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Packaged food is one of the largest consumer markets in the CIS region. In the last decade eating habits have changed significantly, due to fast-paced lifestyles, increasing product availability and the spread of modern retailing. A typical consumer in this region, who used to be loyal to traditional food products and local specialities, is becoming more interested in modern and convenient Western products than ever before. However, now consumers also face economic instability and shock price rises in many countries, and have to make more rational choices in packaged food, trading down to traditional, standard, domestic and economy brands. Despite the current slowdown of consumer demand, the future outlook of packaged food sales remains positive. There are many categories that have considerable room for future growth. Baby food, ready meals, dairy, processed fruit and vegetables, breakfast cereals, sauces and dressings, and sweet and savoury snacks are amongst the most dynamic categories, benefiting from product and packaging innovations and growing consumer interest.
An increasing number of consumers are now choosing packaged food rather than unpackaged alternatives. Volume consumption of packaged food per capita in the region is still lower than in Western European markets, but it is steadily growing: 19% in Azerbaijan and Uzbekistan, 13% in Kazakhstan, 6% in Russia, and 12% in Georgia over 2010-2015. One exception is Belarus, which saw a decline of 3% in volume per capita consumption over the last five years, as the market has suffered heavily from local currency devaluation and seen extreme price increases for imported products. The expanded presence of modern grocery retailers is creating demand for packaged food that is more convenient in storage, easy to consume and fuels demand by new product and packaging developments.
Uzbekistani consumers increasingly opt for packaged food variants as health concerns and the belief that packaged products are cleaner and healthier grow. Kazakhstan is characterised by growing demand for on-the-go snacking and fast meal preparation, as well as the growing popularity of internet grocery retailing in big cities. Georgian buyers are becoming more demanding as to what they eat, and look for packaged food that provides information on ingredients, nutrition and expiration date. While packaged food has a widening prevalence across the region, some categories are still dominated by artisanal and generic products, particularly staples such as bread, pastries and cheese.
Increasing prices on packaged food is prompting a shift to economy and mid-price brands. Local currency devaluation occurred in several countries across the region in 2014 and 2015, leading to significant price increase for imported brands, and domestic brands for production of which imported resources are extensively used. For instance, average prices of packaged food grew by 20% in Kazakhstan, 23% in Uzbekistan, 30% in Belarus and 27% in Russia. The majority of consumers have started looking for cheaper alternatives, shifting to economy categories and seeking out promotions and discounts. To avoid losing competition due to high prices, manufacturers use various strategies: They introduce smaller pack sizes but keep the same price for a product, offer bigger pack sizes that provide better deals by price per unit, trade down in terms of economy packaging and use less expensive ingredients for their products.
Sharp price increases on imported products have opened sales opportunities for domestic brands. Locally-produced packaged food was less affected by currency depreciation than imported international brands and became a more preferable choice for price-sensitive consumers in these times of economic downturn.
In Russia, the embargo on imported food led to deceleration of competition between domestic and foreign manufacturers in some packaged food categories. Domestic players, primarily in dairy and meat, started increasing their production capabilities and started to occupy niches left by imported brands. However, domestic food production requires time and investment to expand and address consumer concerns regarding product quality. Full import substitution is far from reached however, as the embargo has been in force for too short a period, considering the length of production cycle and pay-off period for investments, which can take more than a year. The increased cost of imported resources and interest rates for loans has also restricted investment and expansion of local production. Another major issue in import substitution by local products remains the quality of food that is not always comparable to imports, and cases of falsification, as in cheese. Prolongation of the embargo until August 2016 gives hope for domestic manufacturers to strengthen their position in packaged food from one side, but limits their future plans by a one-year period from another side.
In Kazakhstan, domestic brands suffered from last year’s Russian rouble devaluation, making imported food from Russia more attractive by price. The government’s Made in Kazakhstan campaign was launched to raise awareness of domestic food brands among consumers. The campaign was held by retailers, widening shelf space for local brands and introducing in-store promotions in support of local products.
In Uzbekistan, Azerbaijan, Belarus and Georgia, domestic players continue to play a leading role in many packaged food categories, benefiting from attractive prices and meeting local consumers’ taste. However, domestic brands experience escalating pressure in providing comparable product quality and packaging innovation to international brands.
Health and wellness packaged food has been gaining popularity in the region in the past decade, but demand is still weak compared to Western markets. For instance, in Russia health and wellness brands acquired a 13% value share of total packaged food in 2015, while its share in Germany is 30%. Current health and wellness sales growth is very much restricted by comparatively far higher prices and economic instability. Economic downturn followed by limited disposable income forces price-sensitive consumers to shift to standard products. However, health and wellness brands are expected to have huge potential for future growth in the region due to unsaturated markets, and burgeoning interest in healthy diets and active lifestyles.
While Russian consumers remain loyal to traditional products that are naturally healthy as sour milk and high fibre, their interest will continue to rise for brands positioned for weight management, such as reduced sugar and fat, digestive health, such as products fortified with probiotics, and general wellbeing, such as products fortified with vitamins and minerals.
In Kazakhstan, healthy eating habits are spreading among medium and high income consumers living in big cities. Development of restaurants offering meals made from organic, fresh, preservative-free, diabetic food and services for individual menu building is accordantly fuelling demand for health and wellness packaged food. In Georgia and Belarus, consumers are becoming more health conscious than ever before, and demand for health and wellness brands is expected to accelerate.
Packaged food value sales will continue growing in the next five year period in the region; however, the pace will be slower than in previous years in countries affected by recent macroeconomic changes. Russian sales will significantly slow down and growth will primarily depend on future consumer purchasing power, prolongation of the embargo and sanctions and local currency stability.
Azerbaijan, Kazakhstan and Uzbekistan are also forecast to see some constraints to growth in future than in the past years as a result of increased prices. In these markets, future performance of packaged food sales will be determined by stabilisation of local currency and prices, increasing living standards, ongoing urbanisation, shifts from unpackaged to packaged products and positive demographic trends.
In Georgia and Belarus, packaged food is to perform well in the next five years. The market will benefit from a developed agricultural sector, state control over retail prices and increasing food imports in Belarus, and positive future economic growth, active lifestyle development in big cities and growing preference for packaged food over unpackaged food in Georgia.