July 1998

by Kelly Raftery

Consumer goods markets in the New Independent States (NIS) have changed dramatically over the last five years. The variety and quality of goods available have increased sharply, retail and wholesale distribution channels are expanding, and consumer decision-making is much more sophisticated. Retail sales for 1997 in Russia, the largest NIS market, are estimated at $149 million. While markets for some imported consumer goods, especially foods and beverages, have become quite competitive, they are far from being saturated.

Distribution
In the early 1990s, distribution channels in the NIS were a mix of Soviet-era structures and newly created commercial networks. Today, exporters have a choice between building their own distribution systems or working with local distributors. Many larger companies have opted to create their own networks, including Heinz, Masterfoods, Coca-Cola, and Procter and Gamble. To successfully create its own distribution network, a U.S. company must be ready to make a considerable long-term investment.

Alternatively, an exporter can work through local wholesalers. In general, the distinction between "importer" and "wholesaler" is not relevant in NIS markets, where wholesalers are frequently also importers. Wholesalers' commercial practices vary widely. Some require cash up front from retailers while others are willing to work on a commission basis. Some follow trends and market demand closely, others simply operate as an entity to move imported goods from ports of entry to retail outlets. Retail outlets may also buy directly from suppliers with sales representatives in an NIS country.

Decision-Making
How NIS consumers evaluate a purchase, actually make a purchase, and the amount of money they spend have all changed significantly in recent years. In the early days of the post-Soviet economy, consumer decision-making centered on availability of goods. Once goods became more readily available, consumers employed a relatively simple equation: if something is expensive, it must be more desirable. If an item had a high price, it was assumed to be of higher quality--and confer greater prestige--than a lower priced item. Indeed, at one time retailers could simply be the most expensive store in a market and have people lined up outside, waiting to get in.

In the last two to three years, a different set of equations has emerged. NIS consumers now look more closely than ever at competitive pricing and quality factors, as well as at convenience. The latter is a totally new consideration in the NIS countries, where people are working longer and harder at their jobs than ever before--no more Soviet-style three-hour lunches, for example, to search for a product.

Quality has also become a major consideration in consumer decision-making. Quality is frequently associated with country of origin, and NIS citizens often consider where a certain product was made when considering a purchase. U.S. goods are generally perceived as high quality, but consumers generally will not believe that a U.S.-branded product manufactured in a third country is of the same quality as the same product manufactured in the United States. Some of this attitude is explained by the large quantity of counterfeit goods that has flooded NIS markets, thus reducing brand integrity.

As the NIS economies improve, indigenous products have begun to reenter the market. In many sectors, these NIS brands have regained a substantial market share. Among the sectors most affected by local production are foods, beverages, and pharmaceuticals. Western brands now compete with locally produced goods with new, high-quality packaging. NIS consumers now show preference for some locally produced items that had brand name recognition under the Soviet system and still retain consumer loyalty--at a time when Western brands are just beginning to establish brand recognition and loyalty among consumers. These locally produced goods are and will continue to be real competition for U.S. exporters.

Making the Purchase
NIS consumers have more buying power and disposable income than they have at any other time in the last five years. According to recent estimates, both personal money incomes and consumer spending rose in all NIS countries in 1997. Consumer spending accounted for two-thirds to three-quarters of all personal spending and savings. According to preliminary figures, real disposable incomes rose in almost all NIS countries in 1997, growing from 1-30 percent. All of these figures indicate a capacity and desire to purchase consumer goods.

While the NIS largely remains a cash economy, credit card usage is becoming more commonplace in major markets such as Moscow and St. Petersburg. For example, there are currently one million Visa cards in Russia. Less than four years ago, in contrast, there were only 25,000 Visa cards in Russia. For the first time in 1997, annual cardholder expenditure in Russia exceeded $1 billion, a 94 percent increase over 1996, which is also reflected in retail outlets' increased acceptance of credit card payments.

Personal checking is not yet an accepted payment method in the NIS, but debit cards issued by local banks are becoming more familiar. Even large purchases, such as automobiles or major appliances, are made in cash. For more information, visit BISNIS Online at www.mac.doc.gov/bisnis/isa/9807cons.htm.

Kelly Raftery covers consumer goods for BISNIS.

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