June 1998

by Joan Morgan

Over the past few years, food product exporters who have considered selling their products in St. Petersburg have been daunted by the flood of competitive products into St. Petersburg. Conventional wisdom holds that the St. Petersburg market is already saturated, although this is not true, according to experienced observers. St. Petersburg can still be an excellent market for U.S. food products. Competition is strong, but there are many advantages to exporting to St. Petersburg, especially for firms looking for a base to move into other Russian regions.

Exporters should take into account the new conditions and competition they will face in Russia's second-largest market. To succeed in St. Petersburg, exporters should familiarize themselves thoroughly with the consumer tastes, distribution networks, and the competition from West European exporters and local producers.

The Food Market in St. Petersburg
Processed, consumer-oriented foods worth $1.1 billion--nearly ten times their 1992 amount --accounted for 40 percent of U.S. exports to Russia in 1997. Sales of U.S. snack foods (excluding nuts) to Russia increased 869 percent from January 1997 to February 1998. According to "A Food Exporters' Guide to the St. Petersburg Region" a study funded by the Foreign Agricultural Service of the U.S. Department of Agriculture, between 2.5 and 3 million people are likely to buy imported food products on a regular basis in the city of St. Petersburg. Roughly 15 percent of the population has high income by Russian standards and another 40 percent is in the middle income group. If even 40 percent of St. Petersburg households bought one U.S. consumer-ready food product monthly, the total would be 6 million items per year. This population of affluent and middle income consumers have become the focus of food and beverage marketing in St. Petersburg.

U.S. exporters to the St. Petersburg market need to be aware of the differentiation in consumer tastes and incomes. St. Petersburg consumers are sophisticated and accustomed to the availability of imports. There is an opportunity for importers of exotic foods, since the growing middle class has higher incomes and are willing to try new things. Today, price is the key purchasing criterion among consumers, not brand loyalty. Nevertheless, in order for U.S. exporters to have a long-term market, they need to differentiate themselves by marketing and building brand loyalty. The supply of goods must be steady and uninterrupted. Finally, Russian-language labels must be used, and packaging has to be of high quality and sturdy enough to look good after a long journey.

U.S. brands should be adapted to Russian tastes. The Russian diet was traditionally based upon meat; therefore, heavy soups are well received. Soured milk products such as kefir are popular, as are pickled-vegetable and salad products. Cakes and pastries are extremely popular. According to the "Food Exporters' Guide," while Russians are not "snackers," the growth of the kiosk has increased purchases of chewing gum, chocolate, and bagged sweets. There has recently been an increase in the sales of health and convenience foods.

U.S. products have generally enjoyed a strong reputation among local consumers. U.S. brands and products that have been very successful in St. Petersburg include: Pepsi Cola, Coca Cola, Mars candy, Hershey's chocolate, Uncle Ben's rice, Planters nuts, Tyson chicken, Budweiser, Heinz sauces, Red Baron pizza, and Yarnell's ice cream. Nevertheless, U.S. and other foreign food suppliers face strong and growing competition, both among themselves and increasingly from local producers. Since 1993, when foreign products had already taken a strong position in the local market, there has been a growing effort to have Russian consumers buy domestic goods. According to a March 15, 1998, St. Petersburg Times article, a "Made in Petersburg" campaign was launched in 1996 by nine large St. Petersburg businesses. U.S. companies able to produce locally while maintaining the quality for which U.S. products are known may have extra appeal in the local marketplace.

Logistics, Distribution
In a very price-sensitive market, careful planning is required to ensure that transportation costs don't make an imported product prohibitively expensive. American goods can be transported to St. Petersburg by a number of ways: by sea via Baltic ports; by sea via Black Sea ports; or overland from Western Europe. West European companies and U.S. companies with West European operations ship their products in mostly by truck. Due to the constant difficulties associated with customs clearance, it is recommend that companies hire a freight forwarder experienced in the region or use an experienced declarant employed by a Russian importer.

Smaller U.S. exporters or those new to the market should consider selling to a local wholesaler. St. Petersburg has not reached the stage in retail developments where direct supply to retailers is likely to be feasible or worthwhile. It is still difficult to monitor distribution, introduce product merchandising, or develop a sales strategy for the whole area. However, some Russian importers are seeking long-term supply relationships with Western partners and want to specialize in carrying many brands of one product. For more information, visit BISNIS Online, at http://www.mac.doc.gov/bisnis/isa/isa.htm#Disa.

Joan Morgan covers agribusiness for BISNIS.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)