Recovery growth of the Russian market of baby food, which followed the decline in sales volumes in 2015, was already apparent in 2016. Back then, the volume of retail sales increased by 1.2%, amounting to 1,411.7 thousand tons. In 2017, growth in sales continued, and by the end of the year one can expect an increase by 2.2% up to 1,442.7 thousand tons.
The baby food segment turned out to be one of the most stable segments in the market of children’s goods. This is mainly due to the fact that the process of purchasing baby food is taken seriously by consumers, especially on the early stage of child development.
Nevertheless, this does not imply that no one ‘saves on kids’ – obviously, one’s consumer basket is formed from what one can afford based on their financial resources. The decline in real disposable incomes, which equalled 3.2% in 2015 and 5.8% in 2016, led to decreased consumer purchasing power. Russians had to optimise their budget accordingly by reducing expenses even on categories where it is usually problematic. Growth in prices had a serious impact on the decline in the purchasing power. It was in 2015 when, against the backdrop of the price growth rate reaching its maximum value over the past few years, the volume of retail sales dropped by 3.2%. The increase in prices for baby formula powder, canned vegetable purees as well as fruit and berry blends had almost reached 20% in each category by September, 2015. Highest growth of 22% was observed in the category of fruit and berry purees. The obvious factors in the increase of baby food prices in 2015 were the weakening of the Russian ruble and imported goods having become more expensive as a consequence.
In turn, recovery growth in 2016–2017 was primarily due to slower rates of growth in consumer prices in the main baby food categories. By September, 2016, growth in consumer prices was lower and equalled 7.1% for fruit and berry blends, 6.9% for infant formulas, and 7.7% for vegetable purees. By September, 2017, prices had increased even less – by 2.2, 2.7 and 3.8% respectively for the baby food categories mentioned. The stabilisation of the ruble and a number of other factors, such as decreased growth rates of prices for fruit and vegetable produce in August and September, 2017, contributed to the decline in consumer price growth rates. A recovery in sales volumes was also achieved through decreased inflation and lower rates of decline in real disposable incomes.
Annual inflation in August, 2017 equalled 3.3%, which was the lowest value of the indicator since early 1990s; in September, the consumer price index decreased by 0.1% compared with August, which is not typical for this time of the year, as has been noted in publications by the Central Bank.
Despite the inflation growth rates having been partly restrained by lowered consumption – that is, an established habit to save money that Russian consumers have been demonstrating – and real disposable incomes having continued to drop (in the first 10 months of 2017 they declined by 1.3% to the similar period of the previous year), a number of small positive shifts were sufficient for the market to quickly recover after the decline, which speaks for its stability.
However, the main conclusion which the processes in the market in crisis imply is that high dependence on imports constitutes the key risk for it in terms of both finished goods production and raw materials. For instance, in the total volume of baby formula consumption, 69.6% falls on imported products. Moreover, even in cases of powdered milk production within the country (7.2 thousand tons in 2016), imported raw materials are used. The following case of the German company “Hipp” illustrates how weak Russia’s domestic raw material base is: Stefan Hipp, the company’s management board member, announced that the shortage of organic raw materials was causing production facilities of the new “Hipp” plant in Mamonovo, Kaliningrad region, to be underutilised, as a result of which they may have to be shut down. The degree of dependence on imports turned out to be so high that the Russian government had to weaken the food embargo and allow imports of raw materials required for baby food production – 23 items total. According to the Decree of the Government of the Russian Federation dated 27 May, 2016, the food embargo was lifted for beef, poultry and vegetables used for baby food production.
The problems of Russian baby food output are closely connected with issues of the country’s agricultural industry. On August 29, 2017, the Ministry of Agriculture of the Russian Federation issued an order on the creation of a special interdepartmental group for development of domestic baby food production. The structure included representatives of the Ministry of Agriculture, the Ministry of Industry and Trade, the Ministry of Economic Development, the Ministry of Education and Science, the Ministry of Healthcare, and the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor). As the document states, the main goal of the group is the implementation of ‘comprehensive measures and activities aimed to improve baby food production’.
According to Rusprodsoyuz, an association of food manufacturers and supplies, approximately 70% of the Russian market of baby food is currently occupied by production companies of several corporations. The most significant contribution to production is made by the following companies: “Progress” JSC; “Danone”, “Nutricia” (“Istra-Nutricia” OJSC); “PepsiCo” (“Lebedyansky” LLC); and “KraftHeinz” Co. (“Ivanovski Kombinat Detskogo Pitaniya (Ivanovo Baby Food Factory)” LLC. With the exception of “Progress” JSC, these are subsidiaries of major international holding companies, all of which are oriented towards satisfying domestic demand with the use of a large share of imported raw materials.
In 2016, the volume of baby food produced in Russia accounted for 95.8% of the volume of retail sales. The main share of production – 80% in physical terms – fell on juices. The share of meat, vegetable and fruit blends equalled 16.4%. The other types of baby food occupied small shares in the output structure. In 2016, said categories had already demonstrated high growth rates. For instance, baby formula output increased by 56.5% in physical terms, whereas production of flour-based and milk-based dried baby food grew by 25.4 and 20.4% respectively. However, high growth rates have been due to the low base, so far.
Even though target indicators of the future ‘Strategy for the Development of the Baby Food Industry in the Russian Federation’ have not been established yet, the main short-term goal has already been set. It is defined as import substitution – powdered milk included.
To sum up, the work on import substitution in the Russian market of baby food is currently at the initial stage. In the meantime, the government has faced another issue relevant for the baby food segment, which is the new demographic challenge connected with the low birth rate in the early 1990s.
“RBC Market Research”