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GLOBAL 2016: Economic crisis in Russia impacts spending across categories

Brands and consumers resort to coping strategies 

Russian consumers are familiar with economic crises, but the pain feels deeper this time. Plummeting crude oil prices are slowing the growth of Russia’s oil-dependent economy. Trade sanctions imposed after the nation’s incursion into Ukraine are not helping. People have less money to spend and they are trying to save, which weakens consumption. 

Purchasing has declined across categories and price deflation is significant. Consumer efforts to save money primarily impact durable goods, such as cars, where the average purchase price has dropped. Real-estate values softened, with the impact varying by location. The real-estate value loss signals a larger problem, because real-estate investment is a component of personal savings. Travel also suffered, with overseas bookings down significantly.
Unlike the Chinese, the Russians have limited faith that their government can fix the problems. The hopeful sign for Russia is that oil prices may have bottomed out and the ruble may gain strength. Meanwhile, Russian consumer efforts to save money are accelerating the ongoing shift to local brands, which have increased in quality and are generally priced lower than multinational brands.
This trend is evident in FMCG categories, where western multinationals have achieved low penetration compared with their presence in other major markets. Private-label brands also are commanding greater market share. In these difficult economic circumstances, with consumers shopping for price, most multinational brands are limiting their marketing investment. They are not aggressively attempting to grow market share, but rather fighting against each other and Russian competitors to protect the share they already have.
Brand challenges
During the past decade successful multinational brands focused on reaching members of the expanding and aspirational Russian middle class. The fragile economy dampened middle-class expectations. Meanwhile, Russia’s economy evolved during the fast-growth years, producing factors that compound the challenge facing multinationals, including: better quality local brands; Chinese imports adding more choice and lower prices; and private-label options further crowding the market.
In addition, Russia is experiencing a demographic shift. Ten years ago, when the economy began to take off, the birth rate boomed as the middle class anticipated economic growth, and marketers focused on the younger generation.
Today the median age is just over 39, around the same as in the UK, and much older than the median age in India, which is 27. Consequently, the spending mentality has changed. Luxury purchasing continues, for example, but some luxury consumers are more likely to buy a practical item, like a dress, rather than an expensive handbag.
Consumer coping strategies
The initial reaction when the economic crisis began in late 2014 was to spend money today because tomorrow could be worse. Since then, the consumer mentality has matured. Consumers are more resistant or skeptical about brand messages.
The key coping strategies are: trading down, buying less, buying on promotion, and replacement. Russian consumers look for products that are good enough and offer value for money. They wait for sales. And while meat consumption is growing, people are replacing beef with chicken, which is less expensive. Also, they are eating out in restaurants less often. And the need to economize has encouraged a DIY trend and the rapid expansion of the home improvement retail category.
Consumers have changed not only what they buy, but also where they shop, particularly for packaged goods. They are more likely to visit modern retail outlets, which have expanded rapidly and generally offer lower prices than traditional shops.
E-commerce has also changed Russian shopping habits, with increased numbers of Russian shoppers visiting China’s Alibaba site or AliExpress, the Russian equivalent. Diapers are among the categories purchased most frequently online. A Japanese diaper brand is especially popular. The shift to e-commerce reflects growing Internet and smartphone penetration. Russia’s Internet penetration rate exceeds 70 percent, substantially higher than China’s.
Looking abroad
The trade relationship with China is expanding, with Chinese goods available online. Russian foods, including chocolate and juice, as well as other products, are more available in China, which in the past year opened several cross-border e-commerce zones. In these zones, foreign goods are imported at lower tariffs, making them more price competitive and helping the Chinese government achieve its goal of stimulating domestic consumption.
Meanwhile, Russian brands across several categories are developing rapidly, usually for domestic consumption but sometimes for export. The toothpaste brand Splat is popular and competes effectively with multinationals. The supermarket brand Magnit has effectively expanded modern retail.
Several Russian heritage or Soviet-era brands have transformed to be much more efficient and consumer-centric, including: Sberbank, which has refurbished its branches and also introduced mobile banking; and the state transportation brands, Aeroflot and Russian Rail.
Both business-to-consumer and business-to-business technology is advancing in Russia, although exports usually are usually confined to Russian-speaking neighbors, with some exceptions. Yandex is present throughout the Russian-speaking region, but also in Turkey, the UK and Israel. Russian entrepreneurs developed the widely used cloud-based messaging service Telegram, but it is based outside of Russia.
Government efforts to support Russia’s technology sector include recent regulatory changes that placed certain restrictions on foreign Internet brands. The challenge for local Russian brands is a lack of venture capital. Russian entrepreneurs can proceed on projects that rely on know-how and expertise, but they face a financial barrier in industries requiring investment, in part because of the economic sanctions imposed by the U.S. and EU.

Brand Building Action Points 

1. Be practical.
This is not the first period of economic stress that Russian consumers have endured. They experienced scarcity of material goods during Soviet times and are excellent at coping and innovating practical and peer-to-peer solutions. Provide practical solutions for the need to do more with less.
2. Be personal.
Consumers respond to brands that communicate in a personal way, and Russians are mobile and digitally-savvy.
3. Meet growing expectations.
Despite the difficult economic times, Russian consumers are looking for something more from brands, whether it is a lower price, higher quality, better service, or more convenience. Offer something distinctive.

4. Build credibility.
Having been disappointed with some brand claims in the past, Russian consumers now pay close attention to ratings and reviews. It is especially critical that brands earn positive ratings, because they are an important measure of credibility.

5. Plan two steps ahead.
During the depths of the economic crisis, many of the big brands focused on retaining customer loyalty with low prices. Newer, challenger brands entered the market that were even more price aggressive or differentiated in a meaningful way. These new brands are not going away.

6. Be opportunistic.
For brands considering entering Russia this can be a good time to invest because prices are low. Many of the European retailer brands are expanding in Russia now.