Food Processing Sector in Russia
The Russian economy has entered a “post-crisis” period of moderate growth. Domestic demand, which collapsed in 2009, has been gaining strength, according to the USDA Foreign Agricultural Service.
The food processing sector in Russia continues its recovery, supported by rising disposable income, increasing real wages, declining unemployment and growing food expenditure. During the January to August 2011 period production of the following increased versus 2010: meat and offal, sausages, meat products, dry milk and cream, butter, canned milk, pasta, sugar, confectionery, frozen fruits and vegetables, and mineral water. However most food processing companies believe that the food industry has not fully recovered yet from the crisis. The majority of raw materials and ingredients used by Russian food processors/manufacturers are imported. This leaves ample opportunities for U.S. exports to Russia. WTO accession, which is anticipated for 2012, should ease import restrictions for some products, such as dairy products and certain meats, from the United States.
SECTION I. MARKET SUMMARY
Although the food processing sector in Russia weathered the last global economic recession well, it is still being heavily influenced – both positively and negatively -- by the past two global economic crises. In 1998, Russia suffered a financial crisis which turned out to be a starting point for growth in the local food processing industry after a long period of stagnation. Locally manufactured products were affordable for local consumers compared to imported products and manufacturers improved quality to meet consumers’ needs and seize a larger market share. Prior to the latest economic downturn, the food industry had been growing by about 10% per annum. Foodmag.ru estimates that from 2005 to 2008, investments into food processing enterprises totaled more than 135 billion rubles which demonstrates the attractiveness of this sector for both Russian and foreign investors. Producers of meat and meat products, dairy, edible oil, beverages, and confectionary items made the most capital asset improvements. Two-thirds of total investments were used for modernizing equipment to increase labor productivity, create efficiency, and lower overhead. New equipment helped strengthen Russian food processors making their products more competitive.
Increased expenditures on food products in 2011 indicate that the Russian food industry has joined other markets -- such as the car, consumer electronics, apparel and shoes, tourism and construction materials markets -- demonstrating active growth and recovery from the 2008 crisis. However, according to Ernst & Young, as of 2011 most food processing companies do not think that the food industry has fully recovered from the 2008-2009 slow down. Internal factors including drought, fires and crop failure plagued 2010. In addition, the food sector had to cope with the consolidation of certain beverage and dairy products manufacturers and the Retail Trade Act 1 which put limits on pay-offs to retail buyers and mangers among other rules that have impacted food processing companies directly or indirectly. The global economic recession also led the majority of companies to reconsider their development strategies and direct their efforts toward, first, optimizing their business processes in order to raise their operational efficiency. Secondly, companies are diversifying in order to reduce vulnerability on any one sector.
The most crisis-resistant sectors were businesses that specialized in manufacturing primary goods and that received government support, namely: farming, grain processing, manufacturing flour, bread production, milk production and dietary foods. To the extent that food processors relied on these sectors they have benefited. However, the majority of raw materials and ingredients used by food processors are imported.
The food processing industry is made up of foreign and domestic manufacturers with the latter dominating number wise. The biggest Russian food manufacturers are: Baltika Brewery Company, Unimilk, “United Confectionaries”, “Cherkizovo”, “Efko” Groups of Companies. Among the most well-known foreign food manufacturers in Russia are Kraft Foods and PepsiCo which invested heavily in WimmBill Dann in 2010-2011 These foreign investors are strengthening their positions with investments and marketing activities that overshadow domestic companies. The leaders in this market are focused on consolidation and expansion into regions outside of Moscow and St. Petersburg.
The factors that have restrained faster growth in the food-processing sector are as follows:
•Higher prices of raw materials
•Growing demands from large retail chains and greater competition among food manufacturers for shelf space
•Problems with recruiting qualified personnel
•Sales and distribution problems of manufactured products
•Cost of public utilities
•Logistics problems
•Significant debt load
•Lack of financing in necessary volumes, terms and at affordable interest rate
•Lack of developed distribution system
Table A. Russian Food Processing Sector 2007-2010
There was significant contraction in the number of businesses after the 2008 economic crisis. However, the data suggests that economically viable firms survived and more than filled the void. For example, the value of food production actually increased each year during the 2006-10 period, and as up by 12.6% in 2010. Net profit was also up in 2010, by 15%.
According to Russian Federal Statistics Service, in January-August 2011, the production index of food products amounted to 100.6% against 104.9% in January-August 2010 including broader categories such as meat and meat products - 106.9%, pasta products - 100.6%, mineral waters and soft drinks - 101.1%, beer - 100.3%, sugar - 125.2 percent. Compared to the same period of 2010, output of the following products increased: meat and offal (7.5%), sausages (4.5%), meat products (12.2%), dry milk and cream (21%), butter (2.9%), canned milk (1.7%), pasta (3.1%), sugar (21.5%), confectionery (4.2 %), frozen fruits and vegetables (by 48.8%), mineral water (5.7%). Production of flour from grain crops was almost the same as last year (growth rate - 0.4%), as well as pasta (0.5%) and beer (0.4%). On the decrease were: production of cereals (17%), cheese and cheese products (3.5%), dairy products (3.4%), vegetable oils, unrefined (16.7%), canned fruits and vegetables (1.1%). The decline in output of dairy products was associated with decreased domestic raw material output. Decreased production of vegetable oils is due to reduced production of domestic oilseeds in 2010.
The major consumer of food ingredients in the Russian food market is the meat processing industry with average annual growth of 15%. One of the latest trends in the meat processing sector is increasing emphasis on “natural” food ingredients. Meat processors source both domestic and imported ingredients. Domestic poultry and pork production have shown steady growth while beef production decreased in 2010. Ernst and Young experts explain that the poultry production was hampered in 2010 by the drought that drove up feed prices which make up 70% of production cost and to a lesser extent by the lifting of the ban on American poultry imports. The poultry industry is the most consolidated sector and is comprised of around 600 producers. According to Russia’s State Statistical Service (Rosstat), farms of all types produced about 4.6 MMT of poultry and livestock for slaughter (live weight) in the first half of 2011, 3.8 percent more than January-June 2010. Agricultural enterprises increased production by 7.4 percent at the same time. The Russian Ministry of Agriculture (MinAg) reported that Russia will increase livestock production by 2.8 percent, while total agricultural production will grow 10.0 percent in 2011. The poultry market appears to be close to self-sufficient although imports are still well represented in the processing sector. Pork production totaled 739,000 tons in 2010 which is 14% more than in 2009. Since 2005, pork production has more than doubled. Despite the fact that some anticipate self-sufficiency in pork production within 3-4 years, pork imports remain rather high; in 2010 pork imports totaled 625,000 tons which is 2% lower than in 2009. The biggest pork suppliers are Brazil (34.4%), Germany (17.6%) and Denmark. Meat imports are subject to a quota system which is as follows for 2012: fresh and chilled beef – 30,000 tons, frozen beef – 530,000 tons, fresh, chilled and frozen pork- 320,000 tons, pork trimmings – 30,000 tons, poultry meat – 250,000 tons, mechanically deboned poultry meat (mince) – 80,000 tons. Upon WTO access the quotas will likely change and exporters should monitor the FAS Attaché reporting page for updates.
According to the Agrarian Marketing Institute, by 2012 meat production in Russia will increase by more than 30 percent compared to 2009 level. The main growth is expected in the poultry market where the poultry share is expected to exceed 40 percent of the Russian market’s meat production. Beef’s declining share will continue in spite of the forecasted increase in beef production.
Effective January 1, 2010, Russia requires all imported poultry products be processed with only those ingredients approved for use in Russia. Please consult the FSIS Export Library for a list of approved ingredients <http://www.fsis.usda.gov/Regulations_&_Policies/Russia_Requirements/index.asp>. Also since January 1, 2010 frozen poultry was prohibited for use in processing select foods (e.g., baby food and food for nursing or pregnant mothers). Please consult your importer or USDA FSIS for guidance on a case-by-case basis.
The dairy products market is valued at $16-17 billion and is growing annually by 7-9% in terms of value. Wimm-Bill-Dann and Unimilk maintain the dominant positions in the Russian dairy market. 2010 was a significant year for the Russian milk processing market: Danone took over Unimilk then PepsiCo acquired Wimm-Bill-Dann. The Russian dairy market produces milk, cottage cheese and sour cream and Russians are very loyal to local brands. However, in 2010 Russia imported 255,000 tons of dairy products and cheese.
The Russian juice market is worth $6 billion with 2.9% growth compared to 2009. The leading players are international companies PepsiCo and Coca-Cola which in 2010-2011 acquired, respectively, Wimm-Bill-Dann and Nidan Soki - the biggest Russian manufacturers. PepsiCo and Coca-Cola have a collective market share of almost 85%.
Experts assess the Russian confectionary market at around $12 billion annually which makes Russia the second-largest confectionary market in the world. The confectionary sector is consolidated around a few domestic and foreign players. Top players include United Confectioners which brings together 15 manufacturers including Rot Front, Babaevsky and Krasny Oktyabr which are household names. Nestle, Roshen, KDV-Group Lamzur’, Neva, Slavyanka, and Sladko follow the leaders and also have huge production facilities, wide assortment, active brand support, effectively developed distribution and logistics. Baked products occupy the largest share of the market - approximately 55% followed by chocolate products (32%) and sugary products (13%). Production of chocolate and baked products in 2010 grew by 12.3% compared to 2006 and totaled 1.3 million tons.
The size of Russia’s specialized food ingredients market is evaluated around more than $2 billion. This sub-sector has quickly recovered after the 2008-09 crisis showing 5% growth in 2010 due to domestic food processing industry demand. RBK Research experts forecast 10% growth in 2011.
Russia’s specialized food ingredients market is weighted as follows: flavors (29%), preservatives (24%), colorings (19%), antioxidants (13%), food acids (6%), and cloud emulsions (2%). The market is dependent on imports, due to lack of raw materials domestically and high risks of entry into business.
Regulatory Framework
In 2010, the Government of the Russian Federation (GOR) passed the “Principles of the Russian Federation State Policy in the Field of Nutrition for the Period to 2020” which is considered by many as some progress in terms of GOR support for the food processing industry including food ingredients manufacturers. The main objectives of the policy are: expansion of domestic production of basic raw materials that meet modern standards of quality and safety, the development of manufacturing food products enriched with essential components, specialized baby food, functional food products, dietary (curative and preventive) food products and dietary supplements. Also, the GOR pays attention to the development and implementation of innovative technologies in agriculture and the food industry, including biotechnology and nanotechnology, and development of healthy eating educational programs for various groups of the population. In this regard, technical regulations relating to food are expected to be adopted. It is proposed to strengthen the legal responsibility of the manufacturer for production of food products which are consistent with statutory requirements, and to improve quality control mechanism for food and raw materials produced in Russia and imported from abroad. Also, according to the document, the GOR would provide the conditions for investment in production of vitamins, enzymes for the food industry, probiotics and other food ingredients, consumer foods enriched with vitamins and minerals, as well as would prioritize development of research in the field of modern biotechnological and nanotechnological methods to obtain new sources of food and biomedical estimation of its quality and safety.
The main regulations for the industry will be the Customs Union’s technical regulations "Safety Requirements for Food Additives, Flavorings, and Technological Aids". The draft of these technical regulations is published on Customs Union website and the document is expected to be accepted in the coming months: http://www.tsouz.ru/db/techreglam/Pages/Pishdobavki.aspx.
Trade
The Russian food industry in general is characterized by its dependence on imports. Around 40 percent of products used by the Russian food industry are imported: $36.4 billion was spent in 2010 for importing food products and raw materials. More than a half of the meat and milk products in major Russian cities are imported. 70% of the raw materials in meat processing plants are imported.
According to data from the Federal Customs Service in January-August 2011, Russia’s imports of food products and agricultural raw materials totaled $25.8 billion which is 26.2% more than in the corresponding period of 2010. Compared to the same period in 2010, import volume of fresh and frozen meat increased by 9.6%, butter - by 16.8%, citrus fruits - by 19.0%, tea - 5.7%, cereals - 2.2 times, sunflower oil - 2.1 times, products and canned meat - by 44.2%, raw sugar - by 21.5% cocoa - 5.9%, products containing cocoa - by 10.2%, alcoholic and nonalcoholic beverages - by 18.8%. At the same time imports of fish declined by 18.0%, condensed milk and cream - by 38.2%, white sugar - by 8.8%, cigarettes - by 29.7%. Average contract prices for some produce and other food increased. The greatest increase in contract prices was on fresh and frozen meats (11.4%), fish (1.4 times), concentrated milk and cream (7.3%), butter (25.5%), citrus (16.2%), coffee (1.6 times), tea (5.7%), sunflower oil (45.9%), meat products and canned meat (10.8%), raw sugar ( to 36.0%), sugar (38.6%), and products containing cocoa (22.5%).