Russian consumers are shifting to a new economic reality, says BCG

12 June 2018

The financial crisis that sent shockwaves through Russia in 2014 and lasted for around two years begun to subside last year. Today, Russia’s economy is stabilising, and as a result, the country is becoming increasingly attractive for foreign businesses. However, for businesses to succeed in this post-recession market, companies must meet the needs of value-conscious consumers with a lower purchasing power. 

In a new report released recently by The Boston Consulting Group, the US-origin global consulting firm identifies multiple Russian consumer trends which are set to influence a company’s success in the country. The report, titled ‘Russian Consumers and the New Economic Reality’, surveyed over 4,000 Russians from different economic and social backgrounds spread across multiple age groups. 

The report highlight areas within the Russian economy where consumers are cutting back spending as well as more lucrative sectors. The authors of the report asked respondents about their spending habits, their views on the Russian economy and their optimism about the future for the country.

Russians’ budgets have been squeezed by inflation outpacing income growth

The results identify that whilst Russians have become more conscious of their purchases, there is still a significant market opportunity for foreign companies to invest. Three key sectors are identified – health care, travel and tourism, and automotive – on which Russian sentiment and spending will have a substantial effect.

In the past five years since BCG released its first study on Russian consumer sentiment, Russians have experienced a decline in purchasing power. Whilst economic sanctions have driven up the cost of imported goods due to the Crimean crisis, low oil prices, the devaluation of the Russian Ruble, and inflation outpacing income growth have all taken their toll on Russia’s consumer behaviour. 

Whilst the Russian economy is now growing again, the scars that the downturn have left on consumers are not beginning to fade. At present, consumer confidence is unsurprisingly low, however the Russian market still has a per capita income which is roughly a third greater than that of China. 

The majority of this wealth is situated within urban areas where 77% of the population live. Moscow is the richest city in the country and has an average per capita income double that of most other Russian cities. The 12.4 million Muscovites have an average annual income of around $12,000, nearly four times higher than that of rural areas.

Russian consumers plan to cut back on “unhealthy” products but spend more on fresh foods and educationAs the purchasing power of households in urban areas is still lower than before the economic downtime, Russian families have had to prioritise their spending habits. According to the BCG study, 83% of respondents identify family and home as the most important value, closely followed by health (78%). These two consumer values identify the priorities of the Russian market in general and influence trends in Russian consumer spending. 

The report states: “Our research finds that while consumers have generally become more conservative shoppers over the past few years, they are also willing to spend more – and absorb rising prices – on goods and services that enhance the quality of life of their families.” This includes cutting out unnecessary purchases and premium products whilst opting for lower cost options which maintain a high level of quality.

The average Russian that has cut back on spending on unnecessary items still demands a high level of quality when they do purchase. This is indicated in the report in two ways. Firstly, 46% of respondent are prepared to shift their purchases to goods of a higher quality. Secondly, the respondents who are willing to spend more on higher quality are doing so only in purchases that matter directly to them – in sectors including healthy eating, well-being, and personal enrichment – and by doing so, cutting out spending on alcohol, tobacco, and junk food such as confectionery, frozen foods and ready-to-eat foods. 

A casualty of this trend is Russian consumer demand for prestigious brands and labels. Among indicators that Russians have become more cost-conscious are the responses to the questions; “brands reflect what I am and my values” and about whether “friends and family approve of my brand choices”. Respondents have suggested that they find both of these factors significantly less important than in the previous survey.Russian consumers saving on travelThe report goes on to suggest that this trend identifies a significant market opportunity for “mass-market brands and generics that offer value for money." Author of the report and BCG Partner, Ivan Kotov said in relation to the findings; “Russia remains a critical emerging market for global companies that understand the nuances and needs of this complex consumer economy.” 

Kotov, who leads the firm’s Consumer practice in Russia continued; “Companies that align their strategies with the desires and budgets of Russian households will find significant growth opportunities.”

Russians willing to spend on healthcare

Russian consumer confidence can be exemplified in three sectors of the Russian economy; healthcare, travel and automobile purchases. Whilst Russians are looking to travel more, their ability to travel internationally has been adversely affected. They are now choosing lower cost destinations and invoking cost-cutting methods including booking online in advance and opting for affordable travel packages over luxury counterparts. 

This is a similar trend which has been witnessed in the automobile sector. Companies are now adding more affordable options to the passenger-car market, including an increasingly large footprint by low-cost Asian manufactures. However, one sector where Russians are willing to spend and are increasingly spending is healthcare. The report identifies that 41% of respondents had increased their spending on medicines over the past few years and that a further 30% had spent more on medical services. Respondents nevertheless have expressed their inability to access quality health care through the public sector alone. 

High priced medicines means that 33% of Russians go without

“These findings suggest there is high demand for affordable, high-quality medical services in Russia that’s not being fully met by public programmes,” said Stefan Tushchen, a BCG partner who leads the firm’s Healthcare practice in Russia. 

Together, these factors combined with the fact that private investment is at record levels ($460 million in 2016) in the Russian health sector, show that Russia is becoming a hot-spot for foreign health providers. The lack of options and rising demand according to Tushchen lead to only one thing; “They will increasingly be met by private investors.” 

In another recent report by BCG’s European arm, the consultants found that Europe’s banking industry continues to face economic profit pressures, with in particular the banks in Southern Europe (Greece, Italy, Spain, Portugal) in need of margin improvement to bring their competitiveness to European standards.

Turning economic tide requires reassessment of strategic priorities

16 April 2019

Risks of a downturn in Europe continue on the horizon as various risks to (global) growth come together. A new survey of operations managers in Europe shows that around half expect a downturn somewhere in 2019, although few expect a recession. Leaders in financial services are the most pessimistic, while automotive respondents are the most likely to expect a downturn.

The financial crisis, born from a chain of activities on the back of risky lending by banks combined with poor risk governance as well as an inflated real estate market in the US, nearly collapsed the global economy. The decade that followed saw recovery, with recent years seeing sustained economic growth in Europe, booming equities and positive sentiment among companies and investors.

However, stability may be giving way to uncertainty in Europe. Global headwinds from a trade spat between the US and China, fallout from Brexit, as well as the rise of populism – particularly in Italy, Austria and the Netherlands – means that the tide is turning. Changes to monitory policy are also on the cards, with interest rates expected to rise in Europe and in the US. Meanwhile, the Chinese economy is projected to slow, while growth of other fast growing emerging market economies is stagnating.

Economic expectations - Overview

A new report by Roland Berger, titled ‘Operations Efficiency Radar’, highlights the changing sentiment among European business leaders. According to the study, the number of respondents expecting a downturn this year stands at 48%, up from 17% last year. Few, 2%, however expect a recession, comparable to the view last year.

The sentiment comes on the back of worsening key economic indicators, the researchers note. The number of restructuring cases has increased, global stocks fell 10% over 2018, and there are an increasing number of profit warnings across industries. Market volatility is also up, while business confidence and expectations have trended down over 2018. Profit warnings by companies have gone up, in particular in Europe’s largest economy Germany, and further interest rate hikes are looming around the corner.

Different industries have considerably different expectations. The most pessimistic industry is financial services – 11% of its professionals expect a recession this year and 33% a downturn. The automotive industry meanwhile has the highest number of leaders expecting a downturn, at 92%, followed by industrial products, at 56%. The most optimistic industry is chemicals/pharma, with 36% expecting a boom, followed by consumer goods and retail at 33%.

Economic expectations by industry

The changing market conditions are prompting leaders to change some of their strategic planning and priorities going forward. The automotive industry operations leaders are set to focus on production (79%), working capital management (79%), and product portfolios (77%). Aerospace and defence firms are set to focus largely on production (73%) and controlling & finance (66%), followed by procurement (64%) and product portfolios (61%). Industrial products companies are set to focus their operation priorities on product portfolio (75%), production (69%), and procurement (63%).

For four other industries studied – chemicals & pharma, consumer goods & retail, industrial services and financial services – product portfolio, which includes rationalising, optimising and innovating products, is the top strategic priority.

Commenting on the findings, the authors state, “The first consequences of the fragile environment are already visible in a number of indicators. Company leaders should use the results to challenge priorities throughout 2019, review their early warning systems, fine-tune and/or re-assess budgets and investments and consider crisis preparation scenario’s.”

Related: 13 business and technology trends for 2019.