Emerging health and wellness markets: Ukraine

In Ukraine, the recession has managed to strangle – at least temporarily – spending on premium-priced health and wellness products. But underneath, the health and wellness industry is alive and well, according to Euromonitor International.

Recession hits hard

With a sizeable population of around 46 million, Ukraine remains a market of vast and largely untapped potential, and is of great interest to health and wellness players scouting out new shores.

Things were going so well, with a steadily growing economy and rising disposable incomes creating a viable market environment even for quite sophisticated, premium-positioned health and wellness products, such as functional spreads and functional drinks. However, in late 2008, Ukraine’s economy experienced the onset of the worst recession since the collapse of the former Soviet Union.

The real value of agricultural output fell by 24.9% in 2009. Limited availability of credit is creating a shortage of inputs for many farmers, while livestock and dairy farming is fragmented and inefficient.

The manufacturing sector makes up 17.6% of the country’s GDP, and industries such as food processing (in which the government has minimised its intervention) are the backbone of the economy.

Many manufacturers are struggling badly in the present crisis. Industrial output fell at a double-digit rate in 2009. Even before the crisis, Ukraine lagged behind other transition countries in introducing economic reforms. In 2007, the country’s fractious parliament finally approved a series of measures, including the strengthening of intellectual property rights, paving the way for WTO membership, which was duly accomplished in 2008. Little progress has been made since then, however.

The country is desperate for foreign investment, but corruption and cumbersome bureaucracy discourage many investors. Viewed over the entire 2004-2009 review period, consumer spending grew by an average of 9.3% annually in real terms, reaching 63.1% of GDP in 2009.

Annual disposable income stood at UAH12,317 (US$1,580) per capita in 2009, lower than that of most of its neighbours, including Russia (US$6,949 per capita), Belarus (US$3,701) and Romania (US$5,778). Most opportunities in Ukraine’s consumer markets are in major urban centres such as the capital Kiev, and cities Kharkiv, Lviv and Dnipropetrovsk.

Ukrainians revert to cheaper, traditional health and wellness dairy products

The Ukrainian dairy market provides a good illustration of how the economic crisis has impacted the country’s health and wellness market. Ukrainian consumer purchasing power began to decline in the autumn of 2008, and throughout the winter the shortage of milk and difficulty in obtaining credit from banks forced small producers to scale down production, and subsequently prices increased.

As a consequence, consumers turned away from premium health and wellness-positioned yoghurt products and towards cheaper kefir (a traditional sour milk drink) and other drinking milk products.

Euromonitor International’s packaged food data shows that retail value sales of functional drinking yoghurt rocketed from UAH33 million in 2004 to UAH314 million in 2008, but then fell to UAH258 million (US$46 million) in 2009. Functional spoonable yoghurt dropped from a high point of UAH8 million in 2007 to under UAH7 million (US$1 million) in 2009. Sour milk drinks, in contrast, posted a value CAGR of 27% between 2006 and 2009, reaching UAH1.4 billion (US$241 million) in 2009.

The shift back towards traditional fermented sour milk drinks, such as kefir, and the traditional “baked” milk beverage ryazhanka (or ryazhenka), both of which are regarded as true health foods by Ukrainians, shows that there is no erosion of interest in health and wellness as such, merely that premium-priced offerings are no longer easily affordable. Danone leads both the functional drinking and the functional spoonable yoghurt categories with value shares of 46% and 40%, respectively.

Besides the omnipresent Actimel, its successful Rastishka was the only pro/pre biotic drinking yoghurt available on the market which was solely targeted at children. Both brands were given strong television advertising support. As demand started to decline at the end of 2008, Danone responded by giving discounts in the form of more yoghurt for the same money, and by reducing retail prices.

Carbonates suffer from a tarnished image

In the beverages market, volume sales of carbonates fell from 1.5 million litres in 2007 to 1.2 million litres in 2009, partly because of the recession, but also because of growing consumer unease over their perceived unhealthiness. Apart from these products’ universally maligned high-sugar content, media reports started to surface alleging carbon dioxide to be harmful to health.

This baffling piece of information even had a negative impact on sales of carbonated bottled water, which is considered the industry standard for bottled water in Ukraine, prompting some consumers to switch to unfamiliar still varieties. Low-calorie carbonates remained marginal in all carbonates categories, rising no higher than a 4% share of total volume sales in cola carbonates.

Although these offerings are meant to appeal to health and wellness-oriented consumers, as carbonates are regarded as unhealthy, their intended target group is somewhat indifferent as to whether the product is low in calories or not. In a valiant attempt to stimulate the sluggish carbonates category, manufacturers tried to rouse consumer interest in all sorts of innovative ways in 2009, for example by launching functional varieties, clearly meant to “healthify” the category.

Examples include Fruitonus from Sandora TOV, Botaniq from Coca-Cola Beverages Ukraine Ltd and Jaffa Spring from Vitmark-Ukraine SP TOV. The USPs of both Fruitonus and Jaffa Spring lie in a combination of added juice and herbal extracts, eg lemon plus the immune system-boosting herb echinacea. Botaniq simply features added juice.

Juice – from shop bought to homemade

Previously a high growth area with per capita consumption volumes zooming towards developed country standards, the Ukrainian fruit/vegetable juice category buckled under the recession. Record retail volume sales growth rates of 55% in 2007 abruptly reversed to a 15% decline the following year, and a further 13% contraction in 2009.

The situation was compounded by the fact that a large number of Ukrainians living in rural areas stepped up their home bottling activities as the countryside produces mountains of fruit and vegetables. In order to save money in the medium term, many urban consumers also started purchasing domestic juice extractors, which did not particularly help packaged juice sales either.

At the end of the review period, fruit/vegetable juice remained quite underdeveloped in Ukraine, with a number of categories totally absent. Not-from-concentrate 100% juice was one of these, as fresh alternatives sold through on-trade outlets, kiosks and street vendors, as well as the aforementioned practice of making juices at home, were the preferred and more affordable choices.

Frozen juice also remained an alien concept to Ukrainian consumers. As with healthy dairy products, Ukrainian consumers do love their juices. The recession has precipitated a shift towards cheaper options, rather than putting an end to the health and wellness trend as such. As soon as economic conditions improve and disposable incomes start to rise again, juice sales will inevitably bounce back.

It is therefore important for health and wellness players not to take their eyes off the ball during these fraught times, but to monitor changing tastes and be ready with new and exciting products as soon as the market starts to pick up. In the meantime, health and wellness products are still very much sought after, but an affordable price point is paramount.