Cell Phones, Cosmetics, Coffee: Russians Go on a Shopping SpreePublished: April 24, 2007 in Knowledge@Wharton
IKEA, the Swedish furniture retailer famed for its affordable chic, is fanning out across urban Russia. Wrigley, the American chewing gum maker, has scooped up a Russian premium chocolate maker. Even Wal-Mart is said to be eyeing the country that was once synonymous with boxy Soviet suits and bearskin bomber hats.
Pent-up demand for consumer goods is surging in Russia, thanks to seven years of oil-lubricated economic growth. Russians, who endured decades of privation under the Soviet system, now find themselves with rubles in their wallets. They are eager to spend them on all manner of consumer goods, homemade and imported. "Russia is unlikely to go through a political revolution anytime soon, but it is in the midst of a revolution in retail trade," says Dmitri Trenin, deputy director of the Carnegie Endowment for International Peace's Moscow Center.
"Recent growth has depended very heavily on the consumer sector," adds James R. Millar, an emeritus professor of economics and international affairs at George Washington University. "The real wage has been growing at about 9% to 10% a year, and more than just the people at the top are making money. The rise in the price of oil and increased sales of [natural] gas did provide a substantial boost, but consumer purchases have continued it."
To be sure, many Russians remain poor by Western standards. About one in five Russians lives in poverty, compared with about one in 10 Americans. Many Russians still reside in the same Spartan apartments that they had during the Soviet era. Some even have to share kitchens and bathrooms. But thanks to privatization, many of them also own their homes outright.
That, combined with continued government subsidies for utilities and a flat 13% income tax, means that the average Russian has a larger discretionary income, as a percentage of pay, than his counterparts in the West, says Natalia Zagvozdina, deputy head of equity research at Renaissance Capital, a Moscow investment bank. "Combine the subsidies and lower taxes, and Russians spend about 70% to 80% of their per capita income out there in the retail market," she notes.
Some people are spending even more than that. Consumer finance is one of the sectors that have lately surged as credit cards have been introduced more widely by the country's growing banks. "You are seeing the emergence of an effective banking system," says Maria Gordon, a Russian native who co-leads Global Emerging Market Equity for Goldman Sachs.
Among the other sectors benefiting from the nation's shopping spree are telecommunications, restaurants and food processing. Cell phone penetration already exceeds 100%, meaning that most households have more than one phone. Valery Yakubovich, a Wharton management professor, says he gets better reception on his Russian phone than he does on the one that he uses when visiting Western Europe.
Demand for Branded Products
As Russians spend more, they are also trading up from generic products to branded goods. That has helped establish some hefty and fast-growing firms in the food-processing industry.
Consider Wimm-Bill-Dann Foods, a maker of juices and dairy products. It's based in Moscow but trades on the New York Stock Exchange. Over its last five fiscal years, its sales have more than doubled, while over the last five calendar years, its stock has climbed by more than 150%.
Kalina, a cosmetics and perfume maker, is likewise chalking up big gains. Between 2004 and 2005, the last full years for which information is available, its sales grew by nearly 60%. The company said that that swelling demand for branded products propelled that growth. Branded goods accounted for 77% of sales in 2005, up from 72% in 2004. Kalina has been a pioneer in Russia in the creation of clever advertising campaigns to attract buyers, says Goldman's Gordon.
Western firms also are tapping into the growing appetites of Russia's consumers. In 2005, Coca-Cola paid $600 million for Russian juice-maker Multon. Nestle spent $120 million on an instant-coffee factory in Krasnodar in southern Russia. Overall, the Swiss food giant has invested more than $500 million in the country. Though Russians traditionally preferred tea, coffee has caught on as the economy has grown, with per-capita consumption doubling over the last decade.
Among Western retailers, perhaps the most aggressive expander has been IKEA. It opened its first Russian store in 2000 in Moscow and now has eight, with more planned. One of Ikea's Moscow stores resides in a shopping center that, with more than 50 million visitors in 2005, was Europe's busiest.
Revenues from rising oil prices have been flowing into the country for much of this decade, but Russians initially were afraid to spend freely because they had been burned in the country's 1998 financial crisis, says Vladimir Pantyushin, an economist at Renaissance Capital. Many of them lost their savings when the government of former President Boris Yeltsin devalued the ruble. But those worries have eased. Now they are on a spending spree because many of them lack the sorts of goods -- like refrigerators and televisions -- that Americans and Western Europeans take for granted, Pantyushin says.
In a recent report, Renaissance noted the "roaring domestic economy" and pointed out that, "consumption grew by 27% in dollar terms in 2006." The investment bank predicts that the retail, consumer goods, finance and construction sectors will enjoy 40% average sales growth over the next several years. Another measure of swelling spending by Russian consumers is the growth of imports, which are rising at about 30% a year, Pantyushin notes.
Bill Browder, chief executive of Hermitage Capital Management in Moscow, also expects the consumer boom to continue. "In lots of industries, people will pay more for lots of stuff," he predicts. "There's going to continue to be a broad-based growth in areas where the average person is consuming."
Browder, who runs one of the largest investment firms specializing in Russia, isn't concerned about a drop in oil prices sapping the economy's growth and damping consumer confidence. "Oil prices could drop to $40 a barrel. Russians are still extremely rich," he says.