Russia, so often cited as one of the world’s most attractive emerging markets for food manufacturers, presents soup makers with quite a conundrum. On the one hand, it is the second largest soup consuming nation globally. On the other, growth of the ready-made soup category has been held back as manufacturers struggle to convince consumers to abandon their traditional home-made borscht or schi. Add to the pot the economic crisis and consequent decline in consumer spending and the short-term prospects for the category look cloudy. Katy Humphries reports.
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The growing but currently underdeveloped Russian soup category represents a tempting prize for soup manufacturers.
According to Nielsen data, as of July 2009 the soup market was valued at US$332m and, over the mid- to long-term, the category has been tipped for significant growth.
However, the sector has come under a considerable amount of pressure of late.
Attempts to drum up demand for ready-made soups have met with limited success and news that Mars is considering exiting the market throws into sharp relief the challenges facing manufacturers in the sector.
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By GlobalDataWith a 10-15% growth rate over the past three years, the soup category has been slower to expand than the overall market for prepared foods in Russia, which increased by 20-25% per annum.
Take-up of ready made soups has been sluggish largely due to consumers’ unfamiliarity with this fledgeling category.
In Russia, there is a strong tradition of making family-sized servings of soup from scratch at home using fresh ingredients. As Anglo-Dutch food giant Unilever found to its detriment, Western-style canned or dehydrated soups are therefore not well-suited to Russian consumer preferences.
Unilever launched its Knorr liquid soups in Russia in the mid-2000’s, but by 2007 the company was ready to throw in the towel.
“We found that our product does not match Russian consumer preferences,” a spokesperson for the group tells just-food. “It was prudent to withdraw from the market at that time.”
The onset of the economic downturn last year added to soup-makers woes. The economic crash has had a profound impact on Russian consumption patterns, with the country moving from one of its longest consumer booms in history to economic crisis almost overnight.
Falling consumption is the consequence of low loyalty levels twinned with the relatively high price of prepared soups, Vladimir Smirnov, Atlant Consulting Group analyst, suggests.
“The significance of the financial crisis on consumption has been great. Consumers are reducing spending, with products not long-entrenched in their buying patterns and of a higher price than first sacrificed,” Smirnov says.
Russian consumers are getting poorer. The World Bank estimates that the number of those living under the official poverty line will increase to 17.4% before the end of the year, while Russia’s middle class is expected to shrink by about 10%, to 51.2%. In real terms, this means 6.2m people will have dropped out the higher-spending “middle class” social bracket.
And prospects for a speedy recovery and returning consumer confidence look dim, with the latest World Bank figures estimating that unemployment will rise by 13% by the end of the year.
Declining consumption has put pressure on manufacturers to reduce the price of their soup offering. According to Euromonitor International, in 2008 retail soup sales fell 4% in value-terms as manufacturers cut their prices in a bid to counter declining sales volumes, which dropped by 2% in the period.
“Declining unit prices is expected to be a long-term trend, first appearing during the review period in 2006. The average unit price of soup is expected to continue to decrease in constant value terms,” Euromonitor says.
Given the challenges facing the market, perhaps it should come as little surprise that Mars – one of its largest players – is considering ceasing production of its ready-made soups in Russia, sold under the Gourmania brand.
Mars created Gourmania as a local brand designed to appeal to Russian consumers, with an offering that draws on traditional recipes such as Gurmania Borsch.
According to Finam analyst Maksim Klyagin, the price positioning of the brand coupled with declining demand for convenience soups and pressure to strip costs from the business has prompted the US food group to rethink its investment in the market.
However, he adds: “Perhaps the brand will not be withdrawn from the market because this product category in the long term has significant growth potential.”
The exit of Mars on the heels of Unilever would greatly reduce competition, leaving only Rollton and Campbell Soup Company as national brands.
“The consequence would be a substantial lessening of competition. But we doubt that in the near future there will be talk about the emergence of new major players,” Klyagin says.
If Mars were to exit the Russian soup category, relatively new entrant Campbell would likely be the major beneficiary.
Russia is viewed as a “tremendous” long-term growth opportunity by the US-based soup maker, despite the short-term challenges presented by the market, spokesperson Anthony Sanzio tells just-food.
“The opportunity is to commercialise the enormous soup consumption behaviour,” he reveals.
In a bid to win over Russian consumers, Campbell plans to expand its product offering from three to 14 varieties by the end of fiscal 2010.
The company has also developed an “effective” and “comprehensive” marketing campaign in the country, including advertising featuring a Russian character called a domovoy, Sanzio says.
Another important plank in Campbell’s expansion strategy is securing adequate national distribution. Through a recent distribution agreement with Coca-Cola Hellenic, Campbell is extending its reach to consumers and the group plans to expand distribution from 1,500 stores to 32,000 stores by the end of fiscal 2010.
However, possibly the most important part of Campbell’s bid to gain market share in Russia is the company’s product, which aims to meet local needs and fit into traditional social mores surrounding soup making.
“We have a strong product that resonates well with consumers. Our Domashnaya Klassika saves time in preparing soup and helps Russians make the recipes they have known and loved for years. Unlike other companies in the market, our approach is not to provide fully finished soup, but instead assist in soup preparation – our product is a concentrated broth. Based on our ethnographic research, this seems like the right approach,” Sanzio reveals.
While the growth of the fledgeling soup sector in crisis struck Russia has been hit, its size and potential remains undeniably huge.
Despite near-term obstacles to growth, soup makers who view their investment in the market as a long-term strategy and are able to develop a product that gels with Russian consumer preferences are likely to reap the rewards in the long run.
