Low-end Russian consumers are less crunched

September 28, 2009

Hasbro, one of the world’s largest toymakers, opened its first rep office in Moscow on Sept. 23, citing “good growth” in Russia, which it dubbed “the most attractive market for us”. That seems like a strange description, for a country whose gross domestic product is set to slump by 8 percent this year. But Hasbro explained that despite the crisis, sales of toys were holding up. And it isn’t the only consumer-focused company still reporting surprisingly good results.

Look at the Swedish furniture retailer Ikea. In June, Ikea created headlines when it threatened to halt its investments in Russia because of concerns over bureaucracy. There were far fewer headlines when Ikea reversed its decision in August, once the problems were solved. And few people cottoned on to the most remarkable thing contained in Ikea’s announcements. Despite the crisis, the Swedish company has said that is still seeing double digit sales growth in Russia this year.

This seems highly mysterious, to say the least. On the face of it, Russian consumers appear to have taken a huge hit. In August, retail turnover fell 9.8 percent year-on-year, according to the latest official statistics. In some segments, especially those that depend heavily upon credit to shift products, sales have plummeted. Russian car sales, for instance, were down 54 percent year-on-year in August.

Yet the picture may be far less grim than these alarming figures suggest. While some Russian consumers have undoubtedly seen their incomes squeezed, others are faring remarkably well. A recent report by Renaissance Capital, a Moscow investment bank, illustrates the extremely uneven impact of the crisis on different segments of the consumer market.

The crisis has been especially bad for high-earners and for Russians employed in private sector firms, as these are the most aggressive in terms of cutting costs. Anyone whose business in Russia is based on selling high-end products to wealthy customers has seen their sales plummet.

Yet it’s a rather different story when it comes to the poorer layers of the Russian population. Eager to avoid any social backlash, the Russian government has been generously pumping money into the pockets of public sector employees and pensioners. This year the Russian government has boosted public sector wages by 19 percent and pensions by 25 percent, which is well above inflation (around 10 percent).

That’s a significant stimulus to consumer demand, considering that around one third of all Russian workers are employed in the public sector, while pensioners represent a quarter of the overall population.

These measures explain why overall disposable income is holding up much better than one might expect. During the first eight months of the year (the most recent data) average real disposable income was down a modest -0.7 percent compared with the same period in 2008. That implies that recent falls in consumer spending have more to do with diminished consumer confidence — hopefully a temporary factor that will wear off as the economy recovers.

And with state sector workers and pensioners still enjoying significant real income increases, it’s less surprising that some retailers are continuing to do well. Ikea, for instance, may be benefiting from the fact that it charges relatively low prices, leading consumers to trade down from more expensive products. Renaissance Capital notes that for similar reasons, major Russian food retailers, discounters and hypermarkets also continue to see strong sales growth this year — up 20-30 percent in rouble terms.

That may be small consolation for anyone selling expensive kit such as cars or laptops, where a rebound will have to await overall economic recovery and the revival of credit. But it helps to explain why, for less expensive segments, the Russian consumer market still shows surprising signs of resilience.

Comments

Thus it seems that the new Russian “democracy” is moving towards policies one would associate with the former Soviet Union. The government helps the elderly and its own workers. The “new Russians”, the capitalist entrepreneurs or thieves, depending, will take the hit. This also conforms with the Russian version of “Democracy” in which the government at bottom tells the Industries what to do. This of course is the opposite of American “Democracy” in which the Industries tell the government what to do.

Posted by Richad Gustafson | Report as abusive
 

This is quite remarkable. Quantative easing in just the right place, achieving what trillions of dollars and billions of pounds bank car industry support are failing to do in the west. Paying the little people more is having an instant economic effect by increased consumption.

Regards

Posted by Lee Palmer | Report as abusive
 

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