Russia's Consumer Market: Stimulating Demand

Russia's Consumer Market: Stimulating Demand

Consumer demand is a significant growth driver for the economy and industrial production. According to the Federal State Statistics Service, the household final consumption expenditure accounts for more than half of the Russian GDP use. In 2015-2016, the indicator stood at 52%.

According to the Federal State Statistics Service, in 2015 and 2016, household expenditure dropped by 9.8% and 4.5%, while real GDP fell by 2.8% and 0.2%, respectively. The decline was primarily due to shrinking household income. In 2016, real disposable household income fell by 5.9% compared to a decrease of 3.2% in 2015. In January 2017, it bounced back to growth supported by one-off payments to pensioners, but in February-March the recession resumed.

According to a GFK study ‘The Russian Consumer in 2016: The Habit of Crisis’, the share of those who saw a shrinkage of their income grew from 7% in 2015 to as much as 19% in July 2016. Among other things, the decrease in consumption is due to household debt. In April 2017, every fourth rouble of household income in Russia was spent on servicing bank loans, according to the National Bureau of Credit Histories, and the debt load keeps growing. Businesses have to adjust to the new reality where consumers have become extremely price-sensitive. The discounter format representing stores with a narrow product offering and low prices is clearly on the rise. Amid the overall decline in retail sales in 2016, discounter sales grew by 15.3% due to the growth of both the buying rate and the average ticket (Russian FMCG and Retail Development Trends, GFK, 2017).

Retail chains are streamlining their value propositions. For example, X5 Retail Group is shifting its focus towards consumers with average and below average income and cutting assortment in regional stores by a third to a half. (April International Academic Conference on Economic and Social Development, Higher School of Economics, 2017). Private labels are used as a key consumption growth driver. In general, their selling price is typically just above the cost of production, and so private label goods are usually the cheapest. Hence, DIXY, for instance, plans to increase its share of private labels from 15.5% in 2016 to 25% in 2017.