Entering the Russian Market. Key Niches and Opportunities for New Brands

Since the beginning of 2022, almost 1000 foreign companies have left the Russian market. The reason for this was the tightening of the sanctions policy of European countries towards Russia. Moreover, about 5,000 brands have become inaccessible to Russian consumers.

Some of them have left the region, putting their assets up for sale. Recently, such a decision was made by one of the largest manufacturers of Sylvano paper and the fast food chain McDonalds. Before them there had been Carlsberg (Denmark), Huhtamaki and Valio (Finland), etc. But the German OBI GmbH has already managed to delegate control of its Russian DIY retail network to the founder of the Audit Group consulting group and the Cesar Consulting Boris Lyuboshits. These companies do not plan to get back to the Russian market.

While others suspended production for an indefinite period of time (they turned out to be a majority). Over the past 2 months, none of the companies has announced the resumption of business within the territory of the Russian Federation.

In this connection, a lot of niches of the Russian market have become promising for new foreign brands. Especially, when such major competitors as IKEA or Coca-Cola Company are absent. Moreover, most of the Russian audience expressed their loyalty to brand substitution, as evidenced by statistics.

Attitude of Russians to the Exit of Western Brands in Numbers

In the light of significant changes on the market, the social network TenChat decided to find out how Russian consumers felt about the exit of foreign companies. More than 13,200 Russians took part in the survey.

It turned out that 66% of respondents did not get uncomfortable due to the fact that foreign companies left the market. Notably, 58% of them are representatives of a young audience aged 18 to 34 years, 24% are respondents aged 35 to 54 years, 18% are over 55 years old. Residents of the Siberian and Ural Federal districts turned to be more loyal to changes in the market, but residents of the Moscow and North Caucasus regions turned to be more anxious.

At the same time, the Russian audience has already found some alternatives to foreign online services. 77% of Russians responded that they had replaced streaming platforms for watching movies and TV series with domestic analogues. 55% switched to Russian music services, 54% started using social networks developed by companies in Russia. Next in the list are e-commerce platforms (47%), as well as services for booking hotels, airline tickets and travel arrangements (33%).

All this tells us that brand substitution in Russia is a promising economic trend. Since the majority of the audience reacted predominantly in a positive way and some of them have already used domestic analogues of the departed services.

However, not all sectors of the Russian economy can be “covered” with domestic goods and services. According to the same TenChat survey, only 23% of Russians believe that it is necessary to create copies of foreign brands in Russia. Consequently, the rest of the audience is ready for the appearance of new products and companies.

Having analyzed these data, RMAA specialists carried out their own research in order to find out which niches on the Russian market are currently the most demanded for this, taking into account the expectations and needs of the target audience in the region.

Food and Beverages, Alcohol, Tobacco Products

One of the “affected” sectors of the Russian market economy was the sphere of food products. Moreover, the companies reacted differently to the exit from the market. For example, Coca-Cola Company suspended the operation of some of its factories, PepsiCo and Danone continue to produce baby food and dairy products, and Nestle temporarily (or not - it is not specified) refused investments and advertising campaigns in Russia.

The following companies can be added to this list.

• Dairy products: Chudo (Wonder), Domik v derevne (House in the village), Vesely Molochnik (Happy Milkman), Agusha, Inmarko, Valio.
• Confectionery products:Mars (Snickers, Twix, Bounty, Milky Way, Orbit, Whiskas and Pedigree), Lindt, Fazer, Mondelez, Dr. Oetker.
• Coffee and tea:Brooke Bond, Lipton, Paulig, Starbucks, Lavazza.
• Soft drinks: Coca-Cola, Fanta, Sprite, PepsiCo, Schweppes, BonAqua, Aqua Minerale, Rich, J7, Moya Semya (My family), Dobry (Kind), Russky Dar (Russian Gift), Lyubimy (Favourite), Ya (I), Fruktoviy sad (Orchard), Mountain dew, Adrenaline Rush, Pulpy.
• Alcoholic beverages: Diageo (Guinness, Johnnie Walker, Smirnoff, Baileys, Captain Morgan brands), Brown-Forman (Jack Daniel's, Finlandia), Budweiser Budvar, Velkopopovick Kozel, Carlsberg, Heineken, Absolut, Pilsner Urquell, Bernard, Gambrinus, Staropramen, Pernod Ricard, Chivas Regal, Jameson, Ballantine’s, Havana Club.
• Tobacco products: Winston, Imperial Brands, Davidoff, Richmond, Philip Morris.
• Fast food: McDonald's, Yum! Brands (KFC, Pizza Hut, Taco Bell), Hesburger.

At the same time, the results of the Online Market Intelligence (OMi) study show that Russians in most cases plan to save on any goods, except for food. Only 1% of the total number of respondents are ready to completely refuse to buy in this category (27% and 32% - alcoholic and tobacco-containing products, respectively).

How do you plan to save

Source: OMi research “Dynamics of changes in consumer behavior, media consumption and perception of the situation”, 12-17 of May, 2022, N=5770, Men and Women 18+. NAFI, March-April 2022

Plus, the attitude of citizens to the economic and political situation in the country has also changed, which primarily affects the consumer purchasing power. Experts have noticed an increase in the index of economic confidence of Russians to the highest level over the last 10 weeks. The share of those who believe that the country is in crisis has decreased.

Such conclusions are confirmed by other data showing a gradual increase in weekly expenditures of Russians. According to the Romir research company, this indicator was significantly lower in the previous months of 2022. However, now the expenditures of Russians have increased by 2.7% and by 3.4% compared to the dynamics of the previous year.

All these factors tell us that the Russian market, having experienced an economic recession at the beginning of 2022 due to the exit of many companies, is gradually beginning to rehabilitate itself to the current realities. At the same time, the demand for food remains at a high level.

Pharmaceuticals and Dietary Supplements

Essential medicines continue to arrive in Russia as usual. However, some pharmaceutical companies have restricted their activities in the region. Thus, Pfizer, Sanofi, Bayer, MSD, Novatris, Roche, Bristol Myers and J&J are planning to transfer clinical trials of their drugs outside of Russia. The AbbVie brand refused to supply botox and fillers. Eli Lilly and Company suspended investments and exports of a number of medicines.

Of course, such a situation may affect Russians in the future (opinions on this matter still vary). Since there is a possibility that the pharmaceuticals that have not been evaluated in clinical trials cannot be produced in the country. Therefore, analogues will be needed, because the demand for medicinal products in Russia as a whole has grown by 3.7% - Romir calculated.

The situation is much worse with dietary supplements, which are in demand for Russian buyers. According to ROIF Expert, the size of the Russian dietary supplements market by the end of 2021 has increased by 36% than in previous periods. This was mainly thanks to online sales, in particular, on such large marketplaces as Ozon, Wildberries and iHerb.

The last of the list stopped delivering goods to Russia, Belarus, Moldova and Ukraine due to logistical problems. Thereby consumers were deprived of most popular products in the segment. In addition, Gilead (the largest pharmaceutical holding) has suspended the part of its business operations on the Russian market and GlaxoSmithKline has completely stopped deliveries of dietary supplements and vitamins.

In the end, the situation on the market, as with food products, turns out to be the following. With the steadily increasing demand for medicines and dietary supplements among Russian buyers, free niches have appeared for new companies in the pharmaceutical industry.

Both directions are promising in all respects: for foreign brands, for buyers and for the Russian market as a whole.

Gadgets and Electronics

Despite the fact that the majority of Russians began to stick to line of budget savings in 2022, only 17% are ready to give up buying household appliances and gadgets. As evidenced by the survey conducted by the educational company MAXIMUM Education and the IC Rossgosstrakh Life.

Having mentioned this category of goods, first of all you should pay attention to smartphones, since they are the leaders in sales in the segment. In 2021 the analytical center of the Senergy University found out that Russians (87% respondents of the survey) are not ready to buy used smartphones and do not plan to do so in the future. Along with this, 5.2% of Russians purchase a new smartphone annually, 17.1% - every two years and 77,% - in 3-5 years.

At the same time, the market situation is as follows.

• Smartphones. Apple, the major player in the segment, suspended sales in Russia (partially - purchases in AppleStore for Russian users). Samsung stopped deliveries phones and chips, explaining this by problems of export logistics. At the same time, Xiaomi, Oppo and Huawei have halved their products on the market. Simens and Nokia have completely refused to cooperate with Russian companies.
• Computers. Dell, AMD, Asus, Acer, Inte l “temporarily” left the market due to problems with shipments and dollar fluctuations (according to company representatives).
• Gaming gadgets. PlayStation has stopped all sales in Russia, including within its PS Store service. Nintendo developers also did the same, refusing to supply game consoles and software to the country.
• Another equipment. In the light of the sanctions policy, Japanese manufacturers Epson (copying equipment), Ricon (printers, photo equipment, etc.), Panasonic (various types of household appliances) and Canon (one of the world leaders in the production of photo equipment) refused from the Russian and Belarusian markets. Companies engaged in heavy industry can also be added to the list. This concerns the AmericanOtis (elevators and escalators), Japanese Komatsu (construction equipment) and the Danish manufacturer of wind turbines Vestas.

In other words, this segment of the Russian market “remained” without the leading global players. Thus, it is one of the most promising niches in the current time period. Provided that many friendly to Russia countries have long had brands, the implementation of which is successful on their own local markets. For example, this is the Indian company Lava, specializing in the production of smartphones and components.

Video Games

Further to the technical topic, it should not go without mention the gaming sector. The niche turned out to be almost empty.

The following companies completely suspended the sale - Activision Blizzard (Diablo, World of Warcraft, Starcraft, etc.), Electronic Arts (Sims, Fifa), CD Projekt RED (The Witcher, Cyberpunk 2077, etc.), Rockstar Games (Grand Theft Auto), Ubisoft (Assassin's Creed, Far Cry, Raibow Six). Plus, the Steam and VALVE platforms (except PayPal and Steam Wallet) have disabled queries and limited payment methods for games for Russian users. Also, the creator of the metaverseThe Sandox and the developer of many popular blockchain games Animoca Brands has blocked all its services for players from Russia.

Epic Games and GSC Game World turned out to be more loyal game companies. The first ones refused the commercial cooperation with Russian companies, but retained access to their products for Russian users. The second ones stopped the offline sale of the S.T.A.L.K.E.R. 2 edition, but did not close digital pre-orders of Russian buyers.

It will be recalled that according to the results of 2021, the share of the gaming sector in Russia increased on average by: 14% for mobile games (76.5 billion rubles), 4.2% in the PC games segment (85.4 billion rubles), 8% for console games (15.5 billion rubles). At the same time, the decline of the game sector in 2022 was predicted by many analysts. Industry experts hoped and still hope for the appearance of large Chinese platforms.

Clothing and Accessories

Starting from the end of February 2022, many clothing brands began to close their stores in Russia. The companies gave different explanation with regard to their exit. For example, the H&M brand (the world's second largest clothing retailer) said H&M Group was deeply concerned about the tragic developments in Ukraine and "stood with all the people who were suffering.” In its turn, Inditex holding (Zara, Bershka, Massimo Dutti, etc.), Uniqlo, Nike and Adidas explained their exit by the unstable economic situation associated with changes in exchange rates.

On the other hand, there are also domestic fashion brands on the market. But according to many experts, their assortment will not be able to satisfy all consumer requests. Since Russian retail companies largely depend on raw imports (fabrics, accessories, etc.).

So, what is happening now in fashion retail. The following companies closed stores and suspended operations in Russia:

• Mass Market: H&M, COS, Arket, Inditex (and all its brands), Mark&Spencer, Mango, Mohito, Mothercare, Cropp, Reserved, Matches, The Other Stories, Sinsay, Uniqlo, Victoria Secret's, Adidas, Nike, Reebok, Puma, Levi's, Crocs, Vans, Pandora.
• Premium and luxury: Balenciaga, Chanel, Coperni, Burberry, Hugo Boss, Ganni, Golden Goose, Gucci, Hermes, Karl Lagerfeld, YSL, Nanushka, Monki, Prada, Louis Vuitton, PVH Corp& (Tommy Hilfiger, Calvin Klein, Warner's, etc.), Cartier, Swarovski, Samsonite.
• Multi-brand online platforms: ASOS, Farfetch, Mytheresa.

As you can see from the list, the world's leading brands have left the Russian market. And at the moment, the fashion retail niche urgently need new companies. Especially it urgently need brands that produce goods for the whole family and have a wide range of basic things. As well as - offline and online storefronts, since the Russian audience prefers different ways of shopping in this segment. Fashion Consulting Group CEO Anna Lebsak-Kleimans expressed such idea: “Online players are more actively going offline, and this process will continue, because different channels give a noticeable synergistic effect. More than 70% of Russian customers say they want to continue going to physical stores, at the same time online continues to grow. With a multi-channel approach, brands feel much more stable.”

Cosmetics

This niche of the Russian market has always been considered a promising direction for new brands. Plus, it will be much easier to reach the Russian consumer in the current market conditions. Because the segment was left by the world's cosmetic leaders.

These beauty corporations have left Russia: Sephora, Estee Lauder (Aveda, Bobby Brown, Tom Ford Beauty, Clinique, MAC Cosmetics, DKNY, Smashbox, etc.), L'oreal (Garnier, Lancome, Bioterm, Giorgio Armani Beauty, Kiehl's, Maybelline NY, NYX Professional Makeup, Matrix, Vichy and others), Unilever (Rexona, Camay, AXE, Dove, Black Pearl, etc.) plus the multi-brand cosmetics chain Il de Bote.

Alongside this, the promotion of cosmetic products has always been more affordable to implementation than in other niches. Since there have already been successful examples of Korean, Israeli, Indian brands etc. reaching the Russian audience. By the way, Israeli Zielinski &Rozen has been working in Russia since 2018, having offline stores in Moscow and a large number of partners distributing its products online. The products of the Korean manufacturer Holika Holika are presented offline and online at the leading cosmetic sites in the country (Rive Gauche, L'etaul, etc.), and also have their own online store. Israeli professional cosmetics are bought by beauty salons, etc.

The departure of European and American corporations has only accelerated the process of brand substitution on the Russian market, since the audience has long been interested in and buys cosmetic products from less well-known companies from other regions of the world.

Learn more from the White Paper Russian Market Under The Influence Of Western Sanctions. Possible Prospects For New Brands.

In Addition

While carrying out the analysis, we were guided by the basic needs and moods of the audience in the region. It turned out that nowadays the most promising niches on the Russian market are: the sector of food products, pharmaceuticals, gadgets and household appliances, gaming, fashion retail and beauty.

Of course, this list is far from complete. Here the automotive sector in anticipation of new Korean, Chinese auto companies and not only (according to some experts) should be also mentioned. As well as a “sagging” niche of scrap goods after the departure of IKEA, Zara Home, H&M Home. And also, add the need for the appearance of tourist online services etc. in Russia.

Despite the peculiarities of each market niche, everyone is united by one substantial fact. The Russian audience is still financially reliable and ready to acquire goods from new brands. In other respects, the successful sales of products in the region will mainly depend on a competent promotion strategy.

Entrust this task to RMAA competent and skilled experts who know all the nuances of the Russian market and have many marketing tools in their arsenal for more effective and faster results.

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