This study examined the distribution systems of food retail in Russia from a Finnish perspective. Both producers and retail chains viewpoints were considered, as well as major trends in the field of distribution. The geographical focus was on Moscow and St. Petersburg, but also the recent expansion of retail chains to other regions was discussed. The aim of the study was to investigate the field of distribution from a strategic viewpoint, i.e. how the Finnish food producers could gain a larger market share in Russias food sector. The study was based on seventeen Finnish and eight Russian semi-structured interviews. The interviewees consisted of producers, retailers, distributors and experts in the food sector. The distribution of food products in Russia was approached by describing relevant background issues, which included retail trade and the development of domestic content in Russias food sector. The main topic distribution systems in Russias foodstuff trade was analysed from the retailers, intermediaries and producers perspective, and followed by a discussion on Russian consumers. Finally, a summarising theme of Finnish food products current
availability in Russia was discussed.
The competition in the food retail sector in Russia is growing and the future of foodstuff trade belongs most likely to the retail chains. The retail chains in Russia seem to be relatively developed, as they do not differ much from the corresponding Western retail formats. The strengthening of competition is expected to become faster in the near future as more foreign chains will enter the Russian market. Although the share of retail chains of the whole retail trade is at the moment estimated to be around ten percent, they are taking over the markets at a rapid pace at the expense of unorganised forms of trade. Some Finnish producers still have a significant customer base within the unorganised retail trade of foodstuffs but they will have to start taking the retail chains into consideration if they want to expand their business or even maintain it at the current level in Russia.
In the food production sector the competition is fierce, as big Russian and foreign producers want to ensure their piece of the huge demand potential. Thus the largest producers are relentlessly utilising their size: they invest in big marketing campaigns and are willing to pay high entry fees to retail chains in order to secure a place on the store shelves and build a strong brand also in Russia. Geographical expansion of the retail chains has started recently. This might bring possibilities also for Finnish producers to expand their geographical coverage, if they succeed in arranging their distribution accordingly and in convincing the retail chains of the merits of their products.
Information on the domestic content of the Russian food sector is hard to obtain. Thus, the theme was analysed by discussing the local food industry production and agricultural production, and referring to polls and interviews. The years before the 1998 crisis were characterised by high food imports that were speeded up by the overrated rouble. However, the crisis burst the bubble and the imports collapsed. Food-aid, more or less altruistic, was delivered to Russia by the EU and the US. The decline in imports was especially severe in the processed food sector that was in a slight downward slide already before the crisis.
After the crisis, production facilities were cheap, and modernisation of the food sector started with the help of investments. Domestic production and domestic retail chains started to develop fast and agricultural production started to revive as well. Imports of processed food were increasingly replaced by local production, which was reflected in trade statistics as decreasing imports of processed food and increasing imports of raw materials. Currently, there is a shortage of raw material, which will probably persist for some time. This might become an obstacle for further growth of local production. The referred polls and interviews supported the argument of a growing share of local production. Although there are indications that the growth of food production is decelerating, the long-term trend seems to be towards local production, which is strengthened by the patriotic consumption behaviour of the Russians. This creates pressure for Finnish producers towards local production.
The distribution systems of retail trade in foodstuffs in Russia was the main theme of the study. It was analysed from the perspectives of both retailers and producers; also the role of the distributors was discussed. The sphere of distribution is rapidly changing and is currently relatively fragmented. However, major progress has taken place after the 1998 crisis, because the crisis removed inefficient operators from the business. For example, Finnish producers are currently quite well aware of where their products end up. The strengthening of the retail chains is likely to shrink the role of wholesalers as the chains increasingly want to work directly with the producers. Thus, the development of the retail chains requires that the producers pay more attention to them. The wholesalers cope with the increased pressures in various ways: some wholesalers have built their own brands or even invested in production of their own, while some have set up their own retail stores. The strengthening of the retail chains gives them power in negotiations, to which the producers and distributors must adjust. Issues such as store entry fees and chains private label products must be taken into consideration.
The distribution systems of retail chains have developed considerably since the 1998 crisis. The chains are trying to shorten the distribution chain, similarly to what has been seen in the Northern Dimension Research Centre Hannu Kaipio, Simo Leppänen 87 Western countries. Many of the larger chains are acquiring or have already acquired a distribution centre or centres e.g. to boost efficiency and to control the flow of products. The development of the distribution systems of Finnish food producers has not been linear in Russia. The 1998 crisis forced producers to cut down their operations in Russia. Currently, the most popular type of distribution system among the interviewed firms is based on a network of local distributors. Factors that hinder the starting of local production by Finnish producers include the lack of local infrastructure, qualified staff and risk intolerance. There is, however, a strong consensus on the importance of starting local production in order to be a serious actor in Russia in the future.
Russian consumers demand quality in food products and they will not buy the product, if the perceived price-quality ratio is not right. Advertising, especially on television, is expensive and therefore some interviewees recommended more in-store promotion campaigns. Generally speaking, Russian consumers prefer domestic products. However, this depends on the specific product category in question. A Finnish label does not create added value for food products anymore, as all big Western brands are on the market and the quality of Russian products is rising. Producers should bear in mind the format of the specific retail chains when trying to access their assortment, since there can be discrepancies between the producers and retail chains aims to promote themselves to the consumers.
Finally, the study examined the availability of Finnish food products in Russia. Trade statistics show clearly the dramatic effect of the 1998 financial crisis to Finnish food exports to Russia. None of the major export product categories have reached the pre-crisis levels and some have even failed to reach a positive trend after the crisis. A store survey gave a slightly more positive picture of the availability of Finnish products in Russia than the interviews. Although the number of Finnish products is not ample in absolute terms, they have a relatively good position compared to the other producers goods within different product categories. A questionnaire was carried out with Russian food sector professionals to test their awareness of Finnish products. Seven brands were recognised by third or more of the respondents. As expected, the brands having the longest history in Russia were recognised the best. According to the Finnish interviewees, the major barriers for entry in Russia include the authorities, fierce competition, fragmented market and Finnish producers heavy production costs. The producers were also blamed for over-prudence and lack of business skills. The suggested strategies for increasing the market share included focusing geographically or segment-wise, working harder, introducing new products, starting local production, and cooperation between Finnish producers.
Two major points worth noticing in this study recurred throughout this report: the crisis of 1998 and the smallness of Finnish producers. The crisis was a definite watershed for food retail: it removed a large number of inefficient operators from the markets and set up the emergence of retail chains and local production, which are the most important factors shaping the distribution systems in food retail at the moment. The 1998 crisis was a force that initiated changes, whereas the smallness of Finnish producers is related to coping with these changes. Smallness was one reason why Finnish producers had to cut down their operations in Russiadue to the crisis. Smaller producers had fewer resources to tolerate losses during the crisis. Smallness is reflected also on trade negotiations with retail chains and distributors. It makes it harder to cope with the store entry fees and to differentiate from the mass of products propped up by expensive advertising. Finally, it makes it harder for Finnish producers to start or expand local production since it is more difficult for a small producer to get financing and to tolerate the increased risks. Compensating for the smallness might become the crucial factor determining the future success of Finnish food producers in the Russian market.
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