Trading waiting room – Newspaper Kommersant No. 201 (7402) dated 10/28/2022

The expectations of top managers of Russian chains and FMCG suppliers of business growth have worsened by a third over the year. The companies note the impact of the consequences of both military operations in Ukraine and the Western sanctions imposed after the start of the special operation. The main risk is seen in the desire of consumers to save money, which already negatively affects the profitability of retail chains. In the next year, the FMCG market can grow only due to inflation, and analysts are waiting for a new round of industry consolidation.

The share of Russian retail and FMCG executives expecting business growth dropped from 77% to 50% over the year. These are the results of a NielsenIQ survey conducted among top managers of Russian FMCG companies. Of these, 39% noted the negative impact on the business of military operations in Ukraine and a new wave of Western sanctions. This year, 10% of respondents expect a decrease in the turnover of their companies by 2–5%, 17% of top managers predict a fall of more than 5%, and another 22% expect the business to remain at the same level.

One of the main reasons for concern 88% of market participants called the reduction in consumer income. At the end of September, households switched to the mode of saving everyday consumption with a partial rejection of unnecessary spending on entertainment, taxis, etc., according to an analytical review of the Central Bank. Among retail top managers, 57% also fear unstable supplies, 48% fear a change in consumer habits, and 24% fear a decrease in store traffic. And 87% of supplier leaders see risks in interruptions or rising prices for raw materials, 48% in rising logistics costs, about 25% in lack of capacity and stocks.

The executive director of Rusprodsoyuz, Dmitry Vostrikov, predicts that problems with the supply of raw materials, components, equipment and packaging for products will remain at least until the end of this year. The association fears that this will lead to an increase in fines for underdeliveries without the fault of manufacturers. They also see risks from the transition of consumers to more stringent savings models. Executive Director of Rusbrand Alexey Popovichev notes that the situation was complicated by the decision of many foreign companies to suspend investment in marketing, which previously supported demand.

The largest retail chains are already reporting a decline in purchasing power.

In the third quarter, Lenta reported a reduction in gross profit year-on-year by 5%, to RUB 26.5 billion, and a gross margin from 23.6% to 20.9% due to increased investment in traffic retention, an increase in the number of promotions and the expansion of the range of less marginal products. Gross margin of X5 Group (Pyaterochka, Perekrestok, Chizhik) in the third quarter decreased to 24.3% against 26.2% a year earlier, which may also be caused by the introduction of cheaper products in the range and the expansion of promo, said in the Veles Capital review.

According to a representative of Lenta, the chain is increasing the share of goods in the lower price segment in response to the desire of buyers to save money. In addition, the company revised its plan for opening new stores for the current year due to macroeconomic conditions and market uncertainty, and also considers it necessary to refine the small format model. The X5 Group prioritizes the development of Pyaterochka and Chizhik, as well as online business. Fix Price says that in a number of categories they switch to local producers and maintain the required level of stock in warehouses.

As follows from the NielsenIQ survey, more than half of manufacturers due to the crisis will focus on more popular products and switch to local raw materials, and about 30% are considering entering other segments or launching new products.

Network managers primarily plan to diversify purchases in order to avoid difficulties with logistics, NielsenIQ points out. Alexey Popovichev expects an increase in the number of new local brands in the low price segment, as well as the resumption of marketing activity after the sale of part of their Russian business by foreign companies.

Marat Ibragimov, a senior analyst at Gazprombank, predicts the development of a trend towards reducing the size of the package to reduce the purchase budget, as well as an increase in the share of own brands of chains. According to him, it will be easier for the major players to endure the weakening of consumer demand, but for the rest it may be a difficult period, and in the end there will be another round of consolidation in the industry.

In addition, Mr. Ibragimov adds, consumers today are not only reducing everyday expenses, but also saving money, which allows us to expect the implementation of pent-up demand, primarily for non-food products. According to a NielsenIQ survey, 61% of top managers of FMCG companies expect a decrease in demand in the coming year, and 45% expect the market to grow only due to inflation.

Anatoly Kostyrev