In mid-September, FSG held its annual Moscow Breakfast event for regional executives that was centered on how to hit targets in 2019 as uncertainty has returned once again. Watch the video below or continue reading for key takeaways from the discussion, as well as from numerous other meetings with clients and local experts held in Moscow during the week:
The core concerns are US sanctions and the ruble
All the hysteria over US-Russian relations and threats of sanctions/counter sanctions have once again raised high uncertainty in the market. Businesses are struggling to understand how US-Russian relations will develop, what sanctions would be implemented and when, and what this means for businesses, the ruble, and demand.
As presented by FSG and discussed amongst clients, MNCs are highly likely to see additional US sanctions against Russia in Q4 ahead of US mid-term elections in November. The most severe sanctions would target the Russian economy and cause a sharp slowdown in growth. The ruble and sentiment have already weakened in recent months, and neither are likely to recover into 2019. The weakened confidence as a result of rising prices from ruble weakness, the VAT hike, and the weakened financial positions of consumers will soften demand. Still, the economy continues to grow and elevated energy prices ensure rising public spending and opportunities in the private sector in 2019.For more on the type of sanctions, likelihoods, and impact on business, FSG clients can consult our quarterly market review here.
Headquarters are getting increasingly optimistic about targets, and perhaps unrealistic
Firms need to align with corporate on realistic expectations for top line/bottom line growth next year. Half of companies noted that their primary internal challenge for 2019 was managing headquarters’ targets and expectations. While local Russian teams expect a slowdown in demand next year compared to 2018, most firms’ headquarters have set higher ruble revenue and profitability targets compared to this year.
Competitive pressures in the market are intensifying
MNCs are facing a dilemma related to their operations in the market: rising costs and the 2% VAT hike in January 2019 are forcing businesses and retailers to raise prices on consumers and customers whose demand has only recently begun to recover after several difficult years and remains weak and fragile. Moreover, local and regional competitors are increasing their exposure in the market, often winning on price compared to the higher import costs of Western brands. MNCs need to evaluate their strategy and expectations in the market as the environment will cause difficulties in passing on costs to your customers. Tactics used to win in 2018 may not be adequate to win in 2019, requiring finding other ways to differentiate your offering in this competitive atmosphere.
Firms should re-evaluate their business plans as tactics used in the past year may not be adequate to hit targets. While in 2018 most firms focused on developing a few core brands and customer segments in order to win in the market, for 2019 most firms are intending to introduce new products and boost marketing and sales generation activities to drive stronger sales growth next year. Firms are also becoming more serious about localizing aspects of their business further in order to get closer to the market and reduce rising cost pressures.