7 August 2008 - The development of the Russian market for healthy food, as well as the increase of trade within the CIS due to better living standards are viewed as key drivers for Nestle's future growth in the country. However, the lack of human resources and adequate infrastructure are the company's main obstacles, says Bernard Meunier, CEO of Nestle Russia.
In this morning’s H1 2008 financial performance statement, Nestle announced that for Europe it recorded sales of CHF 13.8 billion - a 5.8% organic growth and 2.3% real internal growth. The Swiss firm also said that it experienced double-digit organic growth in Eastern Europe, particularly in Russia and Poland.
Nestle entered Russia 15 years ago and was quick to make acquisitions. The Swiss food giant also invested in its local manufacturing and was not negatively impacted by Russia's default on its debt 10 years ago, argues Meunier. Now the firm manufactures 90% of its products sold in the Russian market locally.
This achievement has enabled Nestle to remain competitive in the country. In 2007, Nestle Russia recorded annual sales of around 2 billion Swiss francs (USD 1.6 billion).
Russia’s food sector is also characterised by a mix of regional and international players on the market. And, thanks to a long tradition of food manufacturing in Russia, consumers in certain segments prefer Russian products. Although domestic producers have a better understanding of local tastes, Nestle also tries to localise its recipes and formulations.
Meunier expects his company to be part of the current consolidation trend in Russia. He believes that there is potential as there are still a lot of small and medium-sized companies in some segments, such as the confectionery sector.
The Nestle Russia CEO sees the consolidation continuing, especially with the development of modern retail. He sees the country becoming more like Western markets, but on the other side, due to its vast territories, Russia will keep its traditional rural shops and local corner shops.
On another level, the Russian consumer health awareness is growing quickly as people are placing more and more emphasis on nutritional balance and well-being. According to Meunier, the Russian consumer awareness in not new as there has always been a rejection of conservatives, colourings or additives. However, the trend is not as mature as in the US or Western Europe.
As Nestle is attempting to become the world leader in its field of health and wellness, the company should benefit from the Russian health food bandwagon.
However, to move forward, the Swiss firm will have to overcome consumer ignorance of the effects food can have on one’s health and weight. Indeed, Meunier argues that there is still a lot of work to do in order to educate the consumer regarding good nutrition as well as the importance of exercising.
The other growth trend identified by Nestle Russia is the increase of trade within the CIS. Meunier says that Nestle must look more and more at other countries, like Ukraine, the Caucasus countries and the Central Asian countries, where sales are increasing, consumption is increasing due to improvements in the living standards. He adds that Nestle’s established presence in Russia and its local manufacturing capacities in Russia will serve the needs of the CIS countries.
These growth drivers, however, are faced with hurdles, which firstly come under the form of a lack of human resources and qualified talent.
This challenge is not specific to the food manufacturers, but applicable to all manufacturers operating in the country. Meunier believes that the key to successful operations in any country, and especially in Russia, is finding the right talents.
Another crucial obstacle for Nestle’s growth in Russia is infrastructure and in particular distribution.
Meunier claims that Russian imports, in general, are increasing at the rate of 35% per year and all ports, airports, roads, customs points are completely clogged. He adds that the government has not made any significant investments for over 30 years. There are plans for changes, however, it will take a few years to see how these investments are implemented. The saturation, especially of warehouses and transportation, has led to increasing costs for the firm. This is due to the lack of resources and the fact that everyone is bidding for the same limited resources.
Meunier argues that the lack of human resources will remain a challenge and he does not see any improvement on this front in the near future. As for Russian infrastructure, he has reasons to be cautiously optimistic, and expects improvements in the next 3 to 5 years.
