OPERATING PERFORMANCE OF THE LEADING FMCG CHAINS
In 2017, the FMCG market grew in physical and monetary terms – by 1.1 and 5% (to 14.43 trillion rubles) respectively. In preparation of the “Russian Consumer Market and FMCG Retail Chains Rating” study, experts at “INFOLine” monitor operating performance of the 200 largest FMCG chains on a monthly basis, forming ratings by retailers, formats and regions. The monitoring revealed that in 2017, growth in retail spaces of the largest FMCG chains (excluding health and beauty retailers*) reached 2 million square meters – 8% higher than in 2016. The greatest input in the increase of retail space last year was made by “X5 Retail Group” – 40.8% (retail outlet expansion equaled 2,934 stores), “Magnit (Magnet)” – 18.7% (growth by 1,624 FMCG stores, not counting 667 health and beauty stores and 51 pharmacies), and “Lenta (Ribbon)” – 8.2% (40 new hypermarkets and 48 supermarkets).
In 2017, “X5 Retail Group” was leading in the segment in terms of revenue, growth rates, network organic development dynamics, and growth in comparable store sales. “Magnit” was the second largest retailer in revenue in 2017; it continued to renew its small-format outlets, launched the new “Magnit-Opt” format and started the optimization of large-format objects.
In 2018, major FMCG retailers will maintain their policy of aggressive growth in retail outlets through both expanding to new regions and gaining control over spaces of inefficient regional retailers. As a result of M&A deals, in 2017 “Magnit” acquired 164 stores from 23 retailers. In 2018, the chain is planning to further increase the number of outlets to 400 through M&A deals. “X5 Retail Group” occupied former facilities of around 100 “Monetka (Little Coin)” discounters in Moscow and Moscow region, and acquired 32 “O’Key” supermarkets in December, rebranding them into “Perekrestok (Crossroad)”. Retailers have been increasingly paying attention to the B2B segment. For instance, “Magnit” launched the “Magnit-Opt” format, and “Lenta” developed private labels for professionals.
Weak results of certain top chains have led to management restructuring. For instance, changes at “Dixi” Group began in late 2015 and lasted until 2017. Head of “Auchan Retail Russia” Jean-Pierre Germain announced his resignation in July 2017. His position was taken by Fran?ois Remy, former Head of “Auchan” in Romania and Luxembourg In May 2018, “Metro” announced that Pieter Boone, General Director of the chain, was leaving the company. He was replaced by Philippe Palazzi, who used to be responsible for the company’s business in Italy. Due to changes in its shareholders, “Magnit” is reviewing its management team: Olga Naumova, ex-General Director of “Pyaterochka (Five)”, has become the Managing Director of “Magnit”; a number of managers at “X5 Retail Group” moved to “Magnit” as well.
KEY CONSUMER BEHAVIOR TRENDS
The overall fatigue from constant saving in recent years has led to the saving consumer behavior model having switched to economy, “cautious” consumption in 2018. 60% of consumers have to save money, whereas around 30% have switched to cheaper brands, actively using discounts, promos, and loyalty programs of retail chains in addition, thus purchasing less expensive goods and reducing expenditures, yet consuming more actively. More than 20% of goods (the maximum value during the recent years) are being bought as part of promotional offers. The expert points out that, in order to escape said pattern of interaction with consumers, one should focus more on other consumer trends.
To better understand the current consumer trends, experts at “INFOLine’ have analyzed more than 5 thousand new products entering the Russian market in 2018**.
Against the backdrop of increasingly popular “cautious consumption”, “INFOLine” distinguished 5 main trends in the food and drinks market: active development of private labels; single-serve packages; health and wellness; labeling; and e-commerce.
Private Labels at Retail Chains
Virtually all the top food retailers ended up launching private labels. According to “INFOLine”, the share of private labels in the food product ranges of retail chains is currently at 20–25%. Certain leaders are already generating up to a quarter of their turnover through private labels or are planning to increase their shares in the near future. For instance, “Pyaterochka” retail chain, the share of private labels at which equals 17%, is aiming to get said indicator to 25% in the next 3 years.
Private label goods tend to be 20–30% cheaper than branded alternatives, which fits the “cautious consumption” trend. At the same time, having rather rich product ranges, retailers are perfectly aware of the need to diversify them from the point of view of price and quality characteristics. The “first price” in the range, one of the main features of private labels, is becoming a secondary aspect while retailers and manufacturers actively introduce product lines in the mid-price to premium segments.
For example, private labels at “Lenta” retail chain include “365 Dney (365 Days)” (economy goods) and “Lenta” (mid-price segment). In late 2017, “Danone” developed the brand “Knyaz Vezhich” specifically for “X5 Retail Group” stores (“Pyaterochka”, “Perekrestok”, “Karusel (Carousel)”. In 2017, “Perekrestok” chain also expanded its private label offer, having presented its new exclusive dairy brand “Sarafanovo” in the mid-price+ segment. The creation and launch of renewed private labels within the mid-price and premium segments were also announced by “Auchan Retail Russia” in July 2018.
In the conditions of the emphasis in the main consumer behavior model shifting towards “cautious consumption” as well as the growing number of Russian residents living alone, goods in economy and practical packaging are quickly becoming more popular. According to “INFOLine”, in recent years food producers have been actively introducing products in single-serve and “family” packages to the market. Said trend allows one to purchase goods in exact quantities required while indirectly solving the issue of abstaining from excess consumption.
Health and Wellness
In 2018, the share of citizens keeping track of their diet reached its maximum for all monitoring periods (60%): 7% follow a diet recommended by doctors; 12% decide on a specific diet on their own; 41% aspire to eat healthy in general. The number of people who blame the inability to monitor their diet on the lack of money dropped twofold – from 28% to 14%. Every fifth individual (22%) reports consuming any types of foods as they feel perfectly healthy as is.
Manufacturers are quick to react to said trend, bringing to the market numerous new goods within the category of food products meeting healthy diets and the standards of healthy living as a whole. Retail chains support the healthy living trend as well and create special zones for goods within the category, labeling them accordingly. For instance, organic product aisles appeared in several hypermarkets of “Hyperglobus” and “Auchan” retail chains.
Labeling as a Form of Persuasion
Effective consumer communication is key to success of any brand. In recent years, product labeling has been one of the integral components of communication, not only informing the consumer but also providing additional motivation during purchasing. All in all, various studies and surveys report that more than 80% of buyers express interest in product labels. “INFOLine” identified several labeling groups: state labels; quality; product composition; regional and religious labeling.
Manufacturers of fast-moving consumer goods actively use labels on their products as an efficient method of persuasion. Labels help, in a quick and simple affirmative manner, communicate to the buyer that consuming the product in question will help them get healthier or more successful – that the product that they are about to purchase is high-quality, which, among other things, is confirmed by state standards. Product labeling is not only critical for items of mass consumption but also for premium goods.
To consumers, it is important to make sure that the products they choose have special attributes, which make these goods stand out among those that they used to purchase before or that are produced by other manufacturers (e.g. they lack certain additives, are natural, or have innovative elements). Therefore the persuasion trend is relevant and significant for modern consumers.
Among other factors, development of e-commerce stimulates the development of the retail market – as Internet companies emerged and retailers and brands launched and developed their own e-commerce websites, consumers got more opportunities for choosing products as well as consumption channels. E-commerce is developing particularly rapidly in the FMCG segment. According to estimates by experts at “INFOLine”, in 2017, the size of the market for food e-commerce approached 15 billion rubles in Moscow and Moscow region and 25 billion rubles in Russia as a whole.
The market leader in 2017 was “Utkonos (Platypus)” retail chain, the revenue of which during the year increased by almost 30% and exceeded 8.5 billion rubles. “Azbuka Vkusa (The ABC of Taste)” was second in revenue (over 1.3 billion rubles), whereas “Auchan Retail Russia” was third (more than 700 million rubles). Fourth place belongs to “Ozon” (over 700 million rubles), whereas the fifth and sixth positions are occupied by “O’Key” (up to 600 million rubles) and “Perekrestok” (around 200 million rubles).
In 2016–2017, food delivery services from operating offline stores started actively developing in Russia, namely “iGoods” in Saint Petersburg and “Instamart” in Moscow. The success of such services in Europe and the US indicates that they are likely to bring revolutionary shifts in consumption stereotypes among the Russians, leading to ordering food online becoming one of the commonly accepted everyday tasks, just like visiting traditional stores is nowadays.
Forecasts by “INFOLine” predict growth in the share of online sales in the FMCG segment in 2018–2020, whereas by 2022, the size of the online FMCG trade market in Russia may increase tenfold. The local bill on legalization of alcoholic beverage sales on the Internet may become the key factor for rapid development in the FMCG segment. In the spring of 2018, the Ministry of Finance of the Russian Federation presented a revised version of the bill which introduces a number of changes in alcohol sales. Experts at “INFOLine” believe that this will not affect growth in alcohol consumption volumes in the country – however, thanks to one of the most high-margin categories of the FMCG range, this will improve the operation of remote consumer services, making them more profitable.
In conclusion, it should be noted that, for 2018, “INFOLine” forecasts a trend towards expansion in the high-margin, fully controlled commodity distribution chain – from logistics, direct imports and private labels to e-commerce and development of wholesale trade as well as personalization of interaction with the consumer within the new business ecosystem based on extensive use of Big Data. As pointed out at ‘INFOLine”, this stage in FMCG retail development can be called “Consolidation – Technological Advantage”. Together, these factors raise the industry's barrier for entry and accelerate the consolidation process.
* A store with a small retail space, offering cosmetics, perfumes, personal hygiene products, household goods, and a limited range of food products.
** The list of new goods is available at http://infoline.spb.ru/shop/bank-novinok/.
Head of Consumer Markets Department