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Russia Food and Drink Report Q3 2008
Business Monitor International, July 2008, Pages: 76
Multinationals have continued to seek and execute bold acquisitions in the Russian food, drink and mass grocery retail (MGR) markets, capped off by PepsiCo’s US$1.4bn takeover of the juice business of Lebedyansky in March. Large local players are doing well too, with MGR giant X-5 Retail completing a share issue to fund its takeover option on hypermarket chain Carousel, and Russia’s largest food player, Wimm-Bill-Dann (WBD), delivering 30% plus sales growth in Q108. The US dollar growth forecast reflects some of the reasons for continued optimism, including 85% growth predicted for the food and drink market as a whole for the period 2007 to 2012, and 123% for the MGR market.
Whether this growth will prove sustainable within and beyond the forecast period remains the central question for foreign investors in Russia’s food and beverage industry. At the moment, the picture remains mixed. As elsewhere, food price inflation is a major issue, although a strong economy and the continued application of a ‘voluntary’ pricing accord by leading food producers and retailers on a number of essential products seems to have staved off an immediate crisis, even if underlying structural problems in the food market remain unaddressed. A major and long-term restructuring of the agricultural sector is desperately needed – but the government needs to put in place incentives and guarantees to attract domestic and foreign investment.
Other problems facing Russian food and beverage producers are, however, more familiar to Western markets than the country’s dilapidated collective farms. As modern retailers continue to expand, the negotiating strength of the largest operators presents an ever-greater threat. With its takeover of Carousel, X-5 Retail will control more than 3% of the Russian food retail market, an unprecedented level by local standards. Foreign MGRs such as Auchan and new entrant Carrefour bring notoriously tough pricing policies and international scale to the marketplace. For the largest local players, such as WBD, the scale and co-marketing opportunities can cancel out narrower margins.
Retail concentration is a real threat to smaller and regional players on the other hand, and they appear to be among those backing a long discussed ‘Law on Retail’ that would put the brakes on big retailers by, among other things, limiting opening hours. Still, the major reason why Russia remains third instead of first in the latest Food and Drink Business Environment Ranking is generalised political and economic risk. The food and drink sector has largely been left alone by the state in the past.
But as foreign companies come to dominate certain sectors, there are fears the government could use overt or subtler methods to re-assert a degree of state control (and profit sharing). The proposal of a government wholesale alcohol monopoly is one example. The new Russian president, Dmitry Medvedev, a former Gazprom chairman, should know better than most the dire impact on productivity and output in the oil and gas industries caused by state control. Investors will be hoping that the early liberal talk of the new president will mean that the food and beverage sector is allowed to continue to develop with minimal government interference.
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