Russia is the most macro-economically stable country in Europe. With a budget surplus of 4%, total debt at a mere 8% of GDP, and strong earning power from oil, the economy can weather almost any storm. In fact, the price of oil, currently a major headache for most of the world, is almost all upside for Russia, which makes money even when it’s priced at $14 per barrel. With oil prices in early August nearing $120 per barrel, Russia is on track to become one of the most cash-rich and powerful countries in the world in the next decade.

Happy times
Consumer confidence in Russia reflects these happy economic times. According to the 2008 Nielsen Global Consumer Confidence Index, Russia is well ahead of the global average of 88, with an index of 105 for the first half of the year—up three points over the first half of 2007. Driving that confidence is a large and rapidly growing Russian middle class. This year, there are 36.5 million households (98 million people) with annual incomes of more than $10,000; and in just two years, 45 million households will have passed this threshold.

Taking the income level up a notch, there are currently 23 million households (63 million people) with annual incomes topping $15,000, which is expected to rise to 34 million households in 2010. Here, the contrast with China is sharp, as China has less than a third that many people—or 25 million people—living in households with annual incomes over $15,000. Put another way, in just two years, China will have 51 million people compared with Russia’s 89 million with annual household incomes over $15,000.

Increased wages = increased spending
Consumer spending is a big growth stimulant for Russia. Private consumption has risen on average 12% in the last three years and will stay at that level until 2010. Real wages (after inflation) grew 18% in 2005–06—the highest level in the world—and rose 15% in 2007. Growth is expected to continue to escalate by 10% per annum for the next three years. These figures compare starkly with real wage growth in other markets.

And Russians put their money where their mouths are—literally. A whopping 117.7% of the total population has a mobile phone—and not just any mobile phone, but a really good one. According to Nielsen Mobile, the average Russian subscriber spends 7,036 Rubles ($293 US) on their new phone. In addition, one-third of the total population owns either a PC or a laptop and 29% of Russians aged 18+ have Internet access. For all that spending, 56% of the Russian population has a dacha—a small plot of land near their city with or without a house, and 39% of Russian families own a car.

Mobile mania
While their mobile devices are expensive, their services are not. The average Russian mobile phone subscriber spends just 557 Rubles ($23 US) on their monthly bill, which is good because Russian subscribers are more likely than subscribers in other markets to shoulder the costs themselves. As of Q1 2008, Nielsen Mobile reports that just 3% of Russian mobile users said their company foots the bill, compared with 7% of U.S. subscribers.

Russian subscribers are unique in other important ways—and text messaging is one of them. As of Q1 2008, 77% of Russian mobile users used text messaging, making them more than twice as likely as the average U.S. mobile subscriber (29%). However, they were less likely to use MMS multimedia messaging (15%, compared to 24% of U.S. mobile media subscribers). Though text-messaging is highest among teens (a whopping 98% of Russian teen mobile users send or receive text messages), text-message use is also fairly high amongst older subscribers: 52% of subscribers 45–54 and 31% of subscribers 55 and older.

But text-messaging isn’t the only data service Russian mobile subscribers have adopted quickly. Twelve percent of Russian mobile subscribers—roughly the same proportion as in the U.S.—use their mobile phone to browse the Internet. News and weather are the most popular categories in other markets, but 34% of Russian mobile Internet users say they visit entertainment sites over their phone, followed by search (28%) and E-mail (24%).

Let’s go shopping
Given its enormous size, Russia has the largest number of retail stores in East and Central Europe—264,373, which is more than twice as many stores as the Ukraine. However, the Russian market is still in its early developing stage and has significant untapped potential for large retail format development. Today, Russia has just over 33 retail outlets per million inhabitants, which is meager in comparison with countries like nearby Norway, with 442 retail outlets per million inhabitants, Austria with 408, or Denmark with 366.

And that booming middle class is supporting the development of hyper/supermarkets, which logged a very healthy growth rate of 67%, even while the number of retail outlets across Russia declined by 7% in 2007 vs. 2006. Hyper/supermarkets in Russia contribute much more to non-food sales (51%) than to food sales (26%), but their importance to the food sector is growing, taking over value share from the traditional trade channel, particularly in highly developed St. Petersburg, where hyper/supermarkets had a 74% value share in 2007, vs. a 67% value share in 2006.

Both global and local retailers are present in the Russian market, and with the booming economy, global players regularly show interest in entering and expanding. Retail expansion in Russia is a two-way proposition, with regional retailers moving to Moscow, and central retailers looking for possibilities in the regions.

No time for dinner
Once they arrive at their local hyper/supermarket, Russians are increasingly opting not to buy the ingredients for a homemade meal. In a trend familiar almost everywhere, urban Russians are devoting more time to working and studying, and veering away from cooking time-consuming meals. As a result, meal makers are the fastest growing food categories in Russia, with a 47% volume growth 2007–2008. Sales of snacks, chocolate bars, single-serve yogurts and other “on the run” products have also grown, particularly for higher income residents in the largest cities.

Nielsen’s Snack Market Study, based on a retail audit of urban Russia from April 2007 to March 2008, found that total retail sales of potato chips, dried seafood, croutons, salted nuts and other snack categories’ value sales have grown by 14%, amounting to approximately 45 billion Rubles.

Potato chips remain the largest category in packed salted snacks, with 34% of the market in value. Over the survey period, potato chips’ value sales grew by 15% in Russia, and potential growth might not be exhausted yet; Russians consume 0.6 kg of chips a year per capita, while Americans and Britons consume 10 times more. Among the mature consumer markets, France is the closest to Russia for potato chip consumption, at 1.4 kg a year per capita.

Nielsen also spotted a new tendency by Russian consumers to buy snacks year-round and as stand-alone purchases, rather than as by-products of another purchase—buying chips with beer, for example. During the winter of 2007–2008, sales of chips and nuts did not suffer the significant decrease recorded the year before. The fastest growing salted snack categories were also consistently strong in pack upsizing¹, showing that consumers are ready to buy more snacks and at a higher absolute price.

Compared to other countries, private label sales are weak in Russia, with only a 1.5 share against 44.1 share for the top five branded labels. However, private label is growing steadily in all major categories. Of all culinary categories, private label has the largest share in regular soups and shows the highest rate of value growth at 88% between 2007 and 2008.

The top five snack manufacturers—Bridgetown , Frito-Lay, Kraft, Russkart and Sibirsky Bereg—occupy about half of the salted snacks market (48% in value and 52% in volume). But the leaders’ share decreased between April 2007 and March 2008 compared to the previous year, while private labels have increased their share to achieve the highest share in the nut category, at almost 6% of total value sales.

And snack manufacturers would be wise to watch for competition from complementary snack categories such as chocolate bars, milk deserts, biscuits, chips and drinking yogurt. Eastern Europeans, Russians included, have a sweet tooth, as evidenced by very strong positive growth for chocolate and sugar/confectionery items. Russians posted the highest regional growth and the largest share of the chocolate category in 2007, while chocolate bars’ value growth was a healthy 23% during the survey period, with big packs prevailing.

Given recent steady price increases in basic commodity items worldwide, the largest contributors to 2007 global growth in terms of absolute dollar value were basics like milk, cheese and meat, due in part to the expense of producing and shipping these categories around the world. In Russia, milk categories² were most affected by the food inflation and showed a drop in volume sale caused by the highest price increases from 2007 to 2008: 35% on the average³. But by the end of first half 2008, the declining trend stopped and the sales stabilized. At the same time, butter rose 43% per kg and margarine was up 35%, though those price jumps did not impact sales. Drinking yogurts exhibit the fastest growth—both in volume and value—in Russia, partly due to single-serve packages containing probiotics and other perceived health benefits.

At the same time, interest of many Russian urban households to convenience and time saving does not mean that fresh food sales are declining. According to Nielsen’s ShopperTrends 2008 study, in Moscow, expenditure on fresh food increased by roughly 40%—less than expenditures on FMCG products. Share of fresh food (fruit and vegetables, meat, chicken, fish and seafood) in a monthly expenditure still accounts for over half of all food, grocery and personal care spending.

Importance of modern trade in selling fresh food is on the rise. Thus, in 2008 roughly 60% of Moscow shoppers prefer purchasing these products in modern trade, supermarkets being the most popular channel for about 30% of shoppers.

Modern trade gained new customers first of all at the expense of open markets, having been traditionally popular in Russia for purchasing fresh food, but during past years gradually loosing their positions.The percentage of shoppers purchasing fresh food in open markets has shrunk this year, nevertheless remaining high compared to other product categories.

Time for a drink
The growing Russian economy is having a positive effect on all the consumer goods categories. And alcohol beverages are a “model” example, indicating the state of personal finance of a Russian consumer. Recent economic good times have inspired Russians to upgrade their brands, while also branching out and driving steady growth rates for beer and premium vodkas and other categories of strong alcohol like whiskey and tequila.

Alcoholic beverages were up 17% in Russia from 2006 to 2007 in the markets with more than $1 billion in value sales, bouncing back from a decline in 2006 due to new tax legislation for imported alcohol. As the largest of the spirits categories, traditionally Russian vodka is truly an international beverage and the mixer of choice around the world. With 11% global growth between 2006 and 2007, vodka sales in Russia are driven by greater distribution, premium brands and flavored vodkas, but its 7% growth⁴ is modest in comparison to beer.

While the U.S. is largest in terms of pure value sales for beer, the largest year-over-year growth from 2006 to 2007 came from Russia, thanks to increased consumption and to a leading manufacturer introducing new products.

The whiskey category is not as trendy as vodka, but there is growth in several markets, including France and Great Britain. Though Russia is a smaller market, whiskey consumption is growing there (+54%)⁵. The trend toward more expensive, premium beverages extends into this category, driven mainly by key mega-polices where real wages are higher than on the average in the country.

While still underdeveloped in comparison to branded alcohol drinks, private label vodkas has also begun to appear more and more, showing a strong increase in year over year growth. Private label beer is now available in two or three retail chains, as well, and its share is growing.

The future is bright
The economy is booming, incomes are rising, consumers are happy, and the under-developed retail landscape is ripe for opportunity. Russia, already the sixth largest economy in the world—on par with the United Kingdom—is well on its way to becoming one of the most cash-rich and powerful countries in the world in the next decade.

(Global What’s Hot: Executive News Reports: What’s Hot around the Globe: Insights on Food & Beverage categories and Insights on Alcoholic Beverage categories, 2006 – 2007)

¹Big packs development
²Without butter and cheese ,
³Compared periods April-May2008 vs. April-May2007
⁴Feb2006-Jan 2007 vs. Feb2007-Jan 2008, Data of Retail Audit, National Urban Russia
⁵Data of Retail Audit in 15 major Russian cities