The fifteen countries that once made up the Soviet Union are the home of about four per cent of the world’s population and only about two per cent of its economic output, but they are responsible for some seven per cent of its hot drinks spending. While the main reason for this is a high level of black tea consumption, long-term trends are shifting consumption away from black tea and towards new forms of hot drinks, especially coffee. Growing consumer incomes during the economic boom years of 2009-2013 accelerated these trends. The onset of recession in Russia slammed the breaks on this experimentation throughout the region, and consumers retreated back to value-priced black tea while they waited for times to improve. While it is too early to definitively say that the region’s troubles are over, Russia exited recession in early 2017, which should herald a return to stability throughout the region. With consumers regaining their confidence, the long-term shift from black tea to alternative hot drinks should begin to pick up speed again, making this an area to watch for both coffee and tea during the forecast period. Categories like instant coffee and fruit/herbal tea are attracting interest from consumers, especially younger ones, across the territory of what was once the Soviet Union. The Commonwealth of Independent States (CIS) is an organisation that encompasses most of the former Soviet states with the exceptions of the three Baltic countries (which never joined) and Georgia (which left after its 2008 armed conflict with Russia). As it happens, those non-members are also the portions of the former USSR where coffee is a more significant component of hot drinks consumption than tea. In all the rest, the hot drinks markets look remarkably similar. Black tea dominates, but its hold is weakening as consumers, especially young people, become interested in alternatives. This shift is highly dependent on growing consumer incomes. Because black tea is a staple product, it is relatively resilient during recessions. While consumers will trade down to more value-oriented brands, black tea is too firmly rooted in these cultures to be abandoned entirely except during the most dire of economic trouble (Ukraine, where GDP declined by a staggering 10 per cent in 2015, is the only place where this has happened in recent years). Non-staple products like coffee, however, suffer a great deal more when consumers start to tighten their belts. Because Russia remains an important trading partner, source of investment, and source of remittances for the CIS nations, trouble in Russia quickly spills over into the entire region. When the Russian economy tipped into recession in 2014 because of a combination of low oil prices, western sanctions, and geopolitical tensions that scared away investors, this is precisely what happened. All CIS nations saw growth rates slow starting in 2014, with Kazakhstan, Belarus, and Moldova seeing especially sharp declines. The effects that took on the hot drinks markets were not difficult to see. From 2009 to 2013, coffee volumes rose every year in all EMI-researched CIS markets with the sole exception of a single year in Belarus. Yet, starting in 2014, volume growth took a sharp decline throughout the region and turned negative in several places. Non-black tea struggled as well. Growth rates in fruit/herbal tea declined in all CIS markets, with Azerbaijan in particular seeing volume growth fall from 11 per cent to negative 2 per cent in the span of a single year. With the worst over, hot drinks growth should begin to pick up again. Every CIS country returned to positive economic growth starting in 2017, even deeply troubled Ukraine. Crucially, Russia itself is on pace to hit 1 per cent real GDP growth, with further accelerations anticipated in coming years. This will spill over into the rest of the region, and economies like Azerbaijan and Kyrgyzstan should regain some of their old vitality. Should the price of oil rise substantially for any reason, this recovery would likely speed up even further. That means a resumption of the hot drinks patterns from years past as well. Worried consumers are gradually re-opening their pocketbooks, and will again be interested in experimentation. This means a couple of things. The first is that café culture should continue its spread. While Russia is starting to reach its coffee shop saturation point, other CIS countries are not. They are attracting interest not only from global chains (Starbucks opened its first outlets in Azerbaijan and Kazakhstan at the tail end of the boom years) but also from Russian chains like Traveller’s Coffee, which are looking at these post-Soviet countries as opportunities now that Russia itself is becoming tapped out. As coffee shops penetrate an area, they also bring an increased interest in coffee that tends to be reflected in retail sales as well.
In Russia itself, where coffee is much more mature than elsewhere and incomes are higher, fresh coffee will see a majority of this growth.
Elsewhere, though, it will mostly be in instant. This does not mean it will be the same instant that people in the region have always consumed, however. Premium offerings, especially micro-ground products, are becoming increasingly popular and are now available both from foreign brands like Jacobs and local ones like Jardin. Orimi Trade’s announcement of a US$100 million investment in a new instant coffee factory St. Petersburg is a signal of the potential that still exists in instant coffee in the region. The next trend to keep an eye on the combination of health and wellness trends and a simple desire for novelty that should provide a boost to green and fruit/herbal tea. During the recession, the desire for healthy beverages, especially among women, did not go away, but the traditional option of chicory coffee was more popular. Now fruit/herbal tea, again making inroads on these occasions and is outgrowing black tea in a relative sense in Azerbaijan, Kazakhstan, Russia, and Ukraine. The interesting interplay to watch will be with chicory coffee, which does not look likely to fade away quietly as the recession ends now that it has seen a rise in popularity. Value growth should still be 4 per cent annually in Russia during the forecast period, although this is unique to Russia and the category is small to negligible in the rest of the CIS. None of this is to mean that black tea is going anywhere. Azeris, Kazahks, and Russians are all drinking over 100 litres per year. Consumption that high will not simply disappear. With growing populations in Central Asia, overall volumes should continue to rise for some time. Rather, what will happen is that black tea will not exert as monopolistic a role over hot drinks as it now does. It will continue to dominate hot drinks occasions, but coffee and other forms of tea will start to take over some of them, especially among younger consumers. The consumer of the future in these post-Soviet nations is increasingly one that will be interested in a variety of hot drinks. GCR Matthew Barry is beverages analyst at Euromonitor International.
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