Review of the Russian Market of Confectionery ProductsResearch by the Center for Confectionery Market Research
CHINESE MARKET FOR RUSSIAN CONFECTIONERS
The past two years turned out to be rather tense for Russian confectioners due to the crisis and, as a result, the decline in consumer demand for sweets, rapidly increasing prices for imported raw materials and more. However, crisis does not only imply problems – it offers new opportunities. A lot of players in the domestic confectionery market found them. One of these opportunities was confectionery product exports. In late 2015 – early 2016 the weak ruble made Russian confectionery products particularly attractive to foreign markets. To be fair, one cannot say that Russian confectionery was not already being supplied abroad in the past – moreover, 2013’s record, when confectionery exports amounted to $ 1.18 billion, has still not been beaten. Therefore markets traditional for Russian confectionery, namely countries of Central Asia as well as Belarus, were not promising any breakthrough sales in crisis. However, values for China unexpectedly rocketed. Over just a year the country became one of the key sales markets of Russian sweets. It would seem that the Chinese market is close and huge enough to be able to take in and process whatever the Russian confectionery industry produces. However, China turned out to be a rather specific market, and Russian players have a lot to learn to be able to operate in it.
WINDOW TO CHINA
In early 2016, the Russian media were full of reports on rapidly increasing export sales of Russian confectionery in China. A few months prior to that, there were no signs of these events. Despite the long-standing trade relations with Russia, China remained a terra incognita to Russian confectioners in particular – even though confectionery supplies to China took place, they were insignificant against the overall export volumes. China was not always part of the top 10 importing countries of Russian confectionery, and was sitting at the bottom whenever it would make it to the list.
Over the past decade, Russia managed to establish sales of confectionery products on foreign markets valued at over $ 1 billion total per year. No other sector of food production in Russia has similar figures. Russian vodka, caviar, broiler meat or pork, which had billions of rubles in subsidies invested in them, do not reach even half of export volumes observed in confectionery products. For years, the main purchasers of Russian confectionery were Kazakhstan, Belarus, Ukraine, countries of Central Asia, Azerbaijan and Baltic countries. The main Western partners were the USA, Germany and Israel, where many immigrants from the USSR live. Therefore it is quite clear who the average consumer of Russian confectionery products abroad happened to be.
However, starting with early 2016 the situation with confectionery exports changed – suddenly a new large player emerged. At the beginning of last year, China rocketed to the levels of the third largest purchaser of Russian chocolate products and the fourth largest purchaser of flour confectionery produced in Russia. By the end of last year China had already taken the second and third places respectively, having passed the traditional leaders for Russian confectionery exports – Belarus and Kyrgyzstan. Thus, during the first 11 months of 2016, China accounted for 13% of the total volume of Russian chocolate exports in volume terms, 9% in flour confectionery and 3,4% in sugar confectionery. Several major Russian confectionery manufacturers from such locations as Moscow, Moscow region, Kemerovo region and Belgorod region established centralized deliveries to China, which radically shifted the overall exports picture. Before, China used to mainly purchase Russian sweets from the neighboring Amur region as well as Khabarovsk Krai and Primorsky Krai.
Despite the promising prospects of the Chinese market, a lot of Russian market players raise reasonable questions. Why did the Russian confectionery breakthrough in China only happen recently? What are the specifics of the Chinese market? Will China keep increasing consumption and purchases of Russian sweets at the same rate? According to representatives of several trade companies supplying products to China, the number of problems having to do with sales in this country may overweigh the hypothetical benefits and profits. However, at this point the prospects of establishing sales in China tend to encourage Russian manufacturers rather than stop them from giving it a go.
ONE CHOCOLATE BAR PER PERSON
China is deservedly considered to be one of the largest food markets in the world. However, confectionery products by their Western definition are still exotic for this country. Even though the popularity of sweets in China has been growing as the Western culture, fashion and lifestyle penetrate the local society, the average per capita consumption of confectionery products in China is not comparable to Russia or European and North American countries. Chinese per capita consumption of confectionery products is as low as about 150 grams per year, 100 grams of which are chocolate products. This basically means one chocolate bar per person per year! Some consider even these numbers to be overstated. According to analysts at “Canadean”, during the past 6 years, from 2011 through 2016, the volumes of confectionery consumption in China grew by 31.1% to 1.137 million tons from 0.867 million tons in 2011, and by 2020 the volume of confectionery sales is expected to have reached 1.4 million tons for the population of about 1.5 billion. Chocolate is expected to account for 70-80% of confectionery product sales in the country. For comparison, in Russia with its population of 146.5 million people, 3.55 million tons of confectionery products were produced in 2016. An average Russian citizen consumes around 4 kilograms of chocolate per year, and this level is not even particularly high. For instance, in Germany and Switzerland – the world’s leaders in chocolate consumption – the figure equals 12-14 kilograms per year on average.
However, it is important to consider how dynamically the Chinese market tends to develop. Average annual growth in confectionery consumption in China over the past 5 years was about 6%.
Chocolate and chocolate products are the largest segment of the Chinese confectionery market, and about 70% of sales fall on them. The rest is split between flour and sugar confectionery. In 2015, the volume of confectionery product sales through retail networks amounted to $ 5.4 billion, according to estimates, and $ 4.8 billion fell on chocolate confectionery.
The largest players in the Chinese confectionery market are the aforementioned transnational companies, namely “Mars”, “Nestl?”, “Hershey’s”, “Ferrero”, and “Mondelez”, which account for about 80% of confectionery product sales in the country. According to “Euromonitor”, “Mars” is the undisputed leader in the Chinese chocolate market, with the share of around 40% in value terms. The largest local players are as follows: “COFCO (China National Cereals, Oils and Foodstuffs Corporation)”, “Want Want China” and “Fujian Yake Food” – they do not have dominant shares in the market.
According to “Euromonitor International”, the largest chocolate product brands are also mainly brands of transnational corporations, and are as follows: “Dove” (“Mars”), “Ferrero Rocher” (“Ferrero”), “Nestl?”, “M&M’s” (“Mars”), “Snickers” (“Mars”), “Hershey’s” (“Hershey”), “Cadbury” (“Mondel?z”), and “Co Co” (“Fujian Yake Food”).
In the structure of Russian supplies to China, chocolate confectionery also prevails, even though its share is lower than 70%. During the first 11 months of 2016, 37.88 thousand tons of confectionery products valued at $ 102.3 million were supplied to China. 47.5% of said volume fell on chocolate confectionery, which equals 57% of its value.
To a number of Russian manufacturers, export sales served as a good way to compensate for the reduction in confectionery consumption within the country in 2015 and 2016. All in all, China seems like a promising direction with its perspectives for growth. This trend becomes particularly strong as consumption of sweets in this country becomes more popular. However, it is clear that there are enough difficulties awaiting Russian producers in terms of conquering the Chinese consumer.
Preferences of Chinese consumers are still unclear to Russian confectioners, and they often seem illogical due to the differences between Chinese and Russian (or European) food traditions. However, judging by the rating of the most popular chocolate brands in China, it may not even be necessary to fully adapt to traditional Chinese preferences, as the Chinese consumer seems to gradually get involved in the Western culture of confectionery consumption, and it is the ‘westness’ of said products that attracts the local consumers in the first place.
Chinese trade partners tend to be more interested in prices rather than flavors and formats, as Russian trade company representatives report. Cheapness is the key principle. The lower the price, the better. Product composition, the presence or absence of palm oil, cocoa content and the like are all regarded as an opportunity to lower the price rather than important criteria of product quality. For instance, the average price for a kilogram of chocolate products supplied to China from Russia in 2016 amounted to $ 3.2. For comparison, the average wholesale price in the Russian domestic market amounted to $ 5.4-5.8 last year. In China this figure is comparable to retail prices for a kilogram of the same product, which implies a large margin to wholesale prices.
Not long ago, representatives of “Obiedinenye Konditery (United Confectioners)” holding company shared their complaints regarding counterfeiting with journalists: counterfeit “Alyonka” chocolate was being sold in China, its volume steadily growing along with the popularity of this brand. Similar cases are reported by transnational companies. At the beginning of this year alone, Chinese police found a manufacturer of fake “Ferrero” and “Dove” chocolate in Wuhu in Anhui province, upon receiving complaints from local residents; since 2014 several people had been producing counterfeit chocolate products under various foreign brands, valued at millions of dollars. As a result, eight people were sentenced to 1-5 years and a fine of $ 0.9 million. However, according to representatives of transnational enterprises, the problem lies in the difficulty of bringing falsifiers to justice rather than the presence of counterfeit itself. In 2008, “Ferrero” filed a lawsuit against a Chinese company “Montresor” to stop the manufacture of sweets copying the main brand of similar products by the Italian group. The court did grant the claim, but the fine was symbolic – only around $ 44 thousand.
Nevertheless, difficulties are present in any markets, but not many offer prospects comparable to China’s. However, patience is key, as growth in confectionery product consumption in China does not have a rapid nature. Though even in Russia, chocolate was exotic 150 years ago.