle price segments are forecasted to have more dynamic progress.
European fashion imports dominate in the Russian market. Italy is the market leader, followed by Germany and France. Local production of designer clothing has grown since 2005, especially in the youth sector, which will soon comprise 25 per cent of the Russian market, according to industry experts. Leading local brands include:
Sports products are another growth segment – Euromonitor continues to report sales growth of 20-30 per cent per annum. This trend is steadily increasing, as Russian consumers start spending more money on sports products and garments due to rising popularity of sports and fitness activities.
The Russian market has again become attractive for luxury clothing, footwear and accessories segment players. Many international retailers, such as Ritter Group, expanded their operations into regional Russian cities in addition to traditional operations in Moscow and St Petersburg. Hermès and Prada have begun independent operations in Russia by setting up their own distribution channels and terminating contracts with former distributors.
Cosmetics and toiletries
Cosmetics and toiletries products were perhaps less affected by the 2008-09 economic downturn, with some categories even showing sustained growth. Although sales stagnated in the mass market segment, high-value and high-quality products achieved noticeable rise.
There has also been a gradual but strong shift towards premium brands with healthy, natural and multifunctional components.
According to RNCOS, several factors – including rising per capita spending on cosmetic products, favourable consumer behaviour, and increasing product innovation – are encouraging positive outlook for the Russian cosmetics sector. It forecast annual growth of around 8.8 per cent during 2010-2013.
Local manufacturing is an important facet supporting sales of mass market products. Many international players have established local production (for example L’Oreal, Henkel, Procter and Gamble and many others). There are also several large Russian manufacturers, such as Kalina, Faberlick, Svoboda and Nevskaya Cosmetica.
The Russian market can be characterised as well established, with sophisticated distribution network, strong purchasing power and a solid presence by all leading international multi-brand companies. Direct sales and beauty salons make up the second-largest distribution channels after traditional retail operations. The passion for beauty is still very much a part of Russian life. Many Russian women want to look feminine and as such sales of decorative cosmetics continue to grow. Word-of-mouth recommendations have great influence on consumer preferences.
Opportunities
Opportunities for Australian exporters in the Russian market include:
- Apparel products for youth market
- Sports products
- High-quality fashion products
- Colour cosmetics
- Ecological/natural cosmetics products
- Baby products (both clothes and cosmetics)
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