Review of the Russian Restaurant Market*Research by the Company “RBC Market Research”
Negative preconditions for the development of the restaurant industry in Russia, which formed as early as in 2015, did not only retain their relevance, but became more significant. The decline in household incomes, which has been observed since 2014, continued in 2016, which worsened the situation in the market of public catering. A decrease in consumer activity could be observed by virtually all players of the restaurant market. Even representatives of the fast food industry have been noting changes in consumer behaviour. ‘Recently consumers have become more demanding and picky about product quality, they are interested in knowing the meal composition and specifics of the preparation process. At the same time the question of prices remains the most important – we have to present an excellent products for the best prices’, says Evgeniy Birin, general director of “EnEf Rus” LLC, developing the “Nathan’s Famous” chain.
Indeed, in the conditions of declining incomes Russians became more attentive to their expenses, including those on eating out. Consumers have been focused on both the price tag and the service, as well as the quality of the food ordered. As expected, a number of consumers abandoned establishments that did not meet their high expectations as a result of such dramatic changes in attitudes of Russians towards eating outside of the home. According to “RBC Market Research”, over the past year 7% of Russians stopped visiting restaurants and even fast food establishments completely.
The struggle for consumers between restaurants and retail became much fiercer. In recent years the leading grocery chains have been actively developing their prepared foods departments. The decline in traffic and average check observed in retail as well encourages market players to expand their ranges f prepared foods. According to “RBC Market Research”, the loss of traffic in restaurants due to competition with retail stores is significant and amounts to 20% of their traffic.
New interesting projects have been emerging at the junction between restaurants and retail. For instance, the concept of meal kit delivery is new for the Russian market, whereas abroad said service is well-known and popular. “Shefmarket”, “Partiya Edy (The Food Party)” and other similar Russian start-ups have been attracting multi-million investments. For example, in June 2016 alone “Shefmarket” received $ 1.3 million from the “AddVenture” venture fund and the universal trade company “Mitsui & Co”. Start-up companies are actively developing nowadays, expanding their client bases. CEO and founder of “Shefmarket” Sergey Ashin notes that the segment ‘is still rather young, and for now it is simply attracting new customers from both the traditional retail customer pool and the public catering industry’. Founder and general director of “Partiya Edy” Mikhail Peregudov has told “RBC Market Research”, ‘This is out third year of existence (we have been around since 2014), and we continue to grow, increasing out indicators at least two-fold every year. In 2016 we grew by almost 100%, and growth in 2017 so far has been going even faster’. Such food delivery with recipes provided can hardly be called a serious competitor to retail and restaurants, but these projects have a lot of potential.
The situation in the restaurant industry is rather difficult. As a result of increased competition many players faced a decrease in consumer traffic in their establishments. In order to return customers, market operators have been increasingly using special offers – coupons and combo menus have become common offers in fast food chains. Affordable restaurants followed the same route and started offering similar deals. However, companies pay more attention to loyalty programmes, business lunches for competitive prices as well as marketing campaigns. Optimisation involving lower costs and higher business efficiency has also become an important strategy that is followed by the leading chain projects.
The measures taken are bearing fruit. Chain operators have been overcoming challenges more successfully and demonstrating better results than the market on the whole. According to “RBC Market Research”, the total revenue of the 23 leading restaurant companies in 2016 increased by 13.1% in nominal terms, whereas the overall market turnover only grew by 3.3%**. It should be noted that in real terms the key indicator of the industry demonstrated a decline of 2.7%.
Despite the crisis chains continue to expand, even though the reality of 2016 was a serious challenge for them. This conclusion was made by “RBC Market Research” agency in May 2017, having conducted an all-Russian study and survey of over 610 chain projects (including restaurants, cafes, bars, fast food restaurants, coffee shops, street food establishments and sushi shops)***. The comprehensive study allowed us to reliably assess the development dynamics of the operating restaurant projects. The research has shown that over the year the number of chain establishments opened in Russia increased by 4.6%****.
The results of the year did not turn out to be positive for all operators. Restaurants of the casual dining format remain the most depressive market*****. According to estimates by “RBC Market Research”, turnover in the segment in 2016 amounted to 193.6 billion rubles, having demonstrated a decline of 9%. This is due to the closure of unprofitable restaurants as well as the loss of part of the consumers who abandoned restaurants of the mid-price segment, switching to less expensive catering establishments. ‘The segment of premium fast food (or, as they call it, casual fast food) welcomed guests who used to opt for full-service places. People with average income became more loyal to self-service restaurants, paying more attention to product quality and the price-quality ratio’, – says Ilya Klimov, marketing director at “BB&Burgers”, confirming the trend based on the example of their restaurants.
“Rosinter”, which can be considered the leader of the casual dining market in Russia, faced a decline in traffic in 2016. The total transactions of the company’s projects, which include “ILPatio”, “Planeta Sushi”, “Tgi Fridays”, “Amerikansky Bar i Gril (American Bar and Grill)”, “Costa Coffee” and others, decreased by 10.6% against 2015. Its gross revenue dropped by 6.5% as well. In 2016, the company’s turnover amounted to 7.2 billion rubles, 161.7 million of which are proceeds from franchising. It should be noted that in May 2016 – May 2017, 19 “Planeta Sushi” restaurants and 9 “ILPatio” restaurants were closed as a result of optimisation.
The situation worsened significantly in the segment of expensive, mainly non-chain restaurants. In May 2016, Arkadiy Novikov, owner of “Novikov Group” shared the difficulties in developing such projects in his interview with “RBC”. ‘[In crisis] it is only the expensive, high-class restaurants that suffer. People have no money, and minimalism and a good atmosphere are valued. Aesthetics are forgotten in crisis,’ he pointed out back then. Therefore today many restaurateurs opt for more affordable, ‘democratic’ concepts. “RESTart” company actively develops projects such as “Steak It Easy”, “Chaikhona Easy” and “Obed (Dinner) Bufet”, and chooses the loyal price policy even in its premium projects. "Novikov Group" together with “Miratorg” have been opening chain burger restaurants “#FARSh” since May 2015. Today the project is represented by six restaurants in Moscow. This autumn a restaurant of the chain will open in Saint Petersburg.
The situation in the coffee shop market is rather contradictory. Chain projects with expanded menus are facing difficulties currently typical for the market of casual dining restaurants. “Shokoladnitsa (Chocolate Girl)” Group was no exception. The overall revenue of the two main legal entities of the company – "Galereya Aleks" LLC and “Kofe Khauz” LLC – declined by 4.1% in 2016, amounting to 9 and 3.4 billion rubles respectively. During the time period of May 2016 – May 2017, 41 “Kofe Khauz” coffee shops were closed. Traditional coffee shops with counter service have been demonstrating growth in sales. In particular, by the end of the year revenue of “Starbucks” increased by 14%, amounting to 4.8 billion rubles. Over the past, the chain opened 9 new coffee shops in Russia. Today the company has 111 active establishments across the country.
Canteens and street-food establishments are also in the list of markets having suffered in the crisis. Visitors of the latter started making purchases less spontaneously, preferring fast food restaurants and eating at home to street catering. For many players the solution for the situation formed is moving to gas stations. This strategy is followed by “Stardog!s”. In 2016 the company continued to decrease the number of non-stationary catering places and expanding their presence in gas stations instead. Today the number of such outlets in the chain is close to 800, whereas the whole “Stardog!s” chain has around 940 places. All in all, the street food turnover declined by 2.4% in 2016 and amounted to 27 billion rubles.
The canteen segment suffered from the crisis as well. The main reasons for sales reduction in canteens and buffets are connected to two trends negatively affecting this segment of public catering. The first factor is caused by growth in the number of affordable restaurants offering various combo menus and business lunches for attractive prices. The abundance of shopping malls opening in the country every year also provides Russian consumers with a large variety of fast food establishments. Every year the high level of food quality and low prices for meals in the latter decrease the pool of canteen visitors. In addition, some Russians have abandoned canteens and prefer eating food prepared at home in advance. The desire to eat healthy and to save money at the same time are the main motivators for this type of behaviour. It should be noted that the canteen segment turnover dropped by 4.9% in 2016, amounting to 273 billion rubles.
The fast food segment, on the contrary, has been demonstrating positive dynamics, as it did in 2015. Market turnover in 2016 reached 530 billion rubles, having grown by 2.1% (graph 4). The segment, however, has its challenges. International chains remain the key drivers of development, and they continue to actively expand. In the period of May 2016 – May 2017 alone, “McDonald’s”, “KFC” and “Burger King” opened over 200 restaurants combined in Russia. Companies’ revenues have been increasing as well: growth in turnover at “McDonald’s” in the past year equaled 8.5%; “Yum! Brands” (franchising as well as “KFC” and “Pizza Hut” chains not taken into account) and “Burger Rus” increased their sales by 36 and 47% respectively. The results of Russian projects are miniscule compared to the achievements of global brands. The “Kroshka Kartoshka (Little Potato)” chain closed 19 of its restaurants over the past year. “Teremok”, despite having opened 8 pancake houses in 2016, has been preparing a list of restaurants to be closed.
The prepared food delivery market is developing at faster rates than the fast food market. The volume of the former did not decrease significantly even during the 2014–2015 crisis, and in 2016 it already demonstrated growth by 5.7% in value terms, amounting to 89.4 billion rubles. The increase in market size was caused by growing interest in this type of service in the Russian population and, as a result, growth in the market audience due to new customers who did not used to order food delivery in the past. E-commerce has been actively developing in Russia, and therefore international chains, including fast food chains, see potential in sales of their products on the Internet. This explains three players of the fast food market having rapidly launched delivery services – almost simultaneously, “McDonald’s”, “KFC” and “Burger King” announced their new delivery options to their visitors.
The development dynamics observed in certain segments of the Russian catering market continues to form a trend in making the Russian restaurant market more affordable. In 2013–2016 the share of street and fast food restaurants in the overall public catering market turnover has been constantly growing. Whereas in 2013 it amounted to 34.5%, in 2016 the indicator reached 41.2%. Demand for fast food and the decline in the share of other restaurant types affects the structure of Russian public catering. This trend has been noted by market players. ‘We can observe democratisation in the Russian restaurant industry. A lot of businessmen who used to be engaged in the middle-segment and haute cuisine switched to fast food – a segment that occupies 40% of the market and currently serves as its main engine,’ says Agnessa Osipova, president of “BRPI” JSC (“Baskin Robbins”), confirming the conclusions by “RBC Market Research”.
The situation in both network and non-network segments of the catering market could be much worse. Growth in popularity of domestic tourism has been growing for the third year in a row, which positively affects turnover in the Russian catering market. In 2016, the number of visits abroad in Russian citizens amounted to 31.4 million. For comparison, said indicator for 2013 and 2014 equaled 54.1 and 45.9 million visits respectively. As Russians become less interested in taking vacations abroad, the popularity of Krasnodar Krai, Crimea and other Russian resorts grew significantly. According to Rosturism (the Federal Agency for Tourism of the Russian Federation), the most popular destinations for domestic tourism in the first half of 2017 have been Sochi, Simferopol, Saint Petersburg and Mineralnye Vody. Nevertheless, this year’s cold summer and Turkey becoming opened as a destination for Russian citizens significantly decreased the number of people desiring to travel to Russian resorts in 2017. Naturally, Russian restaurateurs will be affected by this.
Despite a certain degree of stagnation and even a decline in the market of domestic tourism, results of the current year are expected to be more positive for restaurateurs. Catering turnover will demonstrate positive dynamics, although growth is not expected to exceed 0.5%. Low household incomes remain a serious challenge for most Russian citizens. The consumption model aimed to save more does not hinders market recovery, and therefore future dynamics of development of the restaurant industry depends on household income growth rates. We would like to remind that, according to the baseline forecast by the Ministry of Economic Development of the Russian Federation, in 2017–2018 the citizen well-being will improve: after three years of constant decline household incomes will demonstrate growth of 1–2%.
* Based on the review by “RBC Market Research” ‘Russian Network Market of Public Catering 2017”, update date June 2017.
** The calculation of growth used data for revenue from sales (without VAT, except excise taxes and the like) of the following companies: “Makdonalds” LLC, “Moskva – Makdonalds” CJSC, “Gid” LLC, “Burger Rus” LLC, “Burger King Povolzhye” LLC, “Yum Restaurants Russia” LLC, “Galereya-Aleks” LLC, “Kofe Khauz (Coffee House)” LLC, “Shoko Holding” LLC, “Amrest” LLC, “Rosinter Restaurants Holding” PJSC, “Kofe Sirena” LLC, “Fastlend” LLC, “Teremok – Russkie Bliny (Small Wooden House – Russian Pancakes)” LLC, “Teremok-Invest” JSC, “Primestar Restaurants Group” LLC, “4 Papas” LLC, “Pizza Restaurants” LLC, “Kofe Set” LLC, “Brazers i Kompaniya” LLC, “Markon” LLC, “Kompaniya Eskimos” LLC, “BRPI” JSC.
*** Within this review, a chain is a brand combining 3 or more public catering outlets. The study only took into account chains information on which was accessible to the authors of the report i.e. represented publicly in the media or on the Internet.
**** Growth as well as the number of chain restaurants are calculated based on the analysis of development dynamics of 614 chain projects, including sushi shops; data for the previous years is corrected accordingly based on information on new chain projects, which were included in the review for 2017.
***** Growth in chain restaurants for May 2016 – May 2017 was calculated based on the analysis of development dynamics of 614 chain projects, including sushi shops; data for the previous years is corrected accordingly based on information on new chain projects, which were included in the review for 2017.
Head of Analytical Group
“RBC Market Research”