Russia's grocery retail market is facing a gradual slowdown over the next few years in line with the anticipated deceleration of the country's economy and GDP, the weakening of the ruble and the rise in inflation.

In time, both retailers and shoppers are set to feel the impact of the economic changes. Prices are expected to rise, particularly for imported goods like fresh fruits and vegetables, while overall volume and consumption will decrease.

"The Russian grocery retail market is still expanding but not as fast as before,"  Vadim Khetsuriani, Kantar Retail’s Moscow-based director of retail insights, tells www.freshfruitportal.com.

"Over the next few years we are expecting a gradual slowdown but it will be on a relative scale in comparison to western Europe. From the previous growth rates of 15-20%, we can expect single digit growth or low double digit growth."

Khetsuriani says inflation in Russia has been rising since January.

"Last year, the Ministry of Finance estimated that inflation would be below 6% but they have now revised that figure to over 6%."

Since Russia's retail market tends to follow the country's economic trends, albeit with some delay, Khetsuriani predicts three key effects.

"Firstly, there will be a general decline in the volume on offer at a retail level," he explains.

"Secondly, the rate of new store openings will not be the same as before.

"Thirdly, rising inflation and the weaker ruble will increase prices for manufacturers, retailers and shoppers. And because inflation will be above the growth in salaries, consumers in general will have less purchasing power."

Imports will be squeezed

The slowing economy will place particular pressure on the procurement and sale of already costly imported goods, according to Khetsuriani.

"Russia is still very dependent on products or ingredients of products that are manufactured abroad, so in general the prices for all of those types of products are expected to rise."

In terms of food, especially fresh food, Khetsuriani believes that Russia will become one of the most expensive countries in the region.

"Because of Russia’s climate, the local agriculture industry is not as developed as in western Europe, so a lot of produce is imported," he points out.

"That produce is subject to import tariffs and a costly logistics process, which means they are more expensive."

To put this into context, Khetsuriani claims average price for Polish strawberries in Moscow is double the cost in London.

Furthermore, in eastern Russia he notes that prices are even higher because of the remote region's distance from the country's import hubs.

Fresh produce prices will increase

With the economy slowing and inflation rising, Khetsuriani says fruit and vegetable prices in Russia are set to rise even higher in the coming years.

Already, he notes that a Moscow newspaper recently reported that local banana prices have grown by 50% in the last month.

As prices increase, import volume and consumption are predicted to decline since shoppers will not have the disposable income to buy more expensive produce.

"The larger retailers will probably be able to continue importing a similar volume but overall imports will definitely have to slow," Khetsuriani notes.

"The majority of retailers are under huge pressure to make margins and cover their expenses, so I don't think they will be able to reduce the prices for consumers, except for perhaps Auchan but even then it will still be difficult to cut prices on fruits and vegetables.

"The hypermarkets could sell dry groceries and household cleaning products cheaper to make the overall cost the same for shoppers and still make enough of a margin through the more expensive fresh products."

Retailers will have to be more efficient

In view of the new economic realities, Khetsuriani points out that Russian retailers will soon have to make big changes since they will no longer be able to rely on shoppers to absorb their costs.

"Over the last three years, Russian consumers have been paying for everything – the cost of the retailers' businesses, their growth, their inefficiencies and the import tariffs," he explains.

"This has been fine while the economy has been growing very fast but when it slows down, this will put more pressure on shoppers."

In the future, Russian retailers will therefore have to focus on becoming more efficient, according to Khetsuriani.

But this will be limited by the country's difficult environment in terms of its distances, climate and the nature of its processes and operations, which are not as refined as in western Europe.

"The retailers will have to find ways of becoming more efficient," Khetsuriani states.

"It won't just be about asking for more money from their manufacturers. They will have to look for cheaper sources, which the two leading retailers Magnit and X5 Retail Group will be able to do.

"The retailers could also standardize their ranges or improve their logistics processes. But if you're supplying fruits and vegetables, there is not a lot you can do, whereas with dried food you can be more thoughtful about your range in terms of what is selling well and what isn't."

Despite the limitations, Khetsuriani still believes there will still be some opportunities for modern retailers to open more stores in Russia, particularly in small towns.

"Magnit will continue to grow and in eastern Russia there is still space for the retailers to expand where there is no competition."

Photo: Russian retailer X5 Retail Group

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