Russian food and beverage industry survey 2010
Introduction It has become traditional for Ernst & Young to prepare regular surveys of the Russian food and beverage industry. Surveys were produced in 2004, 2006, 2008 and 2010. The last survey came out amid the difficult period of the financial crisis, which affected not only the food industry but the entire national economy. Participants in the market were concerned as to what measures the Government would take and who would survive under the new conditions. Nevertheless, most companies that took part in the last survey saw the crisis as bearing opportunities for them to increase their market share and raise operating efficiency. The present survey covers a calmer period in the economy. This does not mean, however, that companies no longer have any problems or have stopped building plans for the future. It is precisely these aspects that are the focus of our study. The survey highlights legislative changes which may have had an impact on the industry and indicates how market participants assess the current situation. We would like to thank all participants in the study who have shared their opinions with us, and especially our regular survey respondents. We also hope that those companies that have taken part in the survey for the first time will become regular respondents in the future.
Russian food and beverage industry survey 2010
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Contents Main conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Brief economic overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Key legislative changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Factors affecting industry development in 2011. . . . . . . . . . . . . . . . . . . . . . . . 11 Strategic targets for 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Prospects for industry development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Participants in the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Contact information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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Russian food and beverage industry survey 2010
Main conclusions Although there have been no major economic upheavals and the peak of the crisis is over, market participants are still cautious about the current economic situation.
Around 70% of respondents believe that the crisis in the food and beverage industry is still ongoing. In addition to drought, fires and poor harvests, the year 2010 was marked by a number of other events which impacted the food industry. These include consolidation within the beverage and dairy segments and a notable amount of legislative activity in areas which directly or indirectly affect food companies. The new law on trade, which entered into force in 2010 to a mixed reception within the business community, initiatives in the area of customs regulation and certain other changes affect both the current state of the market and its future development. The crisis of 2008-2009 forced most companies to review their development strategies and focus efforts on optimizing business processes with a view to increasing their operating efficiency. 96% of respondents indicated the raising of operating efficiency as a priority goal for 2011. Key objectives singled out by survey
Russian food and beverage industry survey 2010
participants also included business diversification and expansion into new markets with a view to lowering dependence on the current situation. The participants in the study were generally optimistic about the prospects for the development of the key segments of the food industry, some of them expecting doubledigit growth rates as consumer demand revives. This upbeat stance is reinforced by the fact that market participants expect to witness positive results from Russia’s accession to the WTO. More than 70% of respondents indicated a number of positive changes in the industry that should ensue from Russia’s joining of the WTO. These include lower customs duties and increased transparency in customs regulation and administration.
3
Brief economic overview Macroeconomics Table 1. Key macroeconomic indicators Indicator
2008 (A)
2009 (A)
2010 (E)
2011 (E)
2012 (F)
2013 (F)
2014 (F)
Population (million people)
141.8
141.9
141.7
141.5
141.2
140.8
140.4
5,2
(7,9)
3,7
4,3
4,5
4,4
4,3
Change in GDP (%)
11 710
8610
11 020
12 210
13 630
15 270
16 950
Real disposable income (billion US dollars)
Per capita GDP (US dollars)
831
759
899
1012
1139
1282
1426
Per capita GDP (thousand roubles)
292
275
335
373
415
460
509
20 664
24 081
27 330
30 908
34 669
38 594
42 837
1,7
2,1
5,7
4,4
4,2
4,3
4,2
Real disposable income (billion roubles) Growth in real disposable income (%)
(A) Actual figures, (E) EIU estimate, (F) EIU forecast Sources: Ministry of Economic Development of the Russian Federation, Economist Intelligence Unit (EIU) - Viewswire.
Figure 1. Food retail turnover (billion roubles) 10 000 8005 8000 6485 6000
7104
4891 3947
4000
3218
2000 490 0
866
1093 1417
1754
2092
2580
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Rosstat
Figures for 2010 showed a 5.1% increase in food retail turnover.
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Russian food and beverage industry survey 2010
Agriculture maintained a positive trend during the crisis in 2009 until mid-2010. However, the abnormally hot weather of last summer caused agricultural production to decrease significantly in the second and third quarters of 2010. Production fell by 11.9% for the year overall. According to data produced by Renaissance Capital the market index of food and beverage manufacturers grew by 79% in 2010. This is primarily attributable to the positive trend in shares in Wimm-Bill-Dann in the second half of 2010 and the growth in shares in Sinergia following the publication of financial results exceeding those of CEDC.
The 2010 Drought A major factor impacting agricultural development both last year and in the current year is the abnormal drought that was experienced by 43 of the country’s regions. Crops were destroyed over an area of 13 million hectares (around 30% of cereal crop plantings in the Russian Federation). The drought affected 25,000 farms, primarily in the Volga and Central Federal Districts. The confirmed level of direct damage was in excess of 41.7 billion roubles.
Inflation According to data issued by the Ministry of Economic Development of the Russian Federation, the loss of more than a third of the harvest to the drought and the growth in food prices on international markets caused food prices to increase by 23.6% in 2010, compared with a 1.8% reduction in 2009. Meanwhile, consumer inflation in 2010 remained at the same level as in 2009 (8.8%).
Figure 2. Movement in prices for basic food products (increase (decrease) in prices as a proportion (%) for the period) -1,7%
Meat
Eggs
45,6%
-2,5%
Poultry
58,8% 27,6%
-19,8%
Milk and dairy products
The growth in consumer prices continued in January – February 2011, amounting to 3.2% from the beginning of the year. This has led experts to doubt the feasibility of achieving the target inflation level (6-7%) set by the Russian Central Bank for 2011 (assuming an average harvest level for the year).
42,7%
22,5% 2,4%
Cheese
7,6% 1,6% 4,7% 7,9%
Butter Pasta
23,3%
0,9%
Bread and bakery products
19,9%
2,3%
Sugar Sunflower oil
Prices continue to increase for potates (by 25.1% for January-February 2011) and fruit and vegetable products (by 14.2% for January-February 2011).
16,7% 13,2%
-14,5%
3,0%
Grains and legumes
6,1%
Foreign Investment
5,0% 4,9%
Fruit and vegetable products -20
-10 2009, %
Source: Ministry of Economic Development of the Russian Federation.
There were significant increases in prices for fruit and vegetable products (especially potatoes and other vegetables, for which prices increased by factors of 2 and 1.5 respectively); grains and legumes (especially buckwheat, which, according to data from the Ministry of Economic Development, increased in price by a factor of 2.6 owing to a leap in agricultural producers’ prices, a growth in suppliers’ prices and panic buying); sunflower oil (owing to increased prices for sunflower and increased prices for imports from CIS countries); sugar; milk and dairy products.
Price growth for other foodstuffs (other than socially significant goods and fruit and vegetable products) was likewise fairly high. From August 2010 onwards prices increased by 0.9% monthly, while from July 2009 to July 2010 the rates of growth had been in the region of 0.2–0.4% per month.
Prices for bread, bakery products and pasta increased only slightly despite the high growth in prices for raw materials, which was restrained by local administrations.
According to the Bank of Russia, the total amount of direct foreign investment in the Russian economy in 2010 was 37 billion dollars (i.e. almost the same amount as the year before – 36.8 billion dollars). According to various estimates, the flow of foreign investment is expected to increase by 20-30% in 2011.
Rises in prices for poultry were moderate owing to a high level of market saturation, partly due to increased supplies of cheaper imports. The growth in prices for meat likewise fell short of the 2009 growth rate owing to the low level of demand for expensive meat and market saturation caused by increased slaughter volumes.
In particular, among the foreign companies which have announced or are actively engaged in additional investments in the Russian food and beverage industry, including in the year 2010, are such names as Nestle, Heinz, Unilever, Danone, Kraft, Lotte Confectionery, Mars, Kellogg, Cargill, Coca-Cola, PepsiCo and others.
0
10
20
30
40
50
60
2010, %
Russian food and beverage industry survey 2010
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Trends in Individual Sectors
Dairy sector
Beverages, juices and water
Figure 3. Food and beverage retail turnover by segment, 2009*
Figure 4. Dairy products market, 2010
Figure 5. Juice product market, 2010
22%
20,6%
10% 36%
28%
1% 2,9%
16%
7%
14%
3,5% 3,9% 16% 6,8% 7%
8,2%
1% 2%
33%
8%
Meat & poultry Beverages Flour, cereals Sugar, confectionery Fruits and vegs Dairy products Fish Fats and oils Tobacco Tea, coffee Miscellaneous
Campina
Wimm-Bill-Dann/ PepsiCo
Ehrmann
Unimilk/Danone
Other
Source: Evaluation made by Ernst & Young on the basis of data from a study of 24 major Russian cities conducted by ACNielsen and data from companies and Datamonitor.
* Note: Data for 2010 had not been published at the time of this survey. However, there were no significant structural changes in 2010.
According to various estimates the volume of the Russian dairy products market is hovering at around 16-17 billion dollars and is growing in value terms by 7-9% a year. 2010 was a momentous year for the Russian milk processing market. Two major players were taken over by international corporations: the French holding company Danone took over Unimilk, while the American company PepsiCo acquired Wimm-Bill-Dann. The Russian dairy market is characterised by well-developed locallevel production and a high degree of loyalty to local brands.
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Russian food and beverage industry survey 2010
Source: Rosstat
32%
21% Wimm-Bill-Dann
Nidan
PepsiCo
Sady Pridonia
Coca-Cola
Other
Sources: “Russian Food Market� magazine No. 2 for 2011, the company Market Analytica.
In 2010 the Russian market for juice products was estimated at 6 billion roubles (an increase of 2.9% over 2009 in value terms) and was characterised by a high degree of concentration. The leading players on the market are the international companies PepsiCo and Coca-Cola, which in 2010-2011 acquired the major Russian manufacturers Wimm-Bill-Dann and Nidan Soki. PepsiCo and Coca-Cola have a market share of almost 85%.
Poultry and meat sectors
Cereal and grain
Forecasts for 2011
Results for 2010 show an increase in pork and poultry production in Russia, but a decrease in beef production. The situation in the poultry sector in 2010 was complicated by the abolition as from October 1 of the prohibition on imports of cheap American chicken (which had been imposed from January 1, 2010) and by the drought, which had an adverse impact on the cost of fodder (which accounts for up to 70% of cost of production). Manufacturers believe that the situation must be resolved by means of developing logistics and expanding the geographic reach of products, as well as through additional targeted State subsidizing ofr fodder.
The main factor shaping agricultural development in the current year was the abnormal drought. Nevertheless, according to data issued by the Ministry of Economic Development, the harvested crop of 60.9 million tonnes, processed together with existing cereal crop resources, allowed for almost all domestic requirements to be met and for reserves to be created for the following year.
According to data produced by Renaissance Capital, the macroeconomic forecast for 2011 appears positive, but does not envisage any noticeable growth. The Russian consumer market will strengthen in 2011: actual disposable household income is expected to increase by 3%, while consumption is set to return to pre-crisis levels. The trend observed in 2010 towards consolidation of major players on the consumer goods market will continue. The major buy-outs in 2010 – PepsiCo / Wimm-Bill-Dann , X5 / Kopeika and Danone / Unimilk – demonstrate that manufacturers and leading Russian retail networks are determined to keep growing and are prepared to make investments now in order to achieve that end.
Other food products As a result of the drought sugar production fell by 16.3% compared with 2009.
According to manufacturers, the meat and poultry market as a whole is now close to saturation, while saturation of the market for pork will occur in three or four years’ time. At present, poultry is the most consolidated sector, comprising around 600 manufacturers. Beef and pork production is largely fragmented. Meat imports are represented by a number of companies that have obtained State quotas.
Russian food and beverage industry survey 2010
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Key legislative changes The trade law The trade law which entered into force in 2010 has provoked a great deal of debate in the business community. The law has been criticized by various market participants. Opinions expressed vary widely, and are sometimes diametrically opposed. The opinions of the survey respondents regarding the trade law are presented below. Question:
Figure 6. Question: How do you view the law (draft law) on trade? (from the 2009 retail survey)
Do you think relationships between manufacturers and retail networks have changed as a result of the adoption of the trade law?
It will have a negative impact on the development of retail trade
They have changed only in formal terms – same relationships differently formalized
46%
Nothing will change
34%
It will worsen relationships between networks and suppliers
No, they have not changed
10%
26%
It will help the development of relationships between networks and suppliers
9%
It will boost the development of the sector
6% 0%
10%
20%
30%
40%
Relationships have improved
7%
Relationships have deteriorated
7% 0%
50%
The survey results show that the response of retail networks has been negative, and while manufacturers had hoped for improved conditions of co-operation with networks, 76% of food companies indicate that relationships between manufacturers and networks have not changed in any real sense. Only the form in which co-operation with networks is organized has changed. One major new development was the limitation on manufacturers paying bonuses to buyers in excess of 10% of the price of goods. As a result, manufacturers were often compelled to seek alternative ways of boosting sales of their goods, including by concluding
8
76%
20%
40%
60%
80%
agreements with retail networks on the provision of additional services. According to the results of the survey, following the adoption of the law 81% of respondents were forced to seek an alternative to the bonuses that were previously paid to networks by paying for additional services rendered by retail networks, such as services associated with thepromotion of goods in shops. The answers given by the respondents are presented in Figure 7.
Russian food and beverage industry survey 2010
Figure 7. Effect of the adoption of the trade law on forms of co-operation with retail networks We grant bonuses provided for in the trade law
85%
We purchase additional services from retail networks
81%
We offer a more flexible pricing policy 4% 0%
It goes without saying that such changes give rise to a host of legal and tax risks for the companies concerned. Many have found it necessary to reconsider the existing provisions of contracts between manufacturers and retail networks in the light of the new law. Many companies have devoted considerable time and effort to the process of reviewing contracts. Other legislative changes which might have had a direct or indirect impact on the industry are considered below.
Tax Legislation Electronic VAT invoices As from September 2, 2010 it became possible to exchange electronic VAT invoices. This requires mutual agreement between the parties to a transaction and the availability of compatible equipment and resources needed to accept and process such invoices. It should be pointed out that it will only be possible for the new provisions to be applied after the approval of a set of normative legal acts. At present those normative legal acts have yet to be approved, but it is already safe to say that the introduction of electronic VAT invoices will be welcomed by industry representatives in view of the obvious decrease in the administrative workload.
Customs Legislation
48%
Other
20%
40%
60%
application of standard rates is established for certain categories of payers, including payers of the unified agricultural tax, over the period from 2010 to 2014, many companies take a negative view of the increase in rates.
80%
100%
Limits on deduction of loan interest Special limits on the deduction of interest for profits tax purposes were established for 2010 which were higher than those which normally apply: • For debt obligations in roubles – the refinancing rate increased by a factor of 1.8 • For debt obligations in foreign currency – 15%. The limits for debt obligations in foreign currency have been revised for the period from January 1, 2011 to December 31, 2012 – the refinancing rate increased by a factor of 0.8. Given the current level of refinancing rates this may be regarded by business people as a negative change in view of the fact that the current cost of currency credits normally exceeds the established limits.
Implementation of the Customs Code of the Customs Union The Customs Code of the Customs Union of the Republic of Belarus, the Republic of Kazakhstan and the Russian Federation (hereinafter referred to as “the Customs Union Customs Code”) entered into force from July 1, 2010 (from July 6, 2010 in the case of the Republic of Belarus). The Customs Union Customs Code lays down fundamental principles of customs legislation in regard to such matters as customs payments, customs value, customs control, declaration of goods and other matters. National customs codes are now being revised, and new codes are to be or already have been adopted in their place.
Replacement of unified social tax with insurance contributions A significant new development for taxpayers was the replacement of unified social tax with social insurance contributions with effect from 2010 and the raising of contribution rates from 26% in 2010 to 34% in 2011. The raising of insurance contribution rates was a serious blow to small and medium-sized businesses. Although a gradual transition to the
Russian food and beverage industry survey 2010
9
State Policies State support for cheese and butter manufacture The Russian Ministry of Agriculture has developed and approved a special-purpose programme entitled “Development of Butter- and Cheese-Making in Russia in the Period 2011 to 2013” (hereinafter referred to as “the Programme”). Under the Programme federal resources (the total amount of financing for the Programme in the period from 2011 to 2013 will be 17.64 billion roubles at current prices) will be used to build new plants, to renovate and modernize existing enterprises and to carry out research activities in the area of butter-making and cheese-making. It is planned to improve the system for regulating imports of products from “far abroad” countries and to develop mechanisms for regulating commodity flows within the Customs Union. The
Doctrine in carrying out practical activities and developing normative legal acts relating to the food security of the Russian Federation.
Programme is expected to lead to an increase in the production of cheese and butter from domestic raw material resources and a decrease in the level of dependence on imports.
Food security doctrine On January 30, 2010 the President of Russia approved the “Food Security Doctrine of the Russian Federation” (hereinafter referred to as “the Doctrine”). The Doctrine is aimed at maintaining the food security of the Russian Federation, which means ensuring that the population has a reliable supply of foodstuffs, developing the domestic agro-industrial and fishery complexes, responding efficiently to internal and external threats to the stability of the food market and effective participation in international co-operation in the area of food security. Federal State bodies and State bodies of constituent entities of the Russian Federation are instructed to abide by the provisions of the
The overwhelming majority of survey participants (77%) believe that State policy has an impact on the food industry. 33% of respondents indicated that the most significant influence exerted by the State on the industry is in the form of import restrictions. In particular, import quotas for meat affect the cost of raw materials, volumes of production and prices of goods for the end consumer. Other important factors indicated by the survey participants include the influence of the Federal Anti-Monopoly Service on the market (25% of participants) and price regulation (21% of participants). The majority of the respondents hold major shares with their respective segments, meaning that their actions are monitored by the Federal Anti-Monopoly Service.
Figure 8. Areas of influence of State policy 33%
Import restrictions Monopoly regulation
25%
Price regulation
21%
Subsidies
13%
Increases in excise duties
13%
Tax burden
8%
National projects
8%
Migration policy - hiring of unskilled labour
4%
Toughening of legislative requirements relating to beer manufacturers
4%
Adoption of inadequately thought-out laws, such as the law on trade
4%
Technical regulation (technical regulations for products)
4% 0%
10
5%
Russian food and beverage industry survey 2010
10%
15%
20%
25%
30%
35%
Factors Affecting Industry Development in 2011
In addition to State policies, our respondents also indicated other factors which may have affected the activities of food companies. The great majority of participants in our survey (68%) believe that the financial crisis is not yet over as far as the food and beverage industry is concerned. It is possible that this view may be partly explained by the adverse weather conditions, which led to an increase in prices for raw materials, by the fact that consumer demand has only partially recovered and by a number of other factors, all of which together contributed to the pessimistic outlook reflected in the survey.
Customer Preferences The economic crisis caused changes in customer preferences, which inevitably had an impact on the activities of food and beverage companies. 47% of respondents indicated that customer demand in such segments as alcoholic drinks, sauces, seasonings and canned foods shifted in favour of budget products as a result of the decrease in people’s real disposable income.
Adverse Factors The most serious adverse factor to affect the industry in 2010, selected by 68% of those surveyed, was the growth in prices for raw materials and other materials, which occurred as a result of the severe drought.
Figure 9. Changes in customer preferences in 2010 47%
Shift towards budget products Higher-quality and healthier foods (depending on cost)
43% 0%
10%
20%
30%
40%
50%
Figure 10. Principal adverse factors affecting companies 68%
Growth in prices for raw materials and other materials 55%
Growing influence of trading networks 35%
Problems with hiring skilled personnel
29%
Decrease in demand for products produced Rising utility costs
26%
Logistical problems
23%
High debt burden Unattainability of required financing for required periods at affordable interest rates Lack of properly developed distribution system
At the same time, 43% of survey participants indicated that consumers had begun to make more conscious choices and buy higher-quality and healthier products. These changes affected manufacturers of dairy, meat and fish products and confectionery.
16%
The second most negative factor, according to 55% of those surveyed, was the significant influence of trading networks. There were a number of cases on the Russian market in 2010 of large chains buying smaller competitors, resulting in greater consolidation within the industry and an increase in the amount of pressure exerted by networks on manufacturers. A shortage of qualified personnel is another obstacle to business development, as indicated by 35% of survey participants. Low salary levels and low job prestige lead to a shortage of staff. Problems affecting the training of qualified personnel include inadequate financing of higher education establishments which train specialists for enterprises of the food and beverage industry.
16% 13% 10%
Problems with hiring unskilled personnel
6%
Adverse climatic conditions (drought and fires) Shortage of products due to shortage of production facilities
3%
New trade law with numerous ambiguities
3%
Seasonal fluctuations in demand
3% 0%
20%
40%
60%
80%
Доля респондентов (%) Russian food and beverage industry survey 2010
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Obstacles to Expansion
Figure 12. Main categories of buyers
The poorly developed regional infrastructure and logistical difficulties associated with expansion into other regions are indicated by 42% of survey participants as the chief obstacles to the expansion of their activities. In particular, these factors affect decision-making on expansion into remote regions such as the Volga, Siberian and Far Eastern federal districts.
We find it equally beneficial to work with retail networks and with large wholesalers
57% 23%
Retail networks Large distributors
13% 0% 10% 20% 30% 40% 50% 60%
38% of companies cite the existence of administrative barriers (local legislative acts, actions of local authorities, etc.) as the chief obstacle to expansion.
Figure 13. Proportion of sales through own distribution network Figure 11. Chief obstacles to expansion of a company's activities Poorly developed regional infrastructure
42%
Difficulties in organizing logistics when expanding into other regions
42%
Administrative barriers 31%
Lack of sufficient demand or distribution restrictions
12% 0%
10%
20%
30%
40%
50%
15% 30%
More than 50% We do not sell through our own distributors 0%
41% 10%
20%
30%
40%
50%
41% of survey participants do not have their own distribution network. 64% of companies are happy with their existing distribution system and do not plan to change it in the near future. Most of those companies do not have their own sales channels and use the services of outside distributors.
Distribution System 57% of manufacturers surveyed find it equally beneficial to sell products to retail networks and to large distributors. The respondents are primarily foreign companies or large Russian companies with foreign capital which hold a significant market share. For Russian and foreign companies which do not have a significant market share in Russia (23% of survey participants) it is more convenient to work with retail networks in view of the lower production and sales volumes.
12
7%
A further 15% of those surveyed indicated that between 26% and 50% of the sales volume is attributable to their own distribution network.
15%
Lack of sufficient financial resources for business development
5-25%
In this respect, more than 50% of the annual sales volume of 30% of participants in the study is achieved using the enterprises’ own distribution networks.
27%
Lack of adequate production facilities
7%
26-50%
38%
Existence of strong competitors in other regions
Less than 5%
Other companies which primarily used their own sales channels at the time of the survey plan to increase the proportion of their own distributors in the future (70% of respondents). Only 20% of those surveyed plan to increase the proportion of outside distributors. These include small Russian companies and subsidiaries of foreign companies which generally use their own sales channels.
Russian food and beverage industry survey 2010
Figure 14. Changes in distribution system
partnerships with retail networks and the diversification of a company’s own product line at no extra cost.
Increasing the proportion of own distributors
70%
Increasing the proportion of outside distributors
Figure 16. Proportion of products manufactured under other labels
20% 10%
Internet trade 0%
20%
40%
60%
80%
35%
55%
Less than 5% 5-10% More than 10%
Transportation Methods Transportation is one of the intermediate but important stages in the process of the sale of products to the end consumer. 52% of companies surveyed deliver products using their own transport subdivision.
2%
At the same time, virtually all survey participants (93%) hire specialized transport companies to deliver products.
Although, for most respondents, the manufacture of products under other labels is a profitable activity, only 35% of survey participants have a company portfolio in which the proportion of other labels is greater than 10%
Figure 15. Main methods of product transportation We hire specialized transport companies
93%
Transportation is carried out by our own transport subdivision
52%
Products are mostly collected by customers
The need to promote products and preserve and maintain current market positions makes it essential for companies to have a marketing budget, the amount of which is determined by an organization’s objectives for a planned period.
7% 0%
20%
Marketing Expenses
40%
60%
80%
Companies may resort to using the services of outside organizations where there are significant volumes of products to be shipped to a customer and an insufficient quantity of vehicles.
Co-Operation with Retail Networks The manufacture of products under private retail labels is one of the most effective forms of co-operation. 61% of survey participants manufacture products under private labels – 39% using retail network labels and a further 21% using labels of other manufacturers.
Figure 17. Marketing budget in 2010 (proportion (%) of receipts) 38%
40%
31%
30%
21%
20% 10% 0%
7% 3% No budget
Less than 1%
1-2,9%
3-5%
More than 5%
For 56% of companies this is a worthwhile line of activity. In particular, according to the view expressed by one of the survey participants, manufacturing under private labels enables the achievement of full capacity utilization, the strengthening of
Russian food and beverage industry survey 2010
13
In 2010 7% of surveyed companies were able to allocate less than 1% of annual gross revenue to the promotion of their own products, while 38% had a marketing budget that was not in excess of 3% of annual gross revenue. A small marketing budget indicates that the companies concerned do not have a strategy aimed at the aggressive promotion of their own labels.
Figure 18. Main difficulties associated with VAT administration Obtaining primary documents from contract partners Refusal of VAT reimbursement
17%
Difference in input and output tax rates Other
52% of survey participants have a significant marketing budget, amounting to more than 3% of their annual revenue. This shows that the companies in question have policies that are actively aimed at strengthening their own labels. This course is primarily pursued by subsidiaries of major international players whose development strategy envisages the further strengthening of market positions. Compared with 2009, marketing expenses remained unchanged for 48% of the companies surveyed, while 34% of participants in the study increased the amount spent on promoting their products. This indicates a certain degree of recovery in the food and beverage industry in 2010 and a growth in product demand.
67%
13% 13%
No difficulties arise
4% 0%
20%
40%
60%
80%
Figure 19. Average length of time taken to obtain a VAT refund/credit 4%
44%
VAT Administration From 1 to 3 months From 3 to 6 months From 6 to 9 months
Tax legislation and tax administration also have an impact on the financial position of enterprises. 67% of respondents experience difficulties in collecting the primary documents needed for VAT reimbursement, which has a negative effect on the level of companies’ working capital.
52%
In addition, the long periods of time taken to recover VAT from the budget have a negative impact on the quality of companies’ working assets. 52% of companies indicate that VAT recovery takes between six and nine months. 67% of companies use tax concessions granted to enterprises which manufacture food products. In particular, 61% of respondents pay assets tax at a reduced rate.
14
Russian food and beverage industry survey 2010
Strategic Objectives for 2011 Raising Operating Efficiency
Figure 21. Methods of increasing operating efficiency
96% of respondents indicated the raising of operating efficiency as a priority objective for 2011. This shows that the pessimistic sentiments engendered by the economic crisis are still prevailing on the market. 78% of respondents believe that the problem of efficiency can be resolved by optimizing current business processes. The second most popular way of increasing efficiency, selected by 70% of participants in the study, is by reducing the cost of production of products manufactured. The crisis has also led 67% of respondents to consider the problem of optimizing logistic processes and reducing costs associated with product transportation.
Optimization of business processes
78%
Reducing cost of production
70% 67%
Optimization of logistics Automation of business processes
56%
Optimization of the structure of distributors Updating/replacement of equipment and development of production technology
44% 41%
Increasing working capital turnover
37%
Centralization of administrative functions
Figure 20. Strategic objectives of companies for 2011
30% 0%
20%
40%
60%
80%
96%
Increasing operating efficiency 70%
Launching new products Expanding the geographic reach of sales
52%
Expanding the current product range
52%
Creating an own brand
22%
Increasing the proportion of products produced under private labels
19% 0%
20%
40%
Among important objectives 70% of those surveyed indicated the launching of new products, which should increase market share by attracting new customers. Generally speaking Russian manufacturers look to set up production in related segments. For instance, manufacturers of alcoholic drinks consider launching non-alcoholic products, ice cream manufacturers plan to start producing frozen foods, while some dairy product manufacturers aim to branch out into the juice and beverage segment.
30%
Development of vertical integration
Launching of New Products
60%
80% 100%
Expansion of Geographic Reach of Sales The next most popular choice of objective, indicated by 52% of companies, is expanding the geographic reach of sales. Companies prefer to expand into regions with a high population density, a well-developed infrastructure, an acceptable level of purchasing power and a favourable business climate.
Russian food and beverage industry survey 2010
15
Expansion of Production
Figure 22. Regions as targets for expansion (in decreasing order of precedence) 80%
71% 57%
60%
50%
43%
40%
36%
36% 21%
20% 0%
CFD
NWFD
SFD
UFD
VFD
NFD
FEFD
More than 70% of survey participants declared their intention to expand into regions of the Central Federal District (CFD). According to the Forbes ranking of “30 Best Cities for Doing Business�, 17% of the total number of cities fall within the CFD. The North-Western Federal District (NWFD) is the second-choice market for 57% of companies. Then come the Southern (SFD) and Urals (UFD) federal districts, which account for 50% and 43% respectively. 57% of survey participants say that macroeconomic indicators are of key importance in selecting the geographical direction of further expansion. For some meat and dairy product manufacturers (48%) the main factor to be considered in entering a new geographic market is proximity to the region in which the company is located.
In 2011 participants in the market expect to see increased demand in all segments of the food and beverage industry. In view of this fact, 85% of participants in the study intend to invest resources in the expansion of production so as to be in a position to meet consumer demand as it arises and thereby consolidate their position on the market. Unlike the majority of food manufacturers, manufacturers of beer and alcoholic drinks do not expect significant growth in their segment, and accordingly have no plans to expand their production capacities. 78% of companies surveyed have plans which involve purchasing new, more productive equipment. The use of modern equipment would help increase the quality of end products and reduce amounts spent by companies on routine maintenance. A large number of survey participants (57%) also plan to build new facilities. This shows that many enterprises are expecting to see a rapid recovery in the industry. A further 43% of companies plan to invest money in the rebuilding and modernization of production facilities. Figure 23. Methods of expanding production 80%
78% 57%
60%
43% 30%
40%
Expansion of Current Product Range 52% of survey participants plan to optimize their product range by developing new flavours and packaging. This should create additional competitive advantages when it comes to promoting products.
16
20% 0%
4% Purchase of new equipment
Russian food and beverage industry survey 2010
Construction Reconstruction Buying of new or modernization other facilities of old facilities manufacturers
Outsourcing
Sources of Financing of Expansion of Activities
Figure 24. Main sources of financing of production expansion in 2011
The main sources of financing of investment activities are internal resources and bank loans for 76% and 59% of companies respectively.
80%
The use of internal resources allows companies to avoid costs associated with the attraction of loan capital, as well as debt servicing expenses. 59% of companies are resorting to bank loans.
40%
The third largest source of financing is borrowing from shareholders. This option is to be used by 38% of respondents, most of which are companies with foreign capital involvement.
76% 57%
60%
38% 21%
20% 0%
Own resources
Russian food and beverage industry survey 2010
Bank financing
Borrowing from shareholders
Leasing of equipment
14%
Bond issue
17
Prospects for Industry Development Main Trends
Canned Food Production When the economic crisis began there was a sharp decline in volumes of sales of canned fruit and vegetables owing to the drop in people’s real disposal income and the displacement of canned foods by home-grown supplies. In 2011 manufacturers expect the market to recover by 15%,
The results obtained show that in 2011 79% of participants in the study expect to see growth in all segments of the food and beverage industry. Manufacturers are generally cautious in their forecasts and are not expecting growth rates to exceed 10%.
Manufacture of Meat Products
Manufacture of Fish Products
In 2011 the meat product segment is expected to grow by 14-15%. Market participants continue to have a positive outlook thanks to State measures to support the industry (such as the setting of quotas on meat imports and the subsidizing of manufacturers) and the growth in consumer demand.
Market participants expect the most serious growth to occur in the fish product segment owing to the existence of unsatisfied demand in that segment. The Federal Fishery Agency forecasts that the volume of sales of fish and seafood in Russia in the period from 2009 to 2012 will increase by at least 21%.
At the same time, the increased cost of producing meat products and increased prices for animal fodder and products reaching the end consumer might hold back the segment’s development should the rate of growth in people’s real earnings fail to keep pace.
Figure 25. Predicted rates of growth in individual segments in 2011 Confectionery production
8%
Dairy, baby food and diet food production
5% 6%
Production of seasonings, sauces and snacks Beer production
4%
Production of meat products (other than canned meat)
14%
Production of non-alcoholic beverages
10%
Production of frozen vegetables and fruit
8%
Production of canned foods
15%
Production of fish products (other than canned fish)
25% 0%
18
6%
12%
Russian food and beverage industry survey 2010
18%
24%
30%
Participants in the Study Role of International Associations Customs Union Despite the fact that around half of the survey participants export their products to CIS markets, 68% of companies were unable to comment on the introduction of the Customs Union. This may be explained by the fact that the agreement has been active for a fairly short period of time, and it is therefore impossible to make definite conclusions about the effect that the amendments made to the Customs Code will have on businesses.
30 Russian and foreign1 food manufacturers possessing production facilities in the territory of the Russian Federation took part in this survey. Figure 26. Composition of respondents 28%
Foreign companies Russian companies
WTO The accession to the World Trade Organization will affect a large number of respondents, since 41% of survey participants are subsidiaries of foreign companies, and changes in the rules governing foreign trade would affect their activities. 71% of companies expect Russia’s accession to the WTO to yield positive changes.
41%
Russian companies with foreign capital 31%
Market participants see a decrease in import duties on raw materials as one of the main benefits of accession to the WTO. Among the companies which indicated this effect were manufacturers of meat products and confectionery, which import some of the raw materials needed to manufacture their products.
Foreign companies represented the largest group of survey participants (41%). The number of Russian companies and Russian companies with foreign capital was about equal, at 28% and 31% respectively.
Representatives of a number of companies which do not operate in foreign markets consider that lower export customs duties would create advantages for them from the point of view of future expansion. For those companies which already export their products, meanwhile, accession to the WTO will increase the volumes and profitability of export operations.
Revenue Trends
As for negative factors, meat product manufacturers point to the abolition of quotas on imported products and the reduction of State subsidies, which will affect the competitiveness of goods manufactured within the country. Manufacturers’ opinions are divided in regard to the potential impact on the quality of products produced. On the one hand, the absence of any restrictive conditions could lead to low-quality products entering the market, thus reducing the competitiveness and, consequently, the quality of goods produced by Russian manufacturers. On the other hand, it is highly likely that competition would be strengthened as a result of manufacturers from WTO countries entering the Russian market, and that product quality would improve.
The operating results for various companies in 2010 show that some of them experienced an improvement in their financial indicators. 20% of Russian companies had revenues of less than 1 billion roubles in 2010. The number of such respondents decreased by 7% compared with 2009 owing to the fact that certain companies have succeeded in increasing their annual revenue. The number of companies with revenue in excess of 3 billion roubles has increased by 6%.
1 In accordance with the adopted definitions of the specified categories:
• A Russian company is a Russian manufacturer without foreign capital involvement. • A Russian company with foreign capital is a Russian manufacturer in which a foreign company has an interest in the capital but is not involved in day-to-day management. • A foreign company is a subsidiary / branch of a foreign company with involvement in day-to-day management. Except as otherwise stated, Russian companies with foreign capital involvement are included in the category of Russian companies.
Russian food and beverage industry survey 2010
19
Figure 27. Trends in revenues of Russian companies over the period 2009-2010
67% of respondents export their products both to CIS countries and outside the Commonwealth.
80% 60% 40%
27%
20% 0%
27%
20%
40% 40%
33%
Only 33% of participants in the study indicated that they do not export their products. These are primarily companies which produce meat and fish products. Figure 29. Exports
7% 7% > 1 billion roubles 2009
from 1 to 2.9 billion roubles
from 3 to 9.9 billion roubles
< 10 billion roubles
33%
CIS and other countries
2010
Only to CIS countries
Data for 2010 indicate that the number of foreign companies with annual revenues in excess of 10 billion roubles increased to 54%, which is 8% more than in 2009. The number of enterprises with annual revenues of less than 1 billion roubles and up to 2.9 billion roubles did not change, and remained at 2009 levels.
No exports
23%
Figure 28. Trends in revenue of foreign companies over the period from 2009-2010 80% 54%
60%
46% 31%
40% 20% 0%
8%
> 1 billion roubles 2009
20
8%
15% 15%
from 1 to 2.9 billion roubles
23%
from 3 to 9.9 billion roubles
44%
< 10 billion roubles
2010
Russian food and beverage industry survey 2010
Contact Information For additional information about this study please contact Ernst & Young Consumer Products Group in the CIS:
Dmitry Khalilov Partner, Tax Head of the Consumer Products Group in the CIS
Pavel Seregin Partner, Assurance Consumer Products Group
Tel.: (495) 755 9757 Dmitry.Khalilov@ru.ey.com
Tel.: (495) 755 9953 Pavel .Seregin@ru.ey.com
Tatiana Shustova Partner, Transactions Consumer Products Group
Ivan Butyagin Partner, Advisory Consumer Products Group
Tel.: (495) 755 9867 Tatiana.Shustova@ru.ey.com
Tel.: (495) 705 9713 Ivan.Butyagin@ru.ey.com
Sergey Stefanishin Partner, Law Consumer Products Group Tel.: (495) 755 9872 Sergey.Stefanishin@ru.ey.com
Russian food and beverage industry survey 2010
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