By Ian Bell
Since the financial crisis of 1998 the Russian economy has continued
to make significant
strides towards stability.
More recently a rapid
growth phase has had a knock-on effect on consumer spending which
has increased year on year along with the expansion of its much
vaunted consuming middle-classes. Today Russia finds itself in
the lofty position as one of the vital BRIC nations along with
Brazil, India and China, in which multinationals of all descriptions
are looking to expand operations in order to safeguard future
growth alternatives away from more mature, slow growth markets
of the West.
Even in the midst of
the ‘credit crunch’ and the expected onset of a slowdown,
or even recession, in
the world economy, the Russian economy is predicted to see further
growth, which will inevitably feed into advances in its consumer
economy. The country’s almost monopolistic
reliance on raw material
exports, including oil, which is now at an all-time record high
price of $140 per barrel, suggests that companies are right to
see Russia as a safeguard against more turbulent global conditions,
a relief for those looking to satisfy shareholders who have become
used to consistent growth over the last decade or more.
TISSUE TALK
The Russian market for
tissue products is no
exception, with international players already expanding manufacturing
capacity in Russia and looking to cash in on an expected acceleration
in per capita consumption rates. To date, average Russians used
only 2 kg in 2007, one tenth as much as their Western counterparts.
The latent potential of the Russian market has been enough to see
SCA invest something in the region of 230 million in a new manufacturing
plant in the Tula region close to Moscow, designed to drag domestic
tissue manufacturing, which still lags far behind accepted Western
standards, into the new millennium.
The relative under-development
of the Russian market,
even compared to its Eastern European neighbours, can be seen in
the dominant position toilet tissue commands, accounting for 90%
of volume sales in 2007, at 210,000 tons, which contrasts markedly
with the 60% or so which is typical for Western Europe. Although
household penetration rates are as high as one would expect in
any other market, the key to future success must come from the
development of a wider portfolio of products as well as a more
value-led focus. In particular, value development will be key to
leading the market away
from the low-quality single-ply tissue paper which currently accounts
for the lion’s share of volume
sales, the stock and
trade of the majority of small to medium manufacturers at present.
The development of more
advanced products is brought into sharper focus when considering
Russia’s demographic structure. Its
population is both rapidly
ageing and in decline. In addition, the consuming middleclasses
are anything but evenly distributed throughout Russia, with its
European part housing the vast majority of consumers with the purchasing
power necessary to be able to buy brands such as Lotus and Zewa,
which lead the premium branded section of the market.
LOCAL PRODUCTS FOR LOCAL
PEOPLE
The further expansion
of the domestic market
sees continued investment in modern paper and pulp processing as
a pre-requisite for the wider development of ‘middle- tier’ products,
at least by Western standards, to become more affordably priced
and accessible to the wider consuming public beyond the affluent
middle-classes. These kinds of products are still out of reach
for many consumers due to the inability of domestic manufacturers
to make such products, as well as the somewhat prohibitive expense
of importing finished materials into Russia for further processing
or distribution, even in the more westerly end of the country.
The high cost of transportation
also further increases the need for domestic and local manufacturing,
as in the Eastern provinces long lines of supply continue to inflate
unit prices in areas that are perhaps least developed to deal with
them. There is, therefore, a large gap that exists between consumer
trends in European Russia and Asian Russia. The East is dominated
by the cheapest products which are often unbranded and later cut
then packaged locally from larger reels. Where brands do exist,
even what a Muscovite might class as a standard brand, Naberezhniye
Chelny’s TsBK or
SCA’s 54-Metres for instance, will be priced at a premium,
increasingly so the further
East we go.
There are, however, positive
signs that the Russian
market is becoming more homogenised thanks to the development of
chained retail. Certainly, sales of tissue products around Moscow
and St Petersburg have been boosted over the last decade by the
development of a domestic retail structure of supermarkets and
hypermarkets which has provided a platform for much of this future
growth, especially in regional centres, as chains are currently
focusing their expansion away from the more crowded Western centres.
Inevitably, an efficient retail system will demand suitably priced
medium-quality tissue products, which are accessible to a much
wider number of consumers than is currently the case. The Russian
market is set for significant changes over the next decade, not
only where these products are manufactured, but where they are
purchased and by whom, all of which will require a major shift
in Russian consumer culture.
Undoubtedly this heady
combination of external investment and internal modernisation will
inevitably see many regional producers looking to develop into
medium-sized operations in line with the demands of Russia’s
developing retail structure, which will likely demand uniformity
in supply as much as value-for-money products. There is also some
indication that manufacturers could well be inclined to move production
closer to Eastern markets in a bid to circumvent the somewhat prohibitive
transportation costs imposed on them by the Russian railway monopoly
(Rzt). The joint venture between Ilim Pulp, one of the largest
owners of paper and cellulose milling assets in Russia, and US
International Paper, is evidence of multinational interest in the
natural resource wealth of Asian Russia.
THE CONSUMING PUBLIC
So what of other products?
Manufacturers can point
to rapid retail value expansion across kitchen towels (+17% in
2007, $22.5 million) and paper tableware (+9% in 2007, $25 million),
but much of this growth is accounted for by the popularity of these
imported brands among more affluent consumers who purchase these
products for family gatherings around Christmas and for picnics
in the summer.
Tissues is possibly a
more clear-cut case as
the Russian penchant for the traditional handkerchief is alive
and well and many consumers are uncomfortable with the idea of
simply disposing of a tissue after use. Boxed facial tissues are
also proving a challenge to sell in Russia as again they are considered
as a product that is found in ladies’ ‘powder
rooms’ rather than a domestic necessity. Perhaps then the
biggest challenge for
manufacturers will be to change consumer attitudes and behaviour
towards wider acceptance of disposable products, which inevitably
will require heavy long-term investment in advertising if these
products are to become mainstream.
To date, pocket tissue
manufacturers have made
perhaps the most compelling efforts to promote their products on
the basis of hygiene, one with the strapline of ‘why keep
germs in your pocket?’, which has been
very effective in convincing
younger consumers. Winning over the more numerous older age groups
will be a different matter. Getting the price point right will
be an important step, as will product promotion to convince consumers
of the merits of using a disposable handkerchief or kitchen roll
product instead of a non-disposable alternative.
shelves at reasonable
prices is no guarantee of retail success. The wider Russian consumer
public will still have to be convinced of these new modes of living.
Perhaps toilet paper producers have an easy job on their hands
as the majority of Russian consumers are under little illusion
as to the relative quality or otherwise of their staple toilet
tissue products. The interest higher-income groups have shown in
more premium two-ply tissue brands, which are often scented, and
which now account for 15% of value sales, has been the key factor
in generating annual growth of around the 10% mark for the last
three years to take total tissue retail sales to $430 million in
2007. Indeed, manufacturers have been aided by reports in the Russian
press that this staple recycled roll can in fact be hazardous to
public health due to contamination with chemicals during production,
where outmoded facilities are the norm.
CONCLUSIONS
It would appear to be
a matter of ‘when’ rather than ‘if’ Russia
develops a modern tissue
paper industry with a
structure more familiar to that of the West. Certainly the fundamentals
are all in place to see further strong growth over the medium term
and beyond. By 2012 the Russian market will see little in the way
of volume increases, but, undoubtedly, rising household incomes,
along with the arrival of more accessible domestic brands, are
predicted to drive value sales (CAGR 15% in the next five years,)
with little slowdown in sight and increased production capacity
expected during the second decade of the century. TW
| Ian Bell
is Research Manager with Euromonitor International. |
