Crisis update - tissue market development in Russia and CIS
By Greg Grishchenko
By
Greg Grishchenko
Growing economic calamity in Russia has not significantly changed
sales dynamics in the tissue sector so far. Currently, the working
population relies on cash for basic needs, with less than 1%
making use of credit cards or mortgages.
If the crisis continues, toilet paper's share of the tissue
market will increase as consumers reduce the use of kitchen towels,
napkins and pocket hankies. If normality returns, nothing will
change due to the fact that the growing middle class affected
by the crisis will not change their spending habits for food
and household items, preferring to cut back on luxury goods (cars,
travel etc).
The average monthly salary in Russia today is $625/month and
well-to-do consumers are mostly concentrated in major metropolitan
areas. According to Greol Engineering Inc, a USbased consulting
company, only about 20% of working families (salary range $1400/month
- see charts below) can afford to buy higher-end tissue products.
One of the key market players in Russia, SCA, came to the Russian
market in 1994 as a consumer tissue supplier and soon became
a local manufacturer with the purchase of Svetogorsk and Kamenogorsk
mills in 1998. Expecting fast growth, the company started to
form market niches for new tissue products for Russia such as
pocket hankies.
SCA introduced free pocket tissue samples and application advice
and in 10 years made this product a household staple for the
Russian middle class. The company's market share in the country's
toilet tissue segment exceeds 30% in 23 major Russian cities.
Last October SCA Russia's general director Timothy Sokolenko
told Expert Magazine: "Currently SCA is experiencing a shortage
of manufacturing capacity in Russia. Today we make 40% of all
tissue products sold in Russia locally and our Svetogorsk mill
is operating up to the limit."
He confirmed the SCA decision to build two greenfield mills
in the Tula region. Construction of the paper mill in Sovetsk
(a small town of 9000 in Schekin district) started in 2007 and
the first production was due in November 2008 using imported
jumbo rolls. With total employment of 250 and an €80
million investment, the mill planned to launch its new paper
machine in the first half of 2009. The groundbreaking ceremony
for the other plant in Veniov took place in November 2008. This
plant will be the first manufacturer of personal care products
in Russia. SCA intends to complete construction of the first
stage by the end of this year, investing €50
million and providing local employment of 330.
The company is fighting the recession with a range of approaches,
including cutbacks and brand streamlining. According to Timothy
Sokolenko, SCA considers Ukraine and Kazakhstan as priority markets
for the company. In these countries as well as in Russia, the
relationship with the regional government will play a major part
in the success of the project. However, the deepening economic
crisis during the three months following Sokolenko's interview
might change the company plans. Major tissue producers in Russia
are better prepared for the sales decline that will take place
during the crisis than are small companies. In 2008 Syktivkar
Tissue Group and Syassky Paper Mill started new modern tissue
machines and moved into production of high-quality brands. These
will stand them in good stead in difficult times.
Small companies might not survive the financial hardship brought
about by the crisis. Both tissue suppliers in Kaliningrad region,
Cepruss and Sovetsky Pulp and Paper Mill, recently ceased production
.There are slowdown reports from the other Russian regions. Tissue
product output in Ukraine fell 8.3% (9500 tons) in November 2008
compared with the previous month. Ukraine is the largest tissue
exporter to Russian Federation.
Tissue is the strongest segment of the Russian paper market
and not a single tissue manufacturer was found eligible for the
Government financial bailout announced in mid-December 2008.
The list of 295 companies expected to receive help included two
domestic supermarket chains, Sedmoy Kontinent and Kopeyka, however.
Pocket tissue face-off
With growing access to the world's largest supermarket chains,
Russians have started to adopt western spending patterns. Principal
retailers from Western Europe and Asia, as well as homegrown
ones, are competing hard with a broad selection of household
goods.
With the Russian retail sector growing quite rapidly for the
last five years, even small groceries offer quite an extensive
range of product brands. Auchan (France) hypermarkets are advantageously
located around Moscow as centrepieces of the huge shopping malls
near MKAD (Moscow Ring Highway). Metro, Globus (Germany), Spar
(Netherlands), Russian homebased chains Sedmoy Kontinent, Perekrestok
(Crossroads), and Turkish chain Ramstor have become hubs of trade
in all Moscow towns and suburbs. Major supermarket chains keep
opening new stores in all principal cities across the country.
Supermarket chains doing business in Russia are known for their
arm-twisting relationship with suppliers. There is almost no
difference between chains headquartered in Europe and domestic
ones in price-squeezing techniques using private label outsourcing
to low cost Asian mills. It seems impossible for small producers
to get access to supermarket shelves.
With the wide assortment of toilet paper and kitchen towel
brands on the shelves of major supermarkets, pocket hankies are
the biggest mystery. Their estimated share of total tissue market
is still somewhere around 2%. However, variety and selection
of pocket tissue brands at a single European chain store look
very impressive: perhaps 7-8 brands including private labels.
The numbers drop in Russian or Turkish chains.
Currently private label tissue products have minimal presence
in Russian and Ukrainian supermarkets. The pocket hanky brands
sold in the chain supermarkets are mostly 3-4-ply and sometimes
are coming from the same company but from various international
manufacturing locations (see chart). Auchan and Globus management
declined to release sales numbers or market dynamics for this
product. So perhaps one can assume that Russian consumers are
developing a growing habit of using pocket paper hankies to replace
the still-popular cloth.
There have been attempts by supermarket chains to outsource
private labels to China in order to reduce costs. However, retailers
appear to be switching back to tissue producers in Russia, Poland,
Germany and Italy due to numerous problems with Chinese suppliers
caused by complicated shipping logistics and quality problems
leading to lower than expected price savings.
Voice of the young consumer
Ekaterina Bokhon lives in Fryazino, a small town 50 km northwest
of Moscow. A Moscow University graduate, she grew up in Cuba
where her father was a school director in Russian settlement.
She works as an assistant to the general director of a multinational
Finnish consumer products company and spends her vacation in
Egypt and Turkey.
Ekaterina, with her interests in Russian history, literature
and music, says she hardly remembers details about Soviet life
and hardship. "Our generation has childhood memories of
the different country and facing new realities of consumer society," she
says. "We now are more individualistic and set our shopping
preferences according to product aesthetic appeal. For example
I prefer toilet paper and napkin in colour rather than white".
Ekaterina participates in sightseeing trips that are run on
a regular basis
to many ancient towns across Moscow, Yaroslavl and Vladimir regions
(Golden Ring). These places are rich in historical treasures.
The open air tours take place all year around, even if the weather
is not always friendly. During these trips she has discovered
the usefulness of pocket hankies. She prefers Kleenex brand due
to the variety of design patterns and quality. TW
