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Russia Food and Drink Report Q3 2007
Business Monitor International, Oct 2007, Pages: 75
The Russia Food Drink Report provides independent forecasts and competitive intelligence on Russias food and drink industry.
Although in 2007 Russia was involved in some spectacular political disputes with the US, EU and the UK, amongst others, over a wide range of issues, it is not the case that Russia is isolating itself from the world, at least in economic terms. During the year there were continued flows of both portfolio investment and foreign direct investment in Russian retail and food and beverage companies. None the less, trade policy remains a major headache, with Russia’s World Trade Organisation (WTO) talks continuing to drag on against a background of bitter disputes with WTO members Poland and Georgia. Nonetheless, investment flows remain steady as Russia’s consumer spending boom continues well into its seventh year with no signs of abating.
The strength of the Russian food retail sector is reflected by the continued ability of large mass grocery retail (MGR) players to access debt and equity for further expansion and restructuring of earlier acquired debt. At the end of July 2007 X-5 Retail announced it had access to a US$1bn in a syndicated loan organised by Goldman Sachs and Citigroup. In May retailer Dixi raised some US$360mn in a domestic initial public offering (IPO) of 41.67% of its shares. Viktoriya meanwhile has undertaken a restructuring with an IPO expected next year. The downside of this investment is that the ‘window of opportunity’ for big foreign retailers is closing as the largest Russian and international chains already present are securing strong positions in the country’s largest cities. High equity valuations are also putting the price of entry through acquisition out of reach of all but the largest players, such as Wal-Mart and Carrefour - the latter having already committed to opening its first stores next year.
Foreign investment has poured into the food and beverage sectors in recent months as well. But in contrast to the MGR sector, continued fragmentation in many segments offers continuing opportunities for foreign firms as well as well-financed local players. At the same time, multinationals are taking the opportunity to widen their product offering and produce more locally. Coca-Cola Hellenic Bottling Corporation (CCHBC) purchased local water and soft drinks maker Aqua Vision in July while PepsiCo announced the construction of a new snack plant in Russia. Croatian food group Podravka has said it was negotiating the purchase of an unnamed local player, with sources linking the talks to a local snack and soup producer.
Beyond trade disputes, there are other worries however. Retails are concerned that federal legislation being prepared might limit opening hours. While such legislation is intended ostensibly to help independent stores, in reality predatory officials and excessive bureaucratic requirements present a far greater threat to the small and medium-sized enterprise sector. More positively, the new legislation would represent a long overdue codification and updating of existing patchwork legislation, something that is still required in the food industry. However, as ever,. The arbitrary implementation of regulations and lurking political uncertainty mar an otherwise dynamic outlook.
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