Fresh Food Market in Russia Contracted by 4% in 2015

Since the Russian government imposed its import embargo on a great number of food products from the EU, North America, Australia and a handful of other markets, the country’s fresh food sales have been severely affected, despite the much-hyped boost in domestic production as part of Russia’s long-term aspirations towards self-sufficiency. The situation was further compounded by the devaluation of the rouble, the country’s deepening economic recession and Russian consumers’ dwindling disposable incomes. Our recently published fresh food data reveal which categories were the hardest hit, and which ones managed to benefit from the difficult situation.

Nuts bear the brunt

It was nuts which suffered most from the import embargo, with volumes contracting by 29% in 2015, following on from the previous year’s 18% decline. Over the review period, fresh nuts sold through retail, foodservice and institutions declined from 42,000 tonnes in 2010 to 22,000 tonnes in 2015.

The Russian fresh nut market is heavily reliant on imports, with the US and Spain as the main exporters to Russia before the sanctions. Predictably, pistachios and almonds suffered the sharpest declines of 84% and 83%, respectively, followed by coconuts. Peanuts, the largest category, accounting for half of Russian fresh nut sales, was the least affected, since the bulk is imported from Argentina, a country that is not on Russia’s foreign trade blacklist.

According to official statistics, the average retail price for nuts increased by 71% in 2015 on the previous year. Quality suffered noticeably, with nuts that would formerly have been destined for processing now presented as fresh nut offerings.

Nuts are not regarded as an essential food by Russian consumers, but since they have become aware of nuts’ many health benefits, people were disinclined to give them up completely, reserving nuts as a “special treat”. Manufacturers reacted by increasing their offering of affordable bagged nuts containing less than 100g per unit.

Russia struggles to produce enough “fruit and veg”

Next up on the negative growth ranking is fruits, which shrank by 20% in 2015. As one would expect, “exotic” fruits, for which the Russian climate is too harsh for cultivation, were among the biggest losers in 2015, led by kiwis and pineapples.

With a view to stemming the collapse of Russia’s fresh fruit market in the medium-to-long term, should trade restrictions continue, the Russian government allocated RUB2 billion to domestic horticulture, five times the amount granted in 2014. This is a much-needed investment under the current conditions, since the country is unable to meet demand even for those fruits that can be produced domestically. Apples, for instance, experienced a substantial 23% decline in 2015, and pears/quinces lost 37% of their volume sales.

Compared to fruits, vegetables only registered a relatively modest decline of 3% in 2015. Tomatoes, one of the biggest categories in terms of volume, recorded unit price growth of 30% in 2015. The retail price of cucumbers also saw an above-inflation increase of 20%. High prices combined with deteriorating quality led to Russian consumers not maintaining their habitual vegetable intake, which ought to concern the government on grounds of public health.

The biggest loser by a wide margin was cauliflower and broccoli, primarily imported from France and Spain – with the category contracting by 41% last year. Another source of fresh broccoli and cauliflower (as well as other vegetables, fruits and nuts) for the Russian market is Turkey, but since the dramatic deterioration in diplomatic relations between the two markets linked to the conflict in Syria, import restrictions on produce from Turkey came into force on 1 January 2016. This development does not bode well for the recovery of the Russian fresh food market.

On the upside, low-import-dependence crops onions and maize enjoyed 5% volume growth in 2015, owing to a boost in domestic production. The 2015 maize harvest was four times greater than in 2010. We predict that maize volumes will grow by 28% between 2015 and 2020, compared to just 4% for vegetables overall.

Organic produce sales remain negligible

In the current climate, organic and fair-trade fruits and vegetables do not stand much of a chance of gaining a strong foothold in Russia. Russian consumers were already extremely sceptical of “special” labels and certifications, doubting their authenticity, and the supply shortage, accompanied by the inevitable profiteering and incidences of fraud, has only served to further compound these trust issues. Right now, it is above all price considerations that rule purchase decisions, followed by optical/quality appeal.

But, could this situation change in the long term? In December 2015, President Vladimir Putin announced to the Russian parliament that it was his vision for Russia to become the world’s largest supplier of healthy, “ecologically clean”, high-quality food, a notion which, in the president’s opinion, Western producers had lost. Although a National Standard for Organic Products was approved by the Russian parliament in September 2014, it has still not been finalised and so organic products sold in Russia are either foreign or retailer certified.

It is extremely unlikely that ramping up domestic organic production will be able to solve the country’s fresh produce supply bottleneck. Once supply restrictions ease, however, organic home-grown fruits and vegetables should be able to carve out a greater market share for themselves.

Beef suffers the most

The category that, arguably, received the most intensive press coverage for being throttled by Russia’s import embargo over the past year and a half is meat. In reality, however, fresh meat volumes only declined by 1% in 2015. Admittedly, it was a very bad year for beef, volumes of which shrank by 8%, and also for the “other meat” category, which suffered a 13% volume decline. The latter includes meats such as reindeer, horse and rabbit meat, which are regarded as delicacies rather than purchased for habitual consumption, and are priced accordingly, ie at a premium.

Pork sales also declined, although only by 1%. Had Brazil not stepped into the breach by ramping up its exports to Russia and becoming the country’s number one supplier of pork, the decline might have been much more pronounced. Earlier this year, Russia signed an agreement with another South American meat-producing country, Uruguay, to help alleviate its beef shortage.

Due to lower import dependence, a faster production cycle and a much more affordable price tag in the face of declining disposable incomes, consumers increasingly shifted to poultry, which posted 2% volume growth in 2015. Poultry now accounts for 54% of total fresh meat sales in Russia, up from 48% in 2010. But it is not just chicken that benefited from the rising prices of red meat. According to trade sources, domestically reared duck and turkey are enjoying something of a mini-boom right now. This marks a turnaround, particularly for turkey, a previously relatively unpopular type of poultry in Russia.

Another interesting development triggered by these difficult conditions was the rising popularity of halal and kosher meat. Unlike organic offerings, which failed to inspire consumer confidence and were not deemed worth the price premium, Russian consumers – and not just those adhering to the dietary laws of Islam or Judaism – started placing their faith in the perceived superior quality and safety of halal and kosher meats. However, these products are still fairly niche and production remains localised in those areas with sizeable Muslim and Jewish populations. Prioskolie, Turbaslinskie Broilers, Maikop Poultry and Chelny-Broiler are among the largest producers.

Fish fiasco

Where fish and seafood is concerned, the already precarious supply situation since the import embargo commenced intensified further in July 2015, when Iceland was added to the blacklist. Iceland is a prime supplier of perch, mackerel, herring and capelin to the Russian market. Imports from Norway, the world’s leading supplier of salmon, had already been stopped in 2014. Domestically produced fish did not quite manage to plug the gap, and fresh fish volumes subsequently declined by 3% in 2015.

Although seafood was much harder hit than fish, with crustaceans and molluscs and cephalopods volumes plummeting by 55% and 32%, respectively, these merely accounted for 1% of fresh fish and seafood volume sales in 2015 and so the bulk of consumers did not feel the shortage too keenly. Fish, by contrast, is very popular in Russia and an important component of many traditional dishes. To illustrate, at 15.7kg per capita in 2015 (down from 17.3kg in 2013), Russian consumption is significantly above the Eastern European average of 10.2kg, as well as exceeding Western Europe’s 9.2kg and dwarfing North America’s paltry 2.8kg. The lack of offering, both in terms of quantity and variety, caused by the import embargo and the skyrocketing prices demanded for fresh fish are hitting the average Russian consumer very hard indeed.