communist shops
ice cream
hunger for success
young russians
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Russia's consumers come of age
By Jenny Wiggins
Published: September 2 2008 03:00 | Last updated: September 2 2008 03:00
Patrick Ricard, the man who has run French distiller Pernod Ricard for more than 30 years, first visited Russia in the early 1960s. He did not like what he saw.
"It was a terrible country," Mr Ricard says solemnly, sitting on a couch in the foyer of Moscow's Baltschug Kempinski hotel, surrounded by people talking on mobile phones and smoking cigarettes. "Nothing was clean, it was sad and poor."
It is easy to see how a very French Frenchman - the 63-year old Mr Ricard is the kind that dislikes speaking English and wears a red boutonnière on the lapel of his suit - would once have found little to enjoy in Russia.
Thirty years ago, there was little to choose from in Russian shops. They offered one kind of milk, one kind of cheese and one kind of beer - when such products were available. And nearly everything was made in the Soviet Union.
Today, Moscow's bustling supermarkets stock the world's most expensive brands, including Pernod Ricard's whiskies, cognacs and champagnes. "The country has changed a lot. You notice a difference in just six months," Mr Ricard says. "You see they want to succeed."
While the world's leaders fret over the political consequences of Russia's rising economic power, such as its recent invasion of Georgia, the world's makers of wine, chocolate and ice cream are far less perturbed, seeing instead an unmissable business opportunity.
"The marketplace is changing more quickly here than anywhere else I've ever seen or experienced," says Bernard Meunier, the Belgian who runs Swiss food group Nestlé's Russian subsidiary, Nestlé Rossiya.
In his Moscow office, Mr Meunier shows off a new ice cream brand named 48 Kopeks, which Nestlé has developed for the local market. The name refers nostalgically to the price Russians paid for ice cream in the 1960s and 1970s. "The Russian consumer is getting richer faster than any other consumer in Europe," he explains.
During the past few decades, as the European and US companies that make the world's washing powders and instant soups roamed the globe seeking people they could turn into "consumers", they focused on South America and Asia but largely ignored Russia.
Before the Soviet Union fell apart in the early 1990s, it was almost impossible to get foreign brands into Russia. And even after its demise, many foreign companies remained nervous about investing in a country that seemed politically and economically unstable, as well as corrupt.
Their worst fears were borne out at the end of the 1990s when Russia slid into a financial crisis. As the value of the rouble tumbled and banks collapsed, it seemed doubtful whether the country would ever be able to sustain a vibrant domestic market.
Today, those fears are fading fast. Less than 20 years after the Soviet Union collapsed, Russia is on the verge of becoming one of the most lucrative consumer goods markets in the world.
Foreign consumer goods companies such as Nestlé, Unilever, PepsiCo, Kellogg's, Kraft and Wrigley have so much confidence in Russia's future that they have been racing to buy Russian brands, acquiring some $2bn (£1.1bn) of local companies during the past 18 months. Among the companies purchased were Lebedyansky, Russia's biggest fruit juice producer, and Inmarko, its biggest ice cream brand.
Antoine de Saint-Affrique, the Frenchman who runs Unilever's central and eastern European businesses - and who last year transferred his office from Rotterdam to Moscow - argues that companies that do not invest in Russia will miss out on the opportunity of participating in what he describes as "extraordinary" domestic growth.
"Russia has enormous potential that will go above and beyond the oil industry," he predicts, comparing Moscow to cities such as New York, London and Shanghai as he points to the office block going up across the street from Unilever's Moscow headquarters. "They're building it night and day."
Supporting evidence is not hard to spot in Moscow, a city where posters advertising films such as Indiana Jones and the Kingdom of the Crystal Skull are plastered over socialist murals of workers carrying pickaxes. In the basement of a branch of Seventh Continent, one of the first supermarket chains to open in Russia more than a decade ago (it now has close to 130 stores) shoppers happily pay Rbs2,119 (£48) for a bottle of Olmeca Tequila - more than double the price it would cost in the UK. Nearby, at a more expensive grocery chain, Globus Gourmet, a 1988 bottle of Dom Perignon champagne can be picked up for Rbs35,230.
McDonald's - which along with Pepsi was one of few foreign brands to get into Russia in Soviet times - is more popular than ever. Queues trail out of a suburban store on a Saturday afternoon and it is opening restaurants faster in Russia than in any other European country. It claims its Pushkin Square restaurant in central Moscow, opened in 1990, is the busiest in the world.
Fancier restaurants are also appearing on Moscow's streets. At the GQ Bar, a bar and restaurant south of Red Square that opened last year, dessert plates piled with raspberries are served with flakes of gold leaf. And at Turandot, a restaurant near Pushkin Square that opened two years ago after $50m was spent building it over six years, diners can spend thousands of roubles transporting themselves back to the 18th century. The restaurant's walls are decorated with original French tapestries, waiters wear knickerbockers and the wooden chairs are elaborately hand painted.
Expatriate business people believe the ostentation evident at such venues reflects Russians' age-old propensity to indulge in the finer things in life when they can. "People like good food, good wine, good cars . . . and young Russians believe they can turn everything into gold, which currently is true," says Dominique Bach, the Frenchman who runs the eastern European operations of PepsiCo, over a glass of champagne on a balcony outside Moscow's Swissôtel.
"Russia is not a place where doing business is boring," he adds.
How PepsiCo gave a local flavour to its Russian production
A couple of hours' drive south of Moscow in the town of Kashira, PepsiCo has been making crisps under its Frito-Lay brand since 2002. It had hoped to have the factory, its biggest in Europe, up and running earlier: building started in 1998 but was held up by Russia's financial crisis.
It brings in potatoes grown mostly on local farms - it imports one-fifth of its potatoes but is running agricultural programmes to encourage farmers to grow more. These are sliced, fried and packaged before being sent all over Russia by train. Most of the work is done by machines. But the crisps must be packed into boxes by hand, and recently PepsiCo has encountered a new problem: it cannot find enough people to do the job. With the factory running at full capacity and the local unemployment rate hovering around zero, locals reason that they have better things to do than package crisps.
So the company sends buses every day to villages as far as 100 kilometres away to find women willing to work.
When PepsiCo started selling crisps in Russia, it made them with the same flavours that it sells in the UK. Now it makes flavours that appeal specifically to Russians, such as mushroom and sour cream, and crab. It has also developed a snack just for the Russian market called Hrusteam, which is made of dried bread.
On Thursday: how western multinationals are tackling the Russian market
Copyright The Financial Times Limited 2008
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