With ongoing political and economic woes, Russia has become an increasingly challenging marketplace for consumer goods manufacturers. Heavily reliant on the power of the country’s middle class in the past, manufacturers and marketers are now looking at a different reality. As Henry Meyer and Anna Andrianova aptly put it, “Putin’s Miracle Dissolves as Russian Middle Class Faces Crunch” (Bloomberg, 23 April 2015).
Svetlana Uduslivaia, Head of Tissue & Hyg iene Industry - Euromonitor International
As incomes dwindle and the middle class struggles to make ends meet, trading down is high on the agenda for increasingly cash-strapped Russians. Like other household goods, consumer tissue categories are feeling the pinch. In 2015, retail sales of tissue in Rus-sia are projected to see only a modest 3% rise in constant value (US$ fixed 2014 exchange rate) to a total of a little over US$1 billion by the end of the year. This compares poorly to previous years, with recorded growth well into upper single and double digits.
While driving revenues poses a challenge in the short-to-medium term, volume trends are still looking promising. In per capita terms, Russia’s tissue consumption still falls far behind the developed markets, leaving ample room for further household penetration. Moreover, Russia’s downturn creates further opportunities for more affordable domestic products to capture consumer attention and build customer loyalty to secure longterm growth.
LOCAL MANUFACTURERS AND PRIVATE LABEL MEET DEMAND FOR AFFORDABLE PRODUCTS. Toilet paper remains the dominant product category in retail tissue in Russia, accounting for shares of 68% in value and 86% in volume terms in 2014. The lower price of toilet paper encourages many households to use it for a wide range of tasks. This tendency, further exacerbated by the current economic difficulties, hinders demand for other categories, such as facial tissues. Many Russians forego the luxury of higher-priced tissue hankies and turn to toilet tissue instead as a quick fix for runny noses and other needs.
IN THE PAST FEW YEARS, HOWEVER, THE CONSUMER TISSUE INDUSTRY IN RUSSIA SAW THE EXPANSION OF LOCAL PRODUCTION CAPACITIES BY DOMESTIC PLAYERS, and new state-of-the art tissue lines are being installed to boost production volumes while at the same time reducing the cost of production and improving the quality of the tissue paper.
Increased local production at reduced costs, in the face of weakened consumer purchasing power, helps domestic manufacturers with stand market pressures and meet increasing consumer demand for affordable quality products.
DOMESTIC BRANDED PRODUCT MANUFACTURERS HAVE STEADILY GROWN THEIR SHARE OF THE RUSSIAN TISSUE MARKET. Moreover, on-going investments and the resulting improved quality and variety of products will likely further strengthen their position and present a growing challenge to imported brands in the long term, as domestic players can effectively build stronger brand recognition during the downturn.
By 2014, five of the top 10 players in Russian retail consumer tissue were domestic – Syassky, Syktyvkar, Naberezhniye Chelny, Hy-giene Kinetics and Bumfa. Over 2009-2014, Syassky and Syktyvkar grew their value share of consumer tissue sales in retail from a combined 15.2% to 19.5% (see chart previous page).
MAKING MORE AFFORDABLE PRODUCTS DOES NOT OF COURSE MEAN ONLY FOCUSING ON BASIC STANDARD TISSUE, and value-added products are an integral part of the research and development efforts of local manufacturers. Hygiene Kinetics, for example, now offers a wide range of products under the Ola! Waterflow brand, including pocket handkerchiefs enriched with aloe vera and eucalyptus.
In addition to domestic branded products, retail in Russia continues to see further evolution of private label, which continued to capture shares of consumers’ wallets. In 2014, private label tissue products in Russia still showed a significantly lower level of penetration compared to North America and Western Europe, indicative of more room to drive further consumer acceptance and sales. Competitively priced private label tissue products are well positioned to build consumer loyalty and increase their share in 2015 and beyond.
BUMPY ROAD AHEAD. The trend towards bargain shopping will likely be felt in the short-to-medium term, with expected year-on-year growth in constant value terms in retail tissue falling behind that of volume. As the economy and consumer confidence recover, how-ever, many Russians are likely to return to their prerecession shopping habits, and spending is expected to pick up across tissue product categories in the course of 2016 and 2017.
From the brand and manufacturer perspective, the increase in bargain shopping in times of downturn creates an opportunity for domestic brands and private label to capture the attention of price-sensitive consumers, especially outside of wealthier large metropolitan areas. Securing repeat consumer purchases and long-term growth, however, will require continuing investment in the quality of domestic products.
AT THE SAME TIME, HOWEVER, THERE ARE POTENTIAL CAVEATS TO NURTURING CONSUMER AFFECTION FOR LOWER-PRICED PRODUCTS. As post-recessionary lessons from other markets suggest, it can be difficult to “wean” consumers off economy products once they have discovered them, especially with the improved quality of value ran-ges. Innovation and marketing support to increase the appeal of value-added tissue to consumers, once the economy and consumer confidence are on the upswing, will be important in encouraging the desired trading up. *