Rather premium, brand-name articles than cheap bargains

Those who can afford it live by the motto: "We're too rich to spend little." Consumer spending is growing in importance as a key mainstay of the economy.

German consumer goods manufacturers are eying Russia with interest. Although average earnings there are lower, consumers give excessive vent to their passion for shopping. Amid rising incomes and enormous pent-up demand, the scene seems set for growth in demand in the coming years. The outlook is therefore tempting for suppliers from the West. Local fairs provide platforms on which to show themselves in their best light. From year to year Russian and international organisers bring new or modified events to market, some of which succeed in satisfying the heightened aspirations.

Meanwhile, practically all the leading German exhibition companies have placed their agencies, core products and formats on the Russian market or are in the process of doing so. A current example of what will in all probability prove a successful export of an international industry highlight is Messe München's sports equipment and fashion show ispo, debuting in Moscow September 14 to 17. Successful products from Messe Düsseldorf such as the building technology fair SHK, the fashion fair CPM and the cosmetics exhibition Intercharm or Messe Frankfurt's consumer goods show Ambiente are already firmly established as premier industry meets.

This comes as no great surprise, given that German exhibitors are currently raving over fairs in Moscow. Manufacturers of premium consumer goods in particular are being inundated. Be it automobiles, mobile phones, household appliances, furniture, fashion or cosmetics, practically every segment is registering headlong growth. After the gloom of Soviet-era shopping and the abrupt end, caused by the 1998 crisis, to the subsequent mood of euphoria, similar behavioural patterns are now emerging to those in developed market economies, above all in the cities.

The new generation of consumers is self assured, well informed and demanding. When shopping, those who can afford it look at everything but the price tag.
Far more important to the new upper stratum of society are trend setting, exclusiveness, luxury and prestige. And even many people on an average income would rather indulge in one superior brand-name article than several cut-price bargains. The section of the population obliged to exercise thrift hardly goes into the new shopping centres, anyway, visiting the open markets as they always have done.

In the past few years the domestic sector has acted as the driver of economic activity. The retail trade is registering outstanding double-digit sales growth. Retail earnings in 2004 already brushed the US$ 200 billion mark, bettering the year-earlier result by more than 12 %. This year an increase of more than 10 % is expected, and up to 8.5 % over the medium term. Moscow generates roughly a quarter of total turnover.
This passion to consume is fanned by rising real incomes. According to official statistics, in 2004 Russian consumers had over 8 % more to spend than in 2003. The pace of incomes growth will remain on roughly this scale in the coming years, too.
Of course, average monthly wages, currently at the equivalent of about EUR 250, come nowhere near the level in western European countries. And the regional differences are considerable. But in certain sectors salaries are climbing much faster than indicated by statistical averages. Sought-after executives and rare specialists in particular are feeling the surge in their market value directly in the size of their wage packets - with annual mark-ups averaging 20 to 30 %.
And it is the higher earners who frequently opt for established import labels.
These days, not only the tiny segment of mega-rich (barely 1 % of the total population) vie for western brands. Suppliers of luxury goods are very well served by the handful of "nouveaux Russians" and their motto "We're too rich to spend little". In the Moscow boutiques of international luxury goods purveyors, trade is meanwhile brisker than in London or New York. Domestic consumption rests on the broader mass of the resurgent middle class.

Certainly, sociologists count only 20 % of Russian families towards the middle classes, against a share of around 60 to 70 % in western market economies. But at the moment almost 70 % of the population are making the transition from poor to middle class, whereby the Russian and western middle classes are worlds apart. In Russia households with a per capita income in excess of EUR 400 are considered as belonging to the middle class.
Nonetheless, when it comes to shopping far more of the Russian middle class give way to their love of luxury. What is more, increasing numbers are running up debt. Experts forecast a jump in consumer credit by up to 30 % per annum over the coming five years. In surveys more than 30 % of interviewees already admit to using credit. Well over 30 % intend taking out a loan this year. 40 to 45 % of Russians fulfil their dream of a new car by hire-purchase.
Although average earnings are lower than in other east European countries, the consumption of certain categories of goods is higher. The representative commodity basket contains an exceptionally high share of food. Russian consumers spend a larger relative proportion of their income (around 14 % of their household budget) on clothing and footwear than in east, and indeed west European countries. Russian women shell out some 12 % of their incomes on cosmetics and toiletries - twice as much as western consumers.

Analysts explain this consumption propensity by the fact that incomes are not yet sufficient to permit investment in shares or property. The banking system has, anyway, not yet emerged from the shadow cast by the financial crisis, arousing more scepticism than confidence in many people. Experts predict that as purchasing power escalates, in a few years consumer spending will approach the levels in leading industrial nations in absolute terms, too. Until then most consumer goods markets will stay on a growth path.

Only recently a study by the Stockholm School of Economics confirmed the upbeat consumer mood in the country. Young (up to 29), childless single women in particular have taken the motto "Live for the present" to heart. Good news for the supplier community is that Russian women are especially receptive to advertising messages. Recent research by the agency Comcon Media revealed that 95 % of Russian women respond positively to promotion campaigns and take part actively in them. Indeed, Russian clients expect manufacturers to cultivate their brand culture. As a result the advertising industry is notching up annual rates of expansion above the 30 % mark. Constanze Kachcharova

m+a report Nr.5 / 2005 vom 12.08.2005
m+a report vom 12. August 2005