For a country that saw some of the strongest consumer spending growth in the world in the 2000s – when it rose by 10-15% YOY in the years prior to the 2008/2009 global financial crisis – Russian consumers have been struggling. It’s been four years since consumer spending has performed strongly, when it rose by over 4% YOY in 2013, and spending remained in contraction last year (falling by nearly 4% YOY). Since then, our clients have all been wondering – when will demand pick up again?
In my most recent research trip to Russia, this challenge was highlighted in our clients’ concerns about the market. As most consumer companies already know, demand won’t return to pre-crisis levels any time in the near or medium-term. Many firms were refreshed to simply see retail sales reach stagnant growth YOY in April this year, finally ending the consistent contraction in sales each month since January 2015. A bit more encouragingly, some improvements have been seen lately. Inflation has moderated and stabilized, slowing to 4% YOY recently. Consumer confidence, according to a GfK report, rose in Q1 for the first time since 2014 from negative expectations to slightly positive. Retailers have also noted a rise in foot traffic and average check payments. Mortgage credit has likewise risen, indicating a willingness of Russians to take out credit for large purchases.
Still, it is far too early to talk about a specific date in the near future when we might see a noticeable improvement in consumer confidence and demand. Far too many factors are holding back growth in the coming months. Numerous retailers have noted that Russians still tend to try to save rather than spend, a habit they are likely to sustain as they try to rebuild lost savings. The percentage of Russians who had savings fell from 72% in 2013 to 27% in 2016, as savings were used to buy essential goods, as well as pay off loans.
Much of the weak recovery in consumer spending is explained in the data. Real disposable incomes, i.e. the amount of money an individual has left over after all sources of incomes and payments on basic goods are accounted for, continues to contract. Having fallen by roughly 10% YOY in 2015 and 5% YOY in 2016, real disposable incomes have failed to recover in 2017, dropping by nearly 2% YOY in the Jan-Apr period and by over 7% YOY in April alone. As a result, consumers’ outlook for their financial position and the overall economy remains gloomy. Reflecting this, retail sales in the Jan-Apr period contracted by 1.4% YOY.
Discussions with our FMCG clients have confirmed these results for Q1. Some signs of an improving consumer environment are appearing, but are minimal and indicate only a slow recovery ahead.
This prolonged economic downturn has not only weakened consumer sentiment but has fundamentally altered the nature of the Russian consumer. MNCs are observing how Russian consumers are becoming much more rational and savvy, seeking out (and even expecting) promotions and discounts, avoiding impulse purchases, and comparing prices and products at various stores before making purchases. Consumers also continue to remain highly focused on prices, even to the point of clearly sacrificing quality. In the face of a slow recovery, this behavior is moving from short-term crisis response to long-term habit, fundamentally shifting the environment in which MNCs serve their Russian consumers.
For companies selling in the market, operational effectiveness for this new environment thus becomes critical. As demand is not rising notably – and is still likely several months away from a clear pickup – firms cannot simply wait and hope organic growth in the market itself drives stronger sales. Firms can’t improve consumer demand in the economy, but they can improve their ability to capture the demand that is there by increasing efficiency in their channel, streamlining operations, finding resilient customer segments, and adapting their product portfolios to best address their evolving customer base.
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