#8
US Department of Commerce
This report is provided courtesy of the Business Information Service for the
Newly Independent States (BISNIS)
BISNIS Bulletin
October 2001
The Resurgence of the Russian Consumer
by Ellen House and Kelly Raftery
Ellen House and Kelly Raftery work for BISNIS in Washington, DC. Peter
Neisuler, an intern for BISNIS during Summer 2001, contributed to this article.
Following the Russian financial crisis of August 1998, many Russia watchers
pronounced the demise of the country's nascent middle class. Just a few
years later, however, there is ample anecdotal evidence that a group of
Russians with disposable income is reemerging. Moreover, the spending habits
of this group are helping boost both the domestic economy and the country's
imports.
This is not to say that Russia has overcome high poverty levels or extreme
income disparities-both still exist. However, there are indicators that
increasingly point to an expanding consumer class. Private consumption in
Russia, which fell considerably after the ruble crisis in 1998, grew
strongly in 2000 and is expected to increase further this year, evidencing a
general economic recovery. Imports also rose strongly in 2000, after major
declines in 1998 and 1999, and are expected to expand over the next few
years. Renewed consumer spending is not only helping fuel Russia's economic
recovery (high oil prices have also played a major role), it is helping
raise domestic production of consumer goods, increasing competition and
therefore boosting quality, and affecting company behavior.
Who Are Russia's New Consumers?
Several recent studies have attempted to gauge the size, buying power, and
spending habits of Russia's reemerging middle class. In general, they
conclude that the middle class makes up anywhere from 8-35 percent of
Russia's population; some 12-40 million people out of a country of 145
million. Russian government statistics put the number of those who might be
considered middle class at the higher end of this spectrum. According to
recent Goskomstat figures, an estimated 25 percent of Russians live in
poverty, 35 percent can afford clothes and food, but not much more, another
35 percent are middle class with varying levels of disposable income, and 5
percent are "rich." These categories suggest that the middle class in
Russia
is represented by those people with income levels that allow them to make
discretionary purchases. The actions and decisions of these consumers are
being watched closely by Russian and foreign manufacturers and the country's
growing retail sector.
What Are They Buying?
Although determining the size and characteristics of Russia's new consumer
class is difficult, a key indicator of its existence (and importance) is its
ability to purchase food, consumer goods, travel, cars, apartments, and a
more comfortable life-style. A great deal of anecdotal evidence indicates
that Russians have greater buying power now than at any other time in the
last three years, and that they are spending money on optional and luxury
items. Sales of new food items and services are increasingly popular. Among
the industry sectors that are seeing some growth are furniture and home
furnishings, do-it-yourself (DIY) items, cosmetics, clothing and footwear,
restaurant equipment and accessories, and the automotive sector.
A survey of the Moscow middle class (1,000 people aged 18 to 54 were
questioned), conducted in July 2001 by ComCon, a Moscow market research
firm, found that the middle class (an estimated 1.16 million people out of a
total population of 9.3 million) account for 60-70 percent of all consumer
spending in the capital. The survey found that 94 percent of Moscow's middle
class regularly eat out in fast-food restaurants (compared to some 40
percent of the general population), 63 percent eat at upscale restaurants
(compared to 16 percent), and about 85 percent own a car (versus 31.8
percent).
U.S. companies must also realize that the spending habits of Russians have
changed considerably since 1998. Russian consumers now seem to be employing
different reasoning when making purchases. In the past, if an item was
manufactured in the United States, or if it was expensive, it was assumed
that it was of good quality. During the last few years, Russians have become
more sophisticated consumers and more demanding of quality for price. Also,
the average Russian consumer now does not assume quality from the country of
origin. In a poll done by Russian business magazine Expert in 2000, Russian
middle class consumers said they make purchasing decisions based primarily
on the quality of the item. In fact, 92 percent of respondents cited quality
as their number one factor in purchasing decisions. The next question the
survey asked was: How do consumers determine quality? The top three factors
that helped consumers to decide if an item was quality were (1) price, (2)
where the item is sold, and (3) the brand name. Sixty-six percent of
respondents said they would not buy products from a manufacturer they did
not know, even if it meant significant price savings. The same survey found
that middle class consumers prefer to buy from specialized shops and
supermarkets, as opposed to open air markets or other retail outlets.
For the first time since the crisis, new shopping malls, restaurants and
supermarkets are opening all over Russia-in Yekaterinburg alone, five
shopping complexes were opened in the first six months of 2001. Major
international retailers are opening locations and aggressively pursuing
expansion plans in Russia. The Dutch Spar chain recently opened its first
store in Moscow, and plans to open over 30 outlets throughout Russia.
Germany's Metro AG and France's Auchan have both identified sites for retail
development and are working on construction. Ramenka, a Turkish retail
chain, plans on opening its fourth outlet in Moscow in October of this year.
The overwhelming success of Moscow's Ikea store shows Russians growing
hunger for reasonably priced, quality home furnishings.
However, unlike before the crisis, U.S. companies face stiff competition
from local Russian companies, which have begun to manufacture consumer goods
of higher quality than before, but at better prices than imported goods.
Nonetheless, imported consumer goods, car parts, food, and restaurants still
impress Russians and are desirable, and new retail stores are outlets for
disposable income.
Consumers Mean Business
Most studies suggest that the middle class is still in a fledgling stage,
with great potential for growth. In fact, many educated professionals in
jobs still tied to the state-doctors, teachers and university professors,
military personnel and workers in the defense complex-have not yet prospered
in the new system. However, these groups, by virtue of their high education
and skill level, are good prospects for eventually moving into the middle
class.
In addition, although currently the bulk of Russia's middle class can be
found in Moscow and St. Petersburg, it appears that an expanding number of
Russian consumers are also beginning to make their presence felt in
provincial centers such as Samara and Nizhny Novgorod in south central
Russia, Yekaterinburg in the Urals, and Vladivostok in the Far East.
In general, the growing number of Russians with disposable income and the
expanding size of their purses mean potential opportunities for U.S.
exporters of consumables, food processing and restaurant equipment, and
more. New emphasis is already being placed on following consumer trends in
Russia, and Russian companies have begun to devote greater resources to
market research, marketing, and advertising. U.S. companies looking at the
market can expect expanded prospects for exports, but also a more
competitive environment in which to make sales.
