The financial crisis in Russia caused by Western sanctions has resulted in the devaluation of the local currency, the r undefined
uble, and the decline of purchasing power of local population.
This, in turn, has led to the decline of revenue for the coffee majors, as local customers are no longer able to buy coffee in the same volumes, and at the same prices, as in the past. The biggest sales decline is observed in the case of imported coffee, prices for which are usually higher than those of locally produced products.
In response to this, some of the major players in the coffee market have begun to consider alternative ways for their further development in the Russian market, in particular through the increase of localisation of production.
Swiss coffee giant Nestlé recently launched the production of its Nescafé Gold Barista coffee brand, which will be produced at its flagship Russian factory in the city of Timashevsk in the Krasnodar region on the Black Sea.
In addition, the company has recently completed the modernisation of its technology for the production of another flagship coffee brand – Nescafé Classic.
According to recent statements from Maurizio Patarnello, Head of Nestlé Russia-Eurasia, Nestlé’s subsidiary in Russia and Commonwealth of Independent States (CIS), despite the current difficult situation in the Russian consumer market, and in particular in the coffee segment, the company expects its coffee sales will start to grow by the end of the year.
He also said that growth will be achieved through an increased advertising as well as implementation of other measures.
“The financial crisis in Russia has affected all the foreign companies doing business in the country, including Nestlé,” Patarnello says. “We have observed a steep decline of sales for the last 1.5 years. The decline was observed in many categories, including the coffee business. This has resulted in the increase of costs, which, however, cannot be passed on to consumers.
The strategy we chose in 2015, and want to follow in the future, suggests that we should become more competitive, which is expected to be achieved through the increase of the level of localisation of our Russian business.”
In the meantime, other majors are also considering increasing localisation of their Russian production. For example, Mondelēz International recently completed the modernisation of its Russian factory in the Gorelovo area of the St. Petersburg region.
The latest round of improvements increased the output capacity of the factory from 10,500 to 17,500 tonnes of instant coffee and coffee mixes per year.
According to the company, the volume of investments in the project amounted to 2.5 billion rubles (US$50 million), while its payback period is five years.
The factory was commissioned by the company in 2008, while its range includes such well-known brands from the company as Jacobs Monarch and Carte Noire, which have traditionally enjoyed great popularity among the Russian consumers.
The already completed expansion is just the beginning, as Mondelēz plans to continue to increase the volume of Russian production over the next several years.
The St. Petersburg project is currently considered very promising by the company, which is also due to a recent decision by local authorities of the St. Petersburg region to provide a package of benefits to Mondelēz for implementation of its project.
According to an official spokeperson of the governor of St. Petersburg Georgy Poltavchenko, Mondelēz will be the first company that will take advantage of tax prefrences provided by the recently approved St. Petersburg regional law number 113, which is designed to create conditions to increase the volume of foreign investments into the regional economy.
The law reduces income tax to foreign investors to 13.5 per cent and a zero rate of tax on property. The list of provided benefits depends on the volume of investments, while companies that have invested no less that 3 billion rubles in their projects within the St. Petersburg region receive benefits for five years.
In the meantime, leading Russian analysts believe that global coffee majors have chosen the right time to invest in the expansion of their Russian coffee business, as this should improve their competitiveness in the Russian coffee market and increase market share.
According to Maria Drabova, Public Relations Director of Orimi Trade, one of Russia’s largest coffee producers, the Russian coffee market has resumed its growth despite the existing consequences of the financial crisis in the country.
Drabova also says that the increase in local production is the right decision by producers, as further imports cannot provide majors with the same revenue in the Russian market as they did in the past.
The same position is shared by analysts from the Russian Ministry of Agriculture, who say that an increase in local production can be beneficial to Western coffee majors operating in the Russian market.
According to an official spokesperson of Alexander Tkachev, Russia’s Minister of Agriculture, due to their status as transnational corporations, both Mondelēz and Nestlé, as well as other foreign companies operating in the Russian market, will be able to export any surplus products to other European markets, so a decline in demand for their Russian products will not be associated with significant losses for them.
Currently the volume of coffee exports produced at Russian factories of Nestlé and Mondelēz, is estimated at about 10 per cent. But there is a possibility that these figures may be significantly increased in the case of the decline of the demand for coffee in the Russian market.
As a rule, the majority of coffee produced in Russia by Western companies is exported to the CIS countries and Eastern Europe states.
According to a recent report issued by the Russian Ministry of Agriculture, during the next five years the Russian market of premium freeze dried coffee may significantly decline, both in volume and value terms, mainly due to the ever-growing popularity of coffee in capsules.
According to data from Ruschaicoffee, the Russian public association that unites the country’s leading tea and coffee producers, in 2015 the consumption of all varieties of coffee in Russia amounted to 134,000 tonnes.
In 2014 coffee imports to Russia grew to 155,000 tonnes, but it is expected that they will significantly decline this year.
Currently the annual per capita coffee consumption in Russia remains small, not exceeding 900 grams, compared to 5-6 kilograms in the case of the European countries.
In the meantime, according to the General Director of Ruschaicoffee, Ramaz Chanturia, an increase in production will lead to a decline in costs due to the increase of efficiency of production and the introduction of new manufacturing technologies.
According to Chanturia, Western coffee producers expanding their Russian business should take into account trends that are currently observed in the Russian coffee market. GCR