Ukraine: Weak Domestic Supply Chain Worsens Plight of Retail Tissue and Hygiene Industry
The political upheaval of late 2013, escalation of the conflict with Russia, coupled with current political instability, significant budget deficit and weakening banking sector, have had an unfavourable impact on consumer confidence and spending power in Ukraine. In 2015, retail sales of tissue and hygiene in Ukraine are expected to see, once again, a value decline of 1% in constant terms (US$ fixed 2014 exchange rate). Volume is projected to decline at a faster rate across all but essential categories, like toilet paper, reflective of price increases across product categories to cover the cost of imports and subsequent decline in consumer consumption.
While a difficult operating environment opens up a window of opportunity for domestic manufacturers, in view of significant price increases on imported brands and popular resentment that has led many Ukrainians to boycott products imported from Russia, taking advantage of this opportunity is not an easy task. Weak domestic supply chain and shortage of raw materials, coupled with unstable political situation, have hampered investment in local production, presenting a significant challenge to growth of domestic industry.
Consumers trade down and look for alternatives
Shaken consumer confidence and weakening consumer purchasing power over 2014 and in 2015 has led to significant trading down in Ukraine, as many households are now forced to switch to cheaper products or decrease consumption altogether where possible. In urban areas, brand recognition is being substituted with price as the key factor behind purchasing decisions. In rural areas, where brand recognition was weak even before the crisis, many are cutting down on purchases altogether. Products like sanitary protection and nappies/diapers/pants are being forsaken and are being replaced with reusable cloth, self-made products. In 2014, both categories saw a drop in value and volume, and further declines are expected in 2015.
Toilet paper is the only product category to record a positive, albeit modest, trend in 2014 and 2015. It is projected to post an increase of 1% in volume terms in 2015, which is in line with the 2014 trend but much lower than the growth recorded prior to 2014. Toilet paper is considered an essential part of household hygiene, and in many cases it has become a substitute for more expensive wipes and other tissue products.
In order to stimulate demand, manufacturers and retailers are heavily reliant on discounting and promotions. Store displays and product packaging increasingly emphasise value and seek to draw attention to significant percentages in discount, to entice price-sensitive consumers.
Limited local production by foreign manufacturers and challenges faced by domestic producers
The local currency (hryvnya) exchange rate reached a new level of UAH29 per US dollar in February 2015, representing an increase of more than 200% compared to the exchange rate in late 2013. The rapid rate of national currency devaluation has led to a hike in fuel prices and the price of imported goods.
Unlike in Russia, where the past few years have seen a significant production capacity expansion, international manufacturers in Ukraine – which also dominate much of tissue and hygiene – have very limited local production, making them vulnerable to rising costs of imports, and reducing their ability to rely on locally-manufactured products to offer more affordable prices to consumers. Most categories of tissue and hygiene saw unit price increases between 5% and 15% in late 2014, fuelled by costs of imported brands.
Domestic manufactures were also forced to raise prices for their products to cover the increased costs of imported raw materials. However, the increase on domestic products was not as drastic as that of imports, drawing consumer attention towards lower-priced goods. This is also coupled with the fact that the ongoing conflict with Russia has led many Ukrainians to boycott some of the brands that are manufactured in Russia and are then imported into Ukraine, including well-known brands like Pampers.
Hryvnya devaluation has certainly created an opportunity for local companies to gain share in retail tissue and hygiene by offering domestically-manufactured, lower-priced products. However, unlike in Russia, growth in local production has been slower, further hampered by the unstable political environment, as well as by shortage of raw materials and primary semi-finished products.
Challenges and opportunities ahead
Prospects for the Ukrainian economy in general, and tissue and hygiene in particular, remain weak in the short term, with only a modest 1% increase in constant value (US$ fixed 2014 exchange rate) expected for 2016. However, a degree of economic recovery from an infusion of financial support for the country and political normalisation are expected to provide a platform for recovery in the long term. Improved consumer confidence is likely to boost spending on tissue and hygiene products, with retail sales gaining strength from 2017 onward.
On the other hand, prolonged political instability and an ongoing Russia-Ukraine conflict is likely to further influence the Ukraine’s import/export relations with Russia, forcing international companies to import their products to Ukraine from other countries. At the same time, expansion of local production and performance of the domestic companies depends on financial and economic reforms in Ukraine, as well as an improved overall business environment. These include improvements needed in the legal framework that would facilitate setting up and operating business in the country.