A closer look at the consumer-ready products market situation in Russia - includes related article on growing kosher niche market - Cover Story

Russia is a multinational, multiethnic nation with well over 150 million customers for consumer-ready food products, which the domestic economy cannot yet produce in sufficient quantity. Pent-up demand exists for basic and luxury goods. Stretching across 11 time zones, this huge market presents significant opportunities for savvy and persistent exporters.

Russia's hunger for imported consumer-ready products is strong after decades of centralized procurement practices and non-convertible currencies.

In 1996, U.S. exporters held about 12 percent of the Russian consumer-ready products market. The strongest competition comes from European countries.

Because incomes in the cities are higher than incomes in small towns and rural areas, consumer-ready products have found their best markets in Moscow and St. Petersburg and, to a lesser extent, in Yekaterinburg and Vladivostok.

Compared with the large cities of European Russia, there is a relatively small assortment of American consumer-ready products for sale in kiosks and grocery stores in the central and southern regions of Russia. In these regions European products dominate the shelves and windows.

There is a growing awareness on the part of American exporters and their representatives in Russia that the Moscow/St. Petersburg market for consumer-ready products, white not saturated, cannot be expected to grow in the future as it has in the past.

There is an increasing tendency on the part of U.S. exporters to look to cities in regions outside of European Russia for sales expansion. These areas hold opportunities for exporters, but not on the same scale as the Moscow/St. Petersburg opportunities that opened up in 1991.

Russian Trade Restrictions Are Few

In general, Russian barriers to imports are not elaborate. The greatest difficulties are often infrastructure problems: port facilities are limited; rail is expensive; and clearing facilities of banks can be non-existent, requiring that cash or wire transfers be used.

Certification procedures may be expensive formalities. Currently, two certificates are required for food products entering Russia: a Gosstandart certificate showing that the product meets all applicable Russian standards, and a Gosanepidnazour certificate of hygiene showing that the product may be imported. In addition, veterinary certificates are required for all meat and meat products imported into Russia. Experienced Russian importers are generally adept at securing the required certificates.

Russian Labeling Required

Russian-language labeling will be required by law beginning May 1, 1997. Labels must contain the following information:

* name and type of product

* country of origin

* producing company (can be in English)

* weight or volume

* ingredients

* nutritional value

* conditions of storage (where necessary)

* expiration date

* instructions for use

* recommendations for use

* conditions for use (e.g., side-effects)

Stick-on labels are helpful because they can be designed to cover just part of the English-language label. This way, the product retains its cachet as an American product.

Meat Products Restricted

In April 1996, imports of certain products of animal origin were banned. The official notice of restrictions lists banned products by country of origin and requirements that frozen pork be further processed.

Imports of the following U.S. products are prohibited: ground beef, ground pork, mechanically deboned meat, ground meat in blocks for hamburgers, uncooked partially-processed meats such as raw ground beef formed into patties and table eggs. USDA's Food Safety and Inspection Service will not sign U.S.-Russia veterinary certificates for these products.

Tariffs on High-Value and Consumer-Ready Foods

Tariffs on food imports generally range from zero to 35 percent, but certain alcohol and tobacco products tariffs are higher. Tariffs were revised in May 1995 to more closely reflect the sensitivities of domestic Russian producers.

For example, current tariffs on processed fish are 20 and 25 percent; potatoes, 25 percent; sausages, 20 percent; ethyl alcohol, 100 percent; and cigarettes, 30 percent. The tariff on fresh/frozen poultry was set in 1996 at 25-35 percent depending on market prices. There are no tariffs on nuts, coffee, certain infant preparations and many nursery products.

The majority of popular U.S. consumer-ready products, such as processed vegetables, dairy products, vegetable oils, confectionery, red meats and beverages, face tariffs in the 10-20 percent range. Most consumer-ready food imports are also subject to a value-added tax (VAT), which is 10 percent for most food products. Products subject to a 20-percent VAT are fresh and processed fruits, smoked sausages, canned ham, bacon, certain other processed beef and pork products and some processed fish products.

Some U.S. Exports Strong

Frozen poultry exports to Russia are a major American success story. According to U.S. data, in 1995 U.S. exports of fresh and frozen chicken jumped more than 60 percent, to about $600 million. Exports to Russia in 1996 were over $1 billion. U.S. product accounted for 37 percent of all poultry sold in Russia, or 75 percent of total poultry imports. The remaining 25 percent of imports are primarily from France, Germany and the Netherlands.

Red meat imports surged in 1995, more than quadrupling over 1994. Almost half of the dollar value was for frozen pork, which Russian processors use to make kielbasa, or Russian sausages. U.S. beef livers are also used in kielbasa.

U.S. exports of wine and beer to Russia jumped by 50 percent in 1995, making it one of the few growth markets in 1995 for U.S. exporters of alcoholic beverages. Continued growth is expected.

Europe Leads Competition

The high cost of credit has been a leading factor in Russian importers' decision to purchase goods from Europe instead of the United States. With commercial interest rates in the high double digits, short delivery times are necessary.

American suppliers are noticeably reluctant to extend credit to Russian importers. European sellers - probably because of their geographic proximity and their history of generally closer ties to Russia and the former Soviet Union - are much more likely to have established good working relationships with Russian importers, and will extend credit to them.

The lack of supplier credit is one of the greatest constraints to exports of U.S. products to Russia. European sellers are also increasing their deliveries of goods to Russian buyers on consignment. This practice is extremely rare in U.S.-Russian trade in food products.

European supermarket chains have opened grocery stores and supply networks in major Russian cities. These stores are stocked by mixed containers. In Rostov - some 1,100 kilometers south of Moscow - for example, suppliers from several European countries have joined to open a European store. Prices are high, but the stores are busy.

The Russian Processed Products Industry

The Russian government estimates that fewer than 20 percent of Russian food processing plants meet hygiene regulations and quality standards, which are very strict. Foreign investment in food processing plants has been slow in coming and small in dollar amount. This reflects the general situation for foreign direct investment in Russia. Most foreign investment is going to industries that already have high capitalization rates. Food processing firms generally are not among these.

Foreign investment in small enterprises, or in industries like agriculture where profit rates are low, has taken the form of foreign companies working within their own government's programs, or providing money or other inputs under government guarantees, to small firms with untested and relatively inexperienced management.

Some Russian-owned food processors are profitable and expanding, but many more are looking for foreign investment. Many processors import items such as dry milk, sides of beef and juice Concentrate for processing.

Many of these firms have difficulty making timely payments to suppliers.Those that purchase goods locally would prefer to buy from foreign sources whose quality is higher, but financial constraints prevent them from doing so. Recent tariff changes - mostly increases - for consumer-ready foods were made by the government in support of the food processing industry. But these relatively small increases have not significantly reduced demand for foreign food products.

Marketing Consumer-Ready Foods

U.S. exporters of consumer-ready foods have several options for marketing their products in Russia. There are big differences between the purchasing practices of wholesalers and retailers in Russia and those in the United States.These differences primarily reflect the purchasing practices of consumers, who frequently buy small quantities.

Therefore, quantities purchased from wholesalers/importers are generally small by American standards. The quantities of consumer-ready foods that wholesalers/importers want to purchase may be smaller than exporters are accustomed to selling. Unless an exporter is dealing with a very large importer, it generally will not be possible to sell, for example, a container of one line of cookies. Mixed containers are common.

Retail Outlets Usually Small

Most grocery stores in Russia are smaller than U.S. convenience stores. Grocery stores and kiosks are the biggest retailers of imported prepared foods. The purchasing practices of store and kiosk owners have supported the growth of a certain kind of wholesaler, called a cash-and-carry. These cash-and-carry warehouses resemble U.S. discount superstores like Price Club or Sam's.

But unlike the U.S. superstores, Russian cash-and-carry warehouses do not cater to individuals or families. Instead they sell almost exclusively to small stores and to kiosk owners.

Many cash-and-carry warehouses do not have cold storage facilities and can handle only dry goods. Russian consumers tend to buy fresh produce at rynoks, or open-air markets. Many grocery stores in Russian cities do not sell fresh produce and those that do generally have only small produce sections. Imported produce is always available at rynoks; sellers buy their produce from local wholesaler/importers.

Some cash-and-carry stores buy from importers that are large enough to deal in container loads. The cost savings to exporters of shipping large volumes may be offset by the additional layer of markups.

For large exporters there are many advantages to dealing with a big, well-established importer rather than with individual small cash-and-carries. However, for small U.S. companies that want to sell a limited quantity of goods in Russia, making direct contact with cash-and-carries, or with the owner of a large food store, is an option. Selling directly to kiosks is generally not a promising option for U.S. companies.

Many cash-and-carries that buy directly from foreign suppliers get a small amount of short-term credit from their suppliers. The cash-and-carries, in turn, extend short-term credit to their buyers (small stores and kiosks). Because Russian grocery stores and kiosks are so small, they generally need help financing their purchases. High commercial bank interest rates put bank credit out of the reach of virtually all average-sized retailers.

Wholesale Outlets Developing

In several of Russia's largest cities, wholesale markets for consumer-ready goods have developed. These markets are comprised of private importers with a large warehouse network, some of whom have large facilities in Europe and smaller ones in Russia.

While Moscow is still home to the largest number of wholesalers, many Russian buyers are looking outside of Moscow, to avoid real or perceived unnecessary markups and to take advantage of demand. A small amount of Western product comes into Russia through the southern cities of Krasnodar and Rostov, but these cities will not be able to handle large volumes of imports for many years.

However, as trade with cities outside Moscow expands, U.S. exporters will find it profitable to deal directly with buyers in the smaller cities. At this time, most food products that are sold in European Russia and the Urals come through the port of St. Petersburg. U.S. consumer-ready products sold in the Russian Far East (RFE) come to either Vladivostok or Khabarovsk.

RELATED ARTICLE: Growing Kosher Niche Market in Russia

There are real market opportunities for kosher products due to the growing Jewish population in Russia. The total Jewish population in Russia is officially estimated at just under one million, unofficially at about 1.5 million. Moscow is home to Russia's largest Jewish community, with a population officially estimated at 200,000, and unofficially put at 500,000. The city of St. Petersburg has the second largest Jewish population. Some people adhere strictly to Jewish dietary laws, but most buy both kosher and non-kosher foods.

The Moscow kosher foods market, while the largest in Russia, is still small. Kosher foods are sold in specially-marked sections in only two stores in Moscow; however, shoppers will occasionally see a few kosher items for sale in other stores and markets.

In Moscow, the largest kosher food section is in a store that is about one-half the size of a U.S. suburban convenience store. The kosher section consists of two small refrigerated cases and 30-40 feet of shelf space.

Prices for packaged, non-refrigerated kosher foods like cookies, candies, long-shelf-life juices, canned goods and condiments are essentially the same as prices for identical non-kosher items. Therefore, theoretically, Russian consumers should be indifferent between kosher and non-kosher prepared foods. Kosher dairy and meat product prices are extremely high compared with similar non-kosher items.

Most consumer-ready kosher products are imported from Israel and the United States. The most popular items are cheeses, delicatessen meats (kielbasas), chocolates and other candies, cakes, crackers, biscuits, cookies, dry soup-in-a-cup mix and wines. Canned American olives are also very popular.

American kosher foods have no brand recognition in Moscow. Price is the most important factor, and quality is second.

Orthodox Jews and other strict observers of Jewish dietary laws buy fresh meat, and occasionally frozen meat, but never processed meat. Fresh kosher meats in Moscow are all domestically produced. Fresh kosher chickens sell for about $5 per kilo, and fresh kosher beef for about $8 per kilo.

The market for fresh kosher meats is very small. Very little kosher fish is sold in Moscow; what little is sold, is imported from Israel at extremely high prices. Local or imported non-kosher fish satisfies most Jewish consumers.

Susan Reid is an agricultural attache at the American Embassy - Moscow. Tel.: (011-7095) 956-4103. Fax.: (011-7095) 956-4262.

COPYRIGHT 1997 U.S. Department of Agriculture
COPYRIGHT 2004 Gale Group