One of the officials at the Russian Ministry of Agriculture, which, among other matters, oversees production of confectionery in the country, has recently reported that in 2020 the volumes of exports of confections produced in Russia will increase by a third. It is definitely not among our intentions to object to anyone’s forecasts – on the contrary, we are happy to observe the success of Russian confectionery manufacturers abroad. However, the authorities’ expectations appear to us to be at least slightly exaggerated, as in order to achieve the results desired by them, a number of clear significant steps would be required from their side, whereas the current potential for exports among Russian confectioners is rather modest for these levels.
It turns out that among all foods produced in Russia, it is sweets that are supplied abroad the most, annual exports thereof valued at around $ 1 billion. Speaking of exports of Russian food products, which were estimated at $ 20 billion in 2017 according to the Ministry of Agriculture, their main volume falls on agricultural raw materials, primarily cereals and legumes. When it comes to confectionery goods, however, they stand among other categories of finished goods – Russian exports of other such products like caviar, vodka, sausages, dairy goods and the like are not even close to the country’s volumes of confectionery exports. It is remarkable how a whole industry managed to develop so successfully without any additional state support, prohibitive tariffs, subsidies or subsidised loans, not only almost fully meeting domestic demand, but also being one of the largest exporters of finished goods in the country – that is, not even raw materials, but products with high added value.
Unlike the agricultural sector or vodka production, Russian confectioners were not paid particular attention to by the local government for a long time. The agriculture development programme has been long yielding its results and has almost put vodka production in order. Regarding confectionery production, it would seem like it had been developing on its own, without the participation of regulators.
For the first time the Russian confectionery market attracted the authorities’ attention in terms of exports around 2016, when Russian manufacturers of confections began to actively expand their presence in foreign markets having faced a consumption crisis in the domestic market. During certain months, sales of exported confectionery goods were reaching double-digit growth, and a number of extremely promising destinations for exports emerged. China was particularly impressive, having reached the top 3 of the main purchasers of Russian sweets in 2016.
2016 was a record year for Russia in terms of confectionery exports in physical terms – according to estimates by the CMRC, based on the data provided by the Federal Customs Service of Russia, 406 thousand tons of confectionery products were sold to foreign markets during the year (+6.25 to 2015), valued at $ 898 million. In 2017, the record of the previous year was beaten, and supplies increased by 5.9% to 2016, amounting to 430.4 thousand tons at $ 982 million. The maximum value in monetary terms has not been exceeded yet – the record value was reached earlier, in 2013, when exports of confections reached $ 1.18 billion in monetary terms.
Nevertheless, in order to reach 30-percent growth in 3 years, Russian manufacturers of confectionery products would have to increase exports by 10% per year. Do they actually have this potential for growth, given that no such increase has occurred before?
In 2017 it became apparent that the dynamics of exports have been slowing down – sugar confections have been losing their positions; flour confections stayed virtually at the level of the previous year; and only chocolate remained the main driver of progress and positive shifts.
It would not be correct to state that geographic expansion in sales has been significantly affecting and increasing them. Apart from China, only Mongolia may be highlighted among new major purchasing countries – recently it has reached the list of the top 10 countries purchasing Russian confections. The rest of the country list has been remaining unchanged for many years and includes Kazakhstan, Belarus, Azerbaijan, Kyrgyzstan, and Tajikistan, as well as a few countries like Germany or the USA, which are characterised by large numbers of immigrants from the former Soviet republics (it is them who form the main consumer audience for Russian confections in these markets). Exotic destinations like Chile, Algeria, South Korea or New Zealand, which have appeared on Russia’s map of confectionery exports recently, are only purchasing small amounts of goods for now, and it is unclear whether these economic relations will remain strong in the future – at the moment they look like ‘trial runs’.
Another nuance to take into account is that exports are mainly carried out by large, developed enterprises. For example, in the competitive and consolidated chocolate segment of the Russian confectionery market, most active in exports of confections, the five leaders (“Mars”, “Mondelēz International”, “Nestlé”, “Obyedinennye Konditery (United Confectioners)” Holding, and “Ferrero”) account for approximately 80% of domestic sales in the country. 179.1 thousand tons (+16.1%) of chocolate confections valued at $ 531.3 million were exported in 2017. In 2017, the segment was not only rapidly growing, but also the most significant in comparison to other categories of sweets. Within 2 years, the geography of supplies of Russian chocolate expanded from 50 to 70 countries.
For comparison, sales of flour confections in 2017 only increased by 2.7%, reaching 199 thousand tons valued at $ 341 million. The segment of sugar confections demonstrated negative dynamics – in the past year, 52.2 thousand tons of sugar confections were exported, which is 10.4% less than in 2016.
Exports of Russian confections have the main driver, which happens to serve as their main problem as well, being the fact that they mainly belong to lower price categories. This implies that it is cheap confectionery that is in demand abroad, primarily in markets with low consumer purchasing power. When the Russian ruble suffers devaluation, these products become cheaper abroad and demand increases accordingly, whereas strengthening of the ruble leads to the opposite processes. According to one of the suppliers of Russian chocolate to Asian markets, foreign consumers in question are interested exclusively in the price – any properties of the product are acceptable as long as the good itself is cheap. One could only hope that, having attracted foreign consumers with low prices, Russian confections will manage to expand their presence through more expensive goods.
On the other hand, developed markets with higher purchasing power are hardly accessible to Russian confections due to a number of entry restrictions and barriers, even though Russian confectionery goods are perfectly competitive in terms of both price and quality. Therefore a number of Russian manufacturers are entering these markets through purchasing or opening their own production facilities.
2017 formed favourable conditions for Russian confectioners, and one of these was low prices for the main raw materials for confectionery production, including sugar and cocoa. This factor was keeping prices for chocolate at an acceptable level for Russian consumers and consumers abroad. However, in March 2018, prices for cocoa began to grow due to lower forecasts for the new harvest. Therefore Russia’s competitive advantage in terms of prices will eventually be lost. Most likely this would mean that no revolutionary 10-percent annual growth in exports is to be expected in the following year at the least.
The Ministry of Agriculture, overseeing the confectionery industry, is clearly interested in increasing confectionery exports. According to a number of sources of the CMRC, the agency intends to support exporters and is discussing support measures with representatives of the industry, even though at the moment it is unknown what exact steps are in question. We would like to hope that the mechanisms that formed and turned out to be beneficial for other industries will be of use for the stimulation of exports of confectionery products as well. This approach would seem logical coming from the Ministry. Confectioners are among the major consumers of Russian sugar, which has been produced with a surplus for years. Exports of Russian sugar remain rather low, and according to industry experts at the Institute for Agricultural Market Studies (IKAR), it is unlikely that they will exceed 600 tons per year with output maintained at the level of 5.5–6 million tons. Against the backdrop of these conditions, there is the promising confectionery industry, which is already successful at exports and, on top of that, sells products with high added value instead of raw materials.
On the other hand, not only encouragement and stimulation are awaiting Russian confectioners in the domestic market. For a few years, proposals to implement additional fiscal burden on the industry in the form of duties and excise taxes for sweets and products with a high fat content have been emerging. Suggestions to limit confectionery advertising or introduce plain packaging have taken place as well. In a way, this is a global trend, as regulatory agencies in a number of countries have been concerned with high sugar consumption and are determined to change the situation. It is unclear how soon this trend will actually reach the Russian Federation, but it would be naive to assume that the state could refuse an additional source of income. It appears that Russian confectioners may end up having no solution other than increasing sales outside the country.