As Russia’s economy slows, companies will have to generate growth by expanding beyond Moscow into Russia’s other regions. The central question of regional expansion in Russia is how to increase sales volume to regional customers while protecting margins.
There are three factors that make this a challenge for multinationals; typically, customers in Russia’s regions:
- Have lower purchasing power than those in Moscow, depressing margins
- Are more expensive to serve because of transportation costs and underdeveloped sales infrastructure, depressing margins
- Are highly fragmented geographically, reducing the maximum volume of sales in any given region. To significantly grow the size of their Russia business through regional expansion, companies need to capture a large number of regional markets
As a result, the majority of multinationals find that a combination of models will serve them best in reaching regional customers profitably. Companies have successfully leveraged distributor and retailer partnerships, franchising, and online sales, as well as some direct presence to capture regional demand without eroding their margins.
In this podcast, Martina Bozadzhieva, Associate Practice Leader for CEE, discusses FSG’s latest research on how companies can resolve this challenge.