Academic journal article The McKinsey Quarterly

The Russian Consumer Revolution

Academic journal article The McKinsey Quarterly

The Russian Consumer Revolution

Article excerpt

Three keys to success: distribution, distribution, distribution

Moscow's top 30 distributors account for 70% of sales

Mercedes on the streets of Vladivostok

For the foreign manufacturer of consumer goods, Russia is no longer virgin territory. Since the break up of the Soviet Union in 1991, multinationals have been satisfying Russians' hunger for products that were in scarce supply in the old centrally planned economy. Some Western brands have already become household names. Today's true pioneers, then, are not those trying to enter the Russian market, but those intent on building market share in the face of fierce competition and realizing decent returns in what remains a perilous environment.

To succeed in Russia, companies will need to have commitment to long-term rewards, flexibility in adapting to local conditions, which might mean overturning what is accepted wisdom at home, and excellent local management skills. But these things are not enough. Companies that thrive here will quickly seize opportunities to position themselves, and then prepare for keener competition. By actually driving the restructuring process in Russia, foreign manufacturers can help secure their own future. For consumer goods companies, that means controlling critical links in the emerging industry chain - distribution in particular.

Mapping demand

Few doubt the potential rewards in a market of 150 million consumers. Greater Moscow alone has a population of over 11 million, more than the entire Czech Republic. St Petersburg, Russia's second largest city, has 5 million inhabitants, making it as big as Slovakia, Denmark, or the state of Indiana. Already, purchasing power parity easily outstrips that of India and China [ILLUSTRATION FOR EXHIBIT 1 OMITTED], and such indicators as inflation, per capita income, and wages [ILLUSTRATION FOR EXHIBIT 2 OMITTED] suggest that "catch-up" consumption will drive growth as Russia's economy evolves along free-market lines.

Per capita income at present is very low, and will take generations to approach current Western levels. Yet official figures undervalue the wealth that exists in a society with such a large unofficial economy - and they certainly cannot explain why so many Mercedes crowd the streets of Vladivostok. Moreover, with many costs - such as rent and certain staples, like bread and milk - remaining under price control, disposable income is relatively high. An unusually large proportion of household spending goes on food: some 35 percent, compared with around 15 percent in the West [ILLUSTRATION FOR EXHIBIT 3 OMITTED].

A growing market

Since the demise of the Soviet Union, income distribution has become more uneven and a middle class has emerged that can afford to buy foreign goods regularly. Estimates suggest that at least 30 percent of Russian households currently earn over US$200 per month [ILLUSTRATION FOR EXHIBIT 4 OMITTED]. These higher income groups tend to be concentrated in major urban areas, creating islands of opportunity for manufacturers seeking new markets. In Moscow alone, there is a target high-earning market of 4 million people. Fifteen of Russia's 23 biggest cities represent attractive staging posts for foreign manufacturers by virtue of absolute income level, disposable income, or economic base. Of these, five - Moscow, St Petersburg, Nizhni Novgorod, Samara, and Chelyabinsk - stand out as particularly attractive; they also form the core of regional concentrations, such as Moscow, Tula, and Yaroslavl' [ILLUSTRATION FOR EXHIBIT 5 OMITTED].

The product categories available to these wealthier consumers have mushroomed, and some are already dominated by foreign brands. Chocolate bars, for example, were largely unknown in Russia before MasterFoods began importing its Snickers product in 1991. MasterFoods now has a combined 65 percent of a US$300 million market. Further proliferation will inevitably occur as lifestyles and tastes change. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.