Top Five Opportunities in the Beverages Industry in CIS Region
The economic turmoil in Russia and Ukraine in 2014-2015 echoed across neighbouring CIS countries in terms of devaluation, leading to a down-trading trend in these markets. However, what seems as a negative prospect at first glance has potential opportunities.
Economic uncertainty – potential?
The economic difficulties have had a positive influence on private label development. Private label started to gain importance in the CIS region in the aftermath of the financial crisis of 2008/09. While this trend has different levels of importance depending on the country, it is clear that in the light of economic unrest people are likely to increase their interest in private label products, because of their more affordable prices. The development of private label is correlated directly with the development of the modern retail trade. Therefore, while private label products have established a presence in drinks retailing in both Russia and Belarus, where the share of modern grocery retailers’ turnover is higher than 50% of the total in terms of value sales, it is less apparent in other CIS countries. Nonetheless, the modern trade continues to see active development across all CIS markets, and it is just a matter of time before private label starts gaining share, eventually taking over the economy branded segment, in line with growing appreciation by consumers.
Health and wellness only starts to gain importance in CIS
In developed Western European countries, the health and wellness trend has accelerated, with health and wellness positioned beverages developing in line with traditional beverage categories. However, in the CIS region, this trend is only starting to gain attention from local consumers. As with a number of other FMCG developments, Russia is the pioneer in this trend in the beverages market. While in Russia, there is a quite visible segmentation between types of health and wellness beverages, such as naturally healthy (green, fruit and herbal tea, bottled water, juice), better for you (reduced caffeine, reduced sugar drinks), functional fortified (drinks with added vitamins and minerals) and organic, in other CIS region countries the health and wellness segment is still in its infancy, or in some cases is non-existent. Nonetheless, recent data show consumers‘ interest in, and willingness to consume such beverages. This is reflected in the growth of low-calorie colas at the expense of standard ones, which are considered unhealthy owing to their high sugar content, and rising sales of decaffeinated coffee. Although health and wellness beverages are still a niche relative to standard beverages, their presence is expected to grow in the upcoming years. Evidence from other markets suggests that growth in the significance of this trend is inevitable in the future; however, it will be strongly dependent on rising disposable incomes, greater consumer education and a rise in the overall level of social wealth.
Changing coffee drinking culture
Russia, like a number of neighbouring countries in the CIS region, is undergoing changes in consumer behaviour related to coffee consumption. Affected by the Western fresh coffee culture, the Russian and neighbouring markets have seen changes in consumption patterns which have resulted in the increasing popularity of fresh coffee in retail at the expense of instant coffee over the last several years. The strongest increase in the volume share of fresh coffee total over the last five years was seen in Russia and Belarus, with the share of fresh coffee increasing over this period by seven percentage points in Russia and four percentage points in Belarus. The greater appreciation of fresh coffee has also been driven by the growth of specialist coffee shops targeting coffee connoisseurs, as well as casual consumers. Despite relative uncertainty in the light of the latest events in the region, it seems that in some countries, changing consumer behaviour in terms of coffee consumption has reached the point of no return and the share of fresh coffee will continue to grow in the long term.
Greater sophistication in the choice of spirits
Russia, as well as the neighbouring CIS countries, are strongly associated with vodka in terms of alcoholic drinks consumption. Indeed, vodka is by far the leading spirit, with its volume share of overall spirits in Russia and the CIS markets varying from 75% to almost 90%. However, in a number of countries, the share of vodka has been declining, as consumers favour more sophisticated alcoholic drinks, such as whisky, rum, tequila and gin. The dynamics of vodka consumption differed over the 2010-2015 period across the region, from stagnation in Kazakhstan to quite strong declines in Russia and Belarus, while more sophisticated spirits posted volume CAGRs ranging from 7% to 40%. Prior to the current economic crisis in Russia, the region had seen some years of relative economic prosperity, which led to increasing disposable incomes and improving social wealth. In the light of this, consumers were switching from vodka to alternative spirits, in part as a means to highlight their social status. It is expected that as region recovers from the current crisis, this trend will continue to be observed, as a result of market globalisation, in line with greater consumer education and growing sophistication in terms of spirits.
Craft beer wave starts in Russia and the CIS region
Beer sales in Russia have been declining, but at the same time there has been a shift towards better quality beer, with consumers turning away from regional and national mainstream beer brands in favour of craft alternatives. This trend, which came from the West, is beginning to develop in Russia and the CIS region. The craft trend originated with the emergence of a number of microbreweries, which are focused on brewing artisanal alternatives to traditional mainstream beer. However, beer industry giants in Russia and the CIS, such as Baltika Pivovarennaya Kompaniya (Russia), Efes (Russia), Lidskoe Pivo (Belarus), Efes (Kazakhstan) have introduce craft-positioned beers to extend and diversify their portfolios. With constantly diminishing volumes in the region, owing mostly to contraction in the Russian market, craft beer has the potential to benefit, as consumers drink less beer, but of higher quality. Consumers are likely to be interested in trying out different types of pale ales, wheat beers, stouts and flavoured beers, at the expense of traditionally popular lagers, the share of which is expected to contract during the next five years.