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Russia: Shoppers Gone Wild


It's midday on Saturday, and the Mega-1 mall in southern Moscow is packed. Shoppers have come to stock up on groceries at the mall's French-owned Auchan hypermarket, buy furniture at Swedish retailer IKEA, and browse dozens of boutiques selling everything from Yves Rocher cosmetics to Calvin Klein (PVM) underwear. Although crammed with expensive Western merchandise, Mega has been a hit since it opened its doors in December, 2002. Last year it was the world's most frequented shopping center, with 52 million visitors.

Down the road at the Rolf car dealership, Oxana Starostina is filling in registration forms for her new Mitsubishi Lancer, purchased with $20,000 in cash. She and her husband, Maxim, saved the money from their small construction supply business. "Living standards are improving. If you are young or middle-aged and earn $1,000 a month, then you can afford to buy a new car," she explains. Last year the dealership earned an award for being the world's best-selling Mitsubishi outlet. On an average day in 2005, Rolf sold 15 to 20 Mitsubishi Corp. and Hyundai Motor Co. autos costing $15,000 to $60,000. These aren't the only carmakers prospering. Last year, Ford Motor Co.'s (F) sales in Russia increased an impressive 54%. Ford now has more than 11% of the Russian car market after launching local production of its flagship Ford Focus in 2002.

When most investors think of Russia, they think energy -- the fall of Yukos, the rise of Gazprom, and the muscular petropolitics of the Kremlin. But for many multinationals from the U.S., Europe, and Asia, the consumer boom, not oil and gas, is the investment story to watch. Last year, Russia drew a record $16.7 billion in foreign direct investment, 38% more than in 2004. Consumer-related sectors attracted the lion's share. Big deals included Coca-Cola Co.'s (KO) $600 million acquisition of Russian fruit-juice maker Multon, $750 million in acquisitions by Dutch brewer Heineken, and investments in car production from the likes of Toyota (TM) and Volkswagen.

What's attracting these companies is the surprising strength of the Russian consumer, not just in Moscow but also, increasingly, in other cities catching up with the capital's breakneck economic development. Russia's gross domestic product grew by 6.4% last year and has averaged 7% growth over the past five years. Dollar income per capita has risen by nearly 29% per annum over the same period, faster even than in China.

AN EXPLOSION

Rising disposable income and a growing middle class have caused an explosion in all types of consumption. Last year, sales of new foreign cars reached 600,000, a 57% increase on 2004 and a sixfold rise since 2001. Mobile-phone ownership has mushroomed from 3 million in 2000 to 80 million today. No less than a fifth of all households own a computer, four times the figure in 2001. "The most striking thing is the overall growth of consumer potential. It's shown by literally all measures," says Alexander Demidov, managing director of GfK Rus market research in Moscow.

What makes the buying surge all the more remarkable is that the average income per person, while growing fast, is still just $300 a month. Yet a surprising number of Russians live as well or better than their Western counterparts. The richest tenth of Russia's population earns around 15 times as much as the poorest tenth. At latest count (2004), Russia was home to an estimated 88,000 millionaires, according to a study carried out by Merrill Lynch & Co. (MER) and Capgemini. And it's not only the millionaires who are buying cars at the Rolf dealership chain, Russia's largest foreign-car importer and distributor, says President Matt Donnelly. He estimates that 8 million Russians earn at least $2,000 a month, and 3.5 million earn double that. "It doesn't sound like a lot, but they have masses to spend," he adds.

That's because some 70% of Russians' income is disposable, vs. around 40% for a typical Western consumer. "We have 13% flat income tax, subsidized housing and utilities, and 10% savings. The rest of it is pretty much out there being spent," says Natalia Zagvozdina, a consumer-goods analyst at Moscow investment bank Renaissance Capital.

THIRST FOR JOE

No one should underestimate the consuming potential of Russia's wider public, either. Multinational food and drinks companies, the biggest consumer-goods investors in Russia, have already discovered that mass-market opportunity. "As soon as people step out of poverty, they become potential Nestlé customers," says Bernard Meunier, country manager for the Swiss food giant, which has pumped $500 million into Russia to date. Nestlé's most recent foray, a $120 million instant-coffee factory that opened in Krasnodar, in southern Russia, last November, was its first international greenfield investment for two decades. Why there? With an average of 250 cups per person per year, Russia consumes more instant coffee than any other country.

Russians' thirst for joe is a sign that the consumption boom is driven as much by changing tastes and lifestyles as by rising incomes. Prior to the 1990s, Russians barely touched the stuff, preferring tea. Beer is a similar case. Beer consumption has risen from 15 liters a head in 1995 to 60 liters in 2005, just a few liters shy of the European average. Rapid growth has lifted profits for companies such as Denmark's Carlsberg, which owns 50% of leading Russian brewer Baltic Beverages Holdings.

Analysts calculate that there's still plenty of potential for growth in fields such as tourism and financial services as well as consumer durables like automobiles, furniture, and electronics. Appliances giant Whirlpool Corp. is planning to make washing machines in Russia, in partnership with Turkey's Vestel Group. American Express Co. (AXP) launched its first ruble credit cards in December, working in partnership with Russian Standard Bank. "This is a market for the future, and we think it's got real opportunity," says American Express Executive Vice-President Gary L. Crittenden.

There are still openings for relative latecomers to the market, too. "The results are far better than even our most optimistic forecasts," says Leszek Krecielewski, country manager for Ada (Mich.) direct-sales giant Amway Corp., which began selling cosmetics and detergents in Russia last March. Sales reached $110 million in nine months, above forecasts of $100 million for the first year, and were a big chunk of Amway's $600 million in European sales in 2005. The company projects Russian sales will rise to $200 million this year.

Will the consumer boom last? Russia's economy remains closely tied to global oil prices and could face an upset if prices plunge. Then again, persistently high oil prices mean economists are raising their forecasts of Russians' future income and consumption. Goldman, Sachs & Co. (GS) predicts Russia will be the world's eighth-largest economy by 2025, with per capita income of $45,000. China and India are hot. But Russia is heating up fast, too.

By Jason Bush


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