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Specialized Networks Selling Milk and Dairy Products

Research by the Company RBC Market Research

The Russian market of milk and dairy products has undergone significant changes in recent years. Tense trade and economic relations with Belarus, mutual sanctions between Russia and the West, active development of major retail chains, successful development of farm stores, and other factors contribute to industry transformation as well as the emergence or disappearance of sales networks for milk and dairy products. Within the study Retail Chains Selling Milk and Dairy Products 2016, experts at RBC Market Research analyzed the key trends of the market.
Sales networks for milk and dairy products have been actively developing since mid-2004 to 2007. The following contributed to it: increasing real incomes and active growth of the Russian economy; the populations desire to purchase fresh and natural/farm products with a short shelf life; recovered production facilities in agricultural producers and the release of additional funds for retail development.
In the current reality, the factors of creation of sales networks for milk and dairy products have changed significantly:
* the share of major network players increased, the law On Trade was tightened, less opportunities exist for selling self-produced goods through retail chains;
* the crisis and range optimization in the largest chains do not allow producers and distributors of milk and dairy products sell their entire product range;
* urban residents increasingly pay attention to farm products and the concept of healthy eating, and increasingly trust local brands, which leads to growth in demand for certain segments, which are successfully occupied by specialized stores;
* growth in the markup in retail networks leads to the logical emergence of specialized store chains selling their own products at a lower markup. This effect has to do with both the narrower product range and specialization on a certain product group, and with own production.
Manufacturer stores are able to ensure lower prices due to the absence of distributors markup or the need to pay networks, as well as due to their own logistics and other conditions. With very few exceptions, major federal retailers demonstrate a markup of 25-50% for dairy products. Small stores can sell their products at a 10-25% markup due to smaller store areas, less staff and other factors. In case of aggregator stores (these do not produce themselves but have contracts on direct supplies under own trademarks e.g. VkusVill) the markup is not always lower than in large chains. If it is lower, however, this is achieved by the operation scale and low costs. In fact, these are basically private label stores, as they work with producers directly.
At the moment over two thousand store chains selling milk and dairy products operate in Russia most of them are located in large cities. The assessment of the impact of important changes in consumer behavior and retail trade on the development of specialized store chains can be found below.

In 2016, the top 10 product retailers increased their share in food retail turnover to 27.3%. Despite the growth rate in revenue having decreased to 13%, networks increased their presence in the declining market and are not inclined to decrease the rates of store openings and their regional expansion in the following years. For instance, X5 Retail Group and Magnit will open not less than 4 thousand stores combined in 2017; Lenta (Ribbon) and Auchan also plan to actively increase the numbers of hypermarkets and supermarkets. Apparently, in 2017 the share of networks in Russian food retail will increase by several percent points.
Growth of networks combined with the amendments to the Trade Law, according to which the total amount of payment to networks must not exceed 5% of the supply price, substantially decreased the chances of new regional players and brands to successfully develop.
One of the most important recommendations for product promotion in retail chains for producers is to establish a strong brand in the regional market; one way to create a strong regional brand is to create ones own retail network.

The crisis in the economy encouraged major federal and regional network retailers to optimize their operation: a number of large networks are decreasing their product range; networks are tightening up cooperation with suppliers and optimizing logistics. In these conditions, it became more difficult to promote a wide product range in networks. In addition, the difficulty of product return existing for networks and established in the law virtually make the risks of bringing new products to the shelves too high for network players.
In order to provide the consumer with the whole range of products and to ensure direct feedback, more and more dairy producers test small store chain formats.

According to the surveys by "RBC Market Research" and the Russian Public Opinion Research Center, more and more Russians have been doing sports; the number of Russians engaged in fitness is growing by 0.2-0.3% annually and amount to more than 4 million people today. Mass sports and healthy eating are among the key trends of consumption among city residents with higher incomes. It is obvious that in large cities the niche of supply in this area is not occupied yet, and the emerging specialized dairy and meat farm stores aim to occupy it.

The successes of major networks selling farm products, milk and dairy products and other goods, encourage the development of new players. The largest player of the market, VkusVill (revenue of 5.6 billion rubles in 2015), despite not producing milk or dairy products, has been developing in Moscow region, and at higher rates than the largest food retail chains. Meat networks Ariant and Ravis in the Urals, growing by 100-150 stores per year, Krestyanskoe Khozyaystvo (Peasant Farm) Volkova A. P. in Kemerovo with 50 stores and the Kalina-Malina chain, LavkaLavka in Moscow more and more examples of successful establishment of retail networks from scratch appear. Financial success of these networks as well as the decrease in dependence on the largest retailers (for producers) are important factors stimulating the market.

Despite the primary specialization on one product category, almost all successful specialized chains in large cities transform with time and change their format by keeping the specialization but increasing the range with additional categories. VkusVill is a good example of successful format transformation it widened its range with culinary products, meat and household chemicals but maintained its primary specialization on milk. Miratorg, the meat network leading in terms of revenue, virtually turned into a chain of classic supermarkets with the widest range of its own products.

Geographical prospects. In the situation formed, given the declining income rates, the prospects of opening new dairy retail chains only look positive in the largest urban agglomerations, where real incomes and consumption are growing, in particular through migration. The difficulty in storage and transportation as well as the insufficient level of market consolidation indicate that no prospects for the emergence of new federal dairy networks exist for the next few years. However, regional networks will keep appearing.
Formats. Examples such as the transformation of Izbenka (Little Izba) into VkusVill or the increased range in the Saint Petersburg chain Losevo and other dairy networks allow one to conclude that dairy networks with extended products ranges tend to be more viable. Financial results of stores with extended product ranges are dozens of times higher, and players keep looking for successful solutions in terms of changes and transformations. The following recent changes can be mentioned as examples of specialized store transformation: meat network Torgovaya Ploshchad (Market Square) in Novosibirsk that started actively expanding its range with the emergence of the Chelyabinsk Ariant; Myasnoy Gradus (Meat Degree) network in Rostov region combining meat stores with liquor stores; milk producers in the Urals creating their own counters in Ravis and Ariant meat networks.

Maksim Borovikov,
Lead Analyst
RBC Market Research