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Business English: Slowdown hits eastern European consumers
Customers across Russia and Poland are in a wary mood as financial woes hit homeAlexander Prostakov is a dream consumer. The 33-year-old Muscovite stops off for a coffee every day, spends around USD300 a week on food and reckons it would be "boring" to skimp on restaurants and expensive alcohol.
Economic data from Russia suggests Mr Prostakov is not alone. Retail sales are growing at almost 7 per cent year-on-year and a boom in consumer credit is further fuelling spending in a country that relies on domestic consumption for 54 per cent of economic output. Retail loans were up 40 per cent in April compared to a year ago.
But across the eastern European region the picture is more mixed, while even in Russia a government push to stamp out alcohol abuse has dented earnings for some of the multinationals that rushed to tap newly-affluent pockets.
Carlsberg, which has invested USD12bn in Russia since the 1990s, and other brewers have been hit by intense competition and a tripling in tax on beer last year as part of a Kremlin clampdown on alcoholism.
SABMiller suffered a 6 per cent drop in volumes in Russia in the last fiscal year. A similar drop in Poland and Romania was largely due to intense competition. That prompted SABMiller, the number two brewer by sales, to match competitors by cutting its beer prices by 10 per cent.
Aside from alcohol, L'Oréal and Unilever have also highlighted more cautious shopping in the region when it comes to food and personal care. However, L'Oréal, the cosmetics group, has attributed a 2.8 per cent dip in like for like sales last year to company specific issues.
Yet Poland, a country of 38.4m people that avoided the EU-wide recession thanks in part to its spendthrift consumers, is starting to feel the chill winds of the Eurozone financial crisis.
For the past two years Poles have been keen to keep buying, often taking loans or depleting savings in order to purchase big ticket items. Sales of flatscreen televisions jumped markedly before June's European football championships, co-hosted by Poland and Ukraine.
But with the football championships over, "the signs of a slowdown are already here," says Piotr Kalisz, an economist at Citi Handlowy bank.
In June, retail sales rose by 6.4 per cent compared with a year earlier, well short of the 8.9 per cent increase that analysts were expecting. In Russia, too, retail sales growth has been decelerating, falling to 6.4 per cent in April and remaining below 7 per cent in the two subsequent months.
Meanwhile, Polish inflation is running at 4 per cent in July, meaning that pay increases have been eaten up by rising prices. Poland's central bank was the only one in the EU to raise its rates this year, further dampening spending. Poland's high unemployment rate, at 12.4 per cent in June, is also hurting.
The more cautious mood among shoppers is especially tough for multinational manufacturers of consumer goods. They are struggling to make products cheap enough for the market, says Emmanuelle Roman, global consumer products markets leader at Ernst & Young.
"In Russia the cost of doing business is extremely high, so all the global players are struggling to develop products at the right price point for those consumers," she says, adding that local companies have been more successful at this.
Yet there are bright spots. Premium diapers are enjoying a boom in sales, perhaps a reflection of the rising ranks of older, and thus wealthier, mothers.
"Russia is going through an increase of the birth rate," says Natasha Zagvozdina, a retail analyst at investment bank Renaissance Capital. She adds that in Moscow there is a surge of women giving birth in their mid- to late-30s.
"These are people who already have children and have provided for their offspring and for themselves, and now are having their third, fourth, fifth child."
Ms Zagvozdina would know. At 40, she has just given birth to twin girls. Her friend and contemporary Marina Kagan, who lives in St Petersburg and gave birth to twins a year earlier, says she has noticed similar trends in her job as vice-president of communications at PepsiCo Europe.
The company's baby food division is posting double-digit growth in Russia every year, as customers buy more pre-prepared foods, instead of making it themselves at home, and look for items that are tailored exclusively to either newborns or toddlers.
For baby retailers in Russia it is good business. A can of milk formula costs the equivalent of Dollar20-25, while a high-quality pack of 80 diapers is Dollar25-27.
That is tempting enough to keep multinationals firmly fixed on getting their business models right in eastern Europe. As Ryszard Petru, a partner with consultancy PwC in Warsaw, points out: "We have to remember that this is a slowdown but not a crisis."
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The Financial Times, 19.10.2012
© 2012 The Financial Times
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