Russia: Current Challenges and Long Term Opportunities in Retail Tissue and Hygiene
With ongoing political and economic woes, 2015 is expected to be a challenging year for the Russian marketplace. Euromonitor International projects that in 2015 Russia’s real GDP will decrease by 3.8% and consumer expenditure will fall by 4.6%, in constant 2014 prices. As a result, many Russians are expected to trade down. In 2015, retail sales of tissue and hygiene in Russia are projected to see only 1% rise in constant value (US$ fixed 2014 exchange rate) to achieve US$4.4 billion. However, volume sales for many categories are expected to register stronger growth, reflective of weakened purchasing power and bargain shopping.
While challenging in the short term, Russia’s downturn creates a window of opportunity for domestic brands to capture consumer attention, build customer loyalty and drive domestic industry growth, helped by expanding local production and improved supply chain.
Russian consumers are trading down as prices go up
In 2015, price will be among the top considerations shaping Russian shopper behaviour. Tighter budgets are forcing many, and especially low-income consumers, to look for cheaper alternatives for household staples. Trading down is behind the projected modest increase in constant value growth in retail tissue (by 3%) and static growth in hygiene, in 2015 (US$ fixed 2014 exchange rate).
Thus, for instance, in toilet paper, value sales are projected to see constant value growth of 2% (US$ fixed 2014 exchange rate), while volume is expected to see a 4% rise. Within hygiene products, improved birth rates and state family policies stood behind strong growth of diapers and imported diaper brands over the review period. However, despite Russian parents’ loyalty to well-known brands, promotions and price discounts are playing an increasingly important role in their choice of products. As a result, diapers will show only modest growth of 1% in constant value (US$ fixed 2014 exchange rate) in 2015, well below growth registered in 2014.
Expanded domestic production and improved quality can meet demand for affordable products
In the past few years, tissue industry in Russia saw expansion of local production capacities by international and domestic players. For instance, SCA Group, Syktyvkar Tissue Group and Metsäliitto Osk set up production lines with an added combined capacity of 120,000 tons. Syassky CBK installed a new 125-tonne/day Toscotec Ahead tissue line, aimed at boosting production volume of tissue while at the same time reducing cost of production and improving quality of tissue paper. Increased local production at reduced costs, in the conditions of weakened consumer purchasing power, can help manufacturers of tissue products to withstand market pressure and meet increasing consumer demand for quality, affordable products.
On the other hand, hygiene product manufacturers are likely to feel a stronger pinch from the challenging economic environment. The category is dominated by foreign brands, and most are still manufactured and brought in from abroad, thereby making them more vulnerable to current market conditions. At the same time, domestic production of retail hygiene products, while having risen over the years, remains limited and still faces many challenges, including the high cost of raw supplies.
Short-term challenges versus long-term opportunities in Russia’s changing marketplace
The trend towards bargain shopping will be felt in the short term, with expected year-on-year growth in tissue and hygiene constant value at 1% in 2015 and less than 2% in 2016 (US$ fixed 2014 exchange rate). As the economy and consumer confidence recover, many Russians are likely to return to their pre-2015 purchasing patterns, with spending picking up across product categories from 2017 onward. At the same time, however, manufacturers might find it difficult to encourage lower income consumers, who would have discovered cheaper branded and private label products, to trade up again.
From the brand and manufacturer perspective, the increase in bargain shopping creates an opportunity for economy brands, domestic brands, and private label to capture the attention of price-sensitive consumers, especially outside of wealthier, large metropolitan areas.
In 2014, private label tissue and hygiene products accounted for a 3% value share of combined tissue and hygiene retail product sales in Russia. This compares to a 23% value share in North America and a 39% value share in Western Europe, indicative of ample opportunity to drive consumer acceptance and sales. Leading grocery retailers in Russia continue to expand their private label offering in tissue and hygiene, from economy private label to the premium segment. For instance, Auchan OOO offers economy tissue products, wipes, sanitary protection, and wet toilet paper under the Kazhdy Den label. The retailer is also present in the mid-priced segment with toilet paper CleanOk. Competitively-priced private label tissue and hygiene products are well positioned to build consumer loyalty and increase their share in 2015 and beyond.
Domestic branded product manufacturers like, for instance, Syassky CBK and Syktyvkar Tissue Group, have steadily grown their share of the Russian tissue and hygiene market over the review period. Ongoing investments and improved domestic production will likely further strengthen their position and present a growing challenge to imported brands in the long term, as domestic players can effectively build stronger brand recognition during the downturn.
Securing repeat consumer purchases and long-term growth, however, will require significant improvement in the quality of domestic products, especially in hygiene, where foreign brands have historically had a lead over local products due to their better quality