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To Russia, with Love: The Multinationals' Song


It's 2 p.m. on a Saturday afternoon in the north of Moscow, and the newly opened hypermarket of French retail group Auchan is jam-packed. As queues stretch 20 deep or more across 68 cash registers, floor manager Tatyana Skorokhodova closes the entrance to the store for five minutes to ease the flow. Inside the store, 26-year-old attendant Yelena Yeremikhina dashes to refill shelves. "People are grabbing this stuff right out of our hands," she gasps.

Surveying the chaos from a balcony, Philippe Longuet, Auchan's general director for Russia, is unfazed. "For an opening, this is not extraordinary," he says. Longuet even sees enough demand to open two more hypermarkets soon, despite stiff competition. "We think the economy is now stable," he says, "and we hope Russians' purchasing power is going to continue to grow fast."

"Fast" sounds like an understatement. Four years after the August, 1998, ruble devaluation wiped out the savings of citizens overnight, Russia's recovery is translating into a consumer boom. Consumer spending has been climbing so rapidly--42% in the past two years--that it's not only attracting retail giants such as Auchan, it's turning Russia into the fastest-growing market worldwide for many major multinationals, including Procter & Gamble (PG), Nestl? (NSRGY), L'Or?al, and Ikea. "Russia has become a priority for most multinationals," says Daniela Riccardi, vice-president for Eastern Europe at P&G, which is a market leader in Russia in such sectors as detergent, shampoo, and toothpaste. Last year, Russia and its much smaller neighbors Ukraine and Belarus jumped to No. 13 in P&G's global sales rankings, up from No. 17 in 2000. Riccardi believes Russia could make the top 5 in just 5 to 10 years.

Sales are climbing for everything from beer to hair coloring. Analysts tracking the fortunes of Danish brewer Carlsberg watch the ruble exchange rate as a profit indicator for the company. Carlsberg owns 50% of Baltic Beverages Holding, maker of the popular Baltika beer. Last year, Baltika sales soared 60% to $537 million. While Russian men guzzle more beer, women are snapping up cosmetics. Last year, L'Or?al's sales in Russia jumped 52%.

It's a surprising and perhaps fragile surge--especially considering that most Russians scrape by on an average monthly wage of $144, according to official statistics. That's still slightly below pre-crisis levels but more than double the average wage in 1999, when the collapse of the ruble sent the monthly wage plummeting to $63 per month. Since then, high global oil prices have fueled a boom that has not only replenished government coffers, but has also boosted wages across the board and given businessmen in nonenergy sectors the confidence to invest. Real disposable income climbed 7.4% during the first half of the year, nearly twice as fast as gross domestic product growth.

Most of that cash is headed straight for retailers' registers: Russians spend the vast majority of their paychecks on food and other household products. The banking system is so underdeveloped that few consumers have the burden of paying off mortgage and other loans. Not many pay rent, either:Most Russians were given ownership of their apartments just after the breakup of the Soviet Union. "People have more money," says Pekka Huttunen, L'Or?al's director for Russia. "And they trust more in the future, so they are spending more."

That's certainly true for Tatyana Yefimova, a 34-year-old computer programmer, who is bustling around the Auchan store with her 11-year-old son and his grandmother in tow. Her family's income, which includes her wages and those of her husband and mother, is $450 per month. As Yefimova wheels her shopping cart around, she fills it with Ariel laundry powder, Danone yogurt, and locally produced fresh meat. She says she intends to spend about $50 this shopping trip and will do so again next week. "We can be more certain of quality here," she says.

Multinationals, such as Nestl? and P&G, intend to tap into that desire for quality. They're spending millions of dollars on aggressive advertising campaigns. They've managed to increase their market share after losing out to resurgent Russian producers in 1999. Take shampoo sales. Five leading Western companies--Beiersdorf, L'Or?al, P&G, Schwarzkopf-Henkel, and Unilever (UL)--control 63% of the market, according to market researcher ACNielsen Corp. P&G is the biggest single advertiser in Russia, spending almost $200 million on ads last year, according to Moscow brokerage Brunswick UBS Warburg. Meanwhile, the biggest Russian advertiser, beverage group WimmBillDann, spent some $40 million. Most ads run in the Moscow area, which accounts for 30% of Russia's retail market.

How long will this consumer boom run? Despite recent successes, 1998 still casts a shadow on the country. Global consumer-goods giants saw their earnings in Russia reduced by half that year. So to limit their exposure to another downturn, these multinationals are increasing local production. That lowers costs by reducing punitive customs tariffs on imports and protects against devaluations, which could again price imports out of the market. Thus Nestl? has invested over $200 million since 1995 to upgrade nine plants for the production of chocolate, ice cream, cereals, and Maggi instant soups and sauces. P&G recently spent $50 million upgrading its plant in Novomoskovsk in the Tula region, 200 kilometers from Moscow. "We see more solidity in the economy than we did in the past," says P&G's Riccardi, "but you can never say never."

There are warning signs on the horizon. Economists say that government plans to hike spending next year by 19.6% and increase borrowing could destabilize the economy. "It will be more difficult to keep up this momentum if the government loosens financial policy," says Roland Nash, head of research at Moscow brokerage Renaissance Capital.

But many are confident Russia is out of the boom-bust turmoil of the last decade. For Lennart Dahlgren, Russia director for Swedish furniture store Ikea, proof of that came after September 11: Net sales for Ikea fell everywhere but Russia. The company is spending more money on expansion in Russia than anywhere else in the world. It now has two stores in Moscow and is planning to open a third at the end of the year--in a $250 million mall it is contructing that will be the second biggest in Europe. The first store has more customers than any other Ikea store in the world: 4.5 million visitors annually.

Growth may start to slow from the economy's rapid climb out of the crisis doldrums, but multinationals are still banking on double-digit gains for several years to come. After all, annual per capita expenditure on P&G products in Russia is a puny $3, vs. $77 in the U.S. As long as President Vladimir V. Putin can keep the country on a steady course, the potential for consumer sales is huge. Meanwhile, the cash registers keep ringing. By Catherine Belton in Moscow, with bureau reports


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