Review of the Russian Dairy MarketResearch by the Company “Petrova Five Consulting”
Recently “Petrova Five Consulting” completed a study on Russian dairy market development since the imposition of the food embargo. We are glad to share the main findings of the research. It is believed that the embargo gave preferences for the development of the dairy industry – is this true and what are the results of the past two years?
The development of the dairy market cannot be examined without its key indicators – the volume of raw milk production and cattle livestock numbers. Unfortunately, gross production of raw milk did not increase during the past 3 years – in 2014 and 2015 it amounted to approximately 30.8 million tons, whereas in 2016 it decreased to 30.75 million tons. This is an important barrier for development of the industry. Against the overall decline, slight production growth occurred in agricultural organizations and farms – in agricultural organizations there was an increase from 14.4 million tons in 2014 to 15 million in 2016, and farms demonstrated growth from 1.9 million to 2.1 million tons. As a result of a prolonged shortage of raw milk, prices for it were gradually increasing, and in 2016 they reached record values of 24-25 rubles per liter, which caused an increased in costs for all dairy products manufactured.
The dairy cattle population continued its trend towards a decline in 2014–2016. Whereas the total number for Russia was 8.5 million in 2014 and 8.4 million in 2015, by December 1, 2016 the figure had declined to 8.2 million. The number of dairy cows was decreasing in private subsidiary farms. The dairy herd numbers in farms and agricultural organizations remains stable, and raw milk production growth takes place due to growth in livestock productivity. However, no radical change in the dairy situation in Russia can be achieved without a substantial increase in cattle numbers.
Among all dairy market segments, the cheese market was affected by the food embargo the most. Quality European cheeses having disappeared dealt a blow to Russian consumers, who have been increasing consumption of European cheeses for over 20 years. Therefore the cheese market demonstrated the biggest growth during the given time period – in 2015 gross domestic production of cheeses increased by 18% (from 379 thousand tons in 2014 to 448 thousand tons in 2015). In 2016 it increased by 3.5%, reaching 464 thousand tons. Cheese product output during the given period was growing, too: in 2015 the volume of cheese products manufactured grew by 14.7% (from 116 thousand tons in 2014 to 133 thousand tons in 2015), and in 2016 it increased by 2.3% and reached 136 thousand tons.
Increasing production volumes allowed domestic manufacturers to occupy 70% of the cheese market (for comparison: in 2013 their share amounted to 49%). It is obvious that we are reaching the limits of opportunities for growth – on the one hand, the shortage of raw milk prevents a further increase in production volumes; on the other hand, declining real incomes among Russians and increasing prices for cheese negatively affected consumer demand.
Today Russian producers fell into the ‘funnel’ of declining demand and mainly compete by decreasing prices, thus losing segments where the price factor does not play the key role. At the same time it should be noted that small cheese dairy farms began to enter and develop in high-margin segments of the cheese market, which used to be occupied by French and Italian producers. However, the cheeses they produce are unable to cover the demands of the Russian market both in terms of volumes and in terms of stability of quality.
Other segments of the dairy market have not demonstrated significant growth since the embargo was imposed, and some have even suffered a reduction. For instance, production of drinking milk in 2016 increased by 2% and amounted to 5,491 tons, which is only slightly higher than in 2015 and 2014 (5,378 and 5,318 tons respectively). Production of kefir in the past year remained stable compared to 2015 and equaled 1,068 tons, with an increase of as little as 0.04%. In 2015, a slight decline in kefir production was observed – 1,067.5 tons against 1,082.8 tons in 2014. Similar stagnation was observed in sour cream production – its output volumes in 2016 amounted to 585.8 tons, having decreased by 0.13% to 2015, when 586.6 tons thereof were produced – 7% higher than the figure of 2014. Production of quark in 2016 declined by 2% and equaled 432.9 tons, whereas in 2015 it demonstrated a 8% growth to 2014 (441.5 tons against 409.1).
What prevented growth of said segments, apart from the shortage of raw milk? One of the main causes was a decline in consumer demand for dairy products due to their increased costs and reduced real incomes. A decline in affordability of basic dairy products, such as kefir, quark or sour cream, led many Russians to reduce their consumption volumes.
Production of butter decreased the most among dairy segments. In 2016, 240.6 thousand tons thereof were produced, which is 4.5% lower than in 2015. In 2015 the volume equaled 252 thousand tons, which was 2.7% lower than in 2014. They key reasons for the continuous decline in its production is the increase in milk fat costs and thus the costs of the final product (a 25% increase in 2016 alone). For many buyers butter moved to the segment of expensive food products.
All in all, since the imposition of the embargo, the Russian dairy market has gone a long way, during which it became clear that the bans on European imports alone will not help recover the industry from the long-term crisis. A long-term recovery program is required, which would include state support measures and a creation of stimuli for private investments in the industry. In addition, among all segments only the cheese market demonstrated substantial growth, but its potential for growth is virtually exhausted at this point.
Apart from that, significant shifts have taken place in consumption – the increase in prices for dairy products in addition to declining real incomes of consumers moved a number of said goods from the segment of everyday consumption products to the category of expensive food products. This implies that consumers greatly reduced their purchase volumes and are no longer ready to forgive manufacturers’ mistakes that they were ready to ignore in a growing economy. Therefore market players have to reconsider their approach to production and be ready to change in order to keep their consumers – that is, to improve quality and packaging as well as to invest energy and funds in brand development. Without this it will be extremely challenging to compete even under the embargo.
“Petrova Five Consulting”