Analyst Insight by Elizabeth Friend
The increasingly modern Russian consumer foodservice market has become a prime growth target for fast food, and global operators are flocking to secure their presence before it's too late.
When global foodservice operators think about fast food growth, they invariably think of China, which is set to contribute 44% of total global fast food value sales growth by 2015. Lately, though, major operators have also been taking notice of Russia, a fast food market set to increase 29% over 2010-2015. It's a place with a past that led to very low foodservice penetration and a future that includes rising disposable incomes and rapidly developing infrastructure, making the market ripe for a boom in consumer foodservice like the kind seen in the US a half-century ago. Multinational concepts are moving into the industry in increasing numbers, and local players are doing their best to defend their share of the growing market.
A small market primed for growth
Russia's consumer foodservice industry is still relatively immature and, at US$8.1 billion in value sales in 2010, it's much smaller than other similarly developed markets like Brazil, India and China. Russia's Soviet Union-era planned economy, mass early-nineties privatisation and 1998 financial crisis all made the market—up until about 15 years ago—a very difficult place in which to run a business. Many restaurants were forced out of the market during this period, leaving behind a very thin foodservice industry that hasn't yet returned to full-strength.
However, unlike conditions in larger developing markets, where consumers tend to favour full-service dining models, Russian diners love their fast food. In fact, fast food value sales in Russia accounted for 60% of total consumer foodservice sales in 2010, a figure that compares favourably to fast food sales in Brazil (16% of total value), India (12%) and China (23%). This distribution will increase to 64% of total consumer foodservice value sales by 2015, as 84% of total foodservice value growth in Russia will come from the fast food category. Even the fast food-loving US only attributed 39% of value sales to the quick-serve category in 2010, evidence Russia is uniquely fertile ground for fast food expansion.
Russian consumers are getting richer, too. Real per capita disposable income is expected to grow at an average rate of 7% from 2010-2020, and the percentage of middle class households (those earning between 75% and 125% of the median household income) grew 6 percentage points to 30% of total Russian households in 2010. Furthermore, wealth in Russia continues to flow to urban areas, resulting in disproportionately high concentrations of money in areas easily targeted by fast food operators. Urban areas are also seeing a boom in spending on fast-food-friendly highways and commercial centres with food courts that invite sales of quick and convenient fast food. The result is an expanding, urban middle class—all located within a concentrated area with plenty of newly viable outlet locations.
Granted, Russians traditionally prepare their meals at home, and there's a heavy cultural bias toward “from scratch” cooking. However, this growing middle class is made up primarily of young professionals, a group with busy working schedules, increasingly hectic social lives, and, in many cases, no family for which to cook. As a result, these single, urban dwellers are relying increasingly on prepared foods or quick foodservice meals that take little time and effort. Single-person households are actually the most rapidly growing household type in Russia, lending an increasingly large demographic—one with a need for convenience and an open-minded approach to foodservice—to fast food operators' target market.
All about burgers
Russia's current fast food market is dominated by the “other” fast food category, which contributed 47% of total fast food value sales in 2010 and is highly fragmented, with no player claiming more than 2%. However, the lion's share of fast food growth over 2010-2015 (50%) is expected to occur in burger fast food, a category dominated by global concepts.
McDonald's has leveraged its first-mover advantage to become the largest consumer foodservice player in Russia, with a 2010 fast food market share of 19%. When the first restaurant opened in 1990, 80% of McDonald's ingredients had to be imported from other markets and processed in an enormous factory dubbed the “McComplex.” Now, private local businesses supply 80% of the ingredients at Russian McDonald's outlets, evidence of how far the market has come in terms of supply chain feasibility. Also among the top ten fast food operators in Russia are Sbarro, Doctor's Associates, Yum! Brands, Dunkin' Brands and Burger King, which joined the market most recently in 2010. With major expansions being planned by many existing players—most notably Subway, which plans to grow from 167 to 1,000 units by 2015—and competitors Papa John's, Domino's, Cinnabon and Carl's Jr. also moving into the market, things are about to get a lot more crowded.
Home-court advantage?
Perhaps the most interesting variables in play in Russia are the local competitors that are standing firm against the global giants. While McDonald's and its ilk face formidable local competition in a number of developing markets, Russia is unique in the number of local operators that remain significant in the competitive landscape. Four of the top ten fast food concepts in the market are locally-owned, and all four have consistently increased in market share over the past five years, even as the shares of Yum! Brands, Sbarro, and Baskin-Robbins remained comparatively stagnant. These local players include fifth-ranked crepe chain Teremok and sixth-ranked baked-potato chain Kroshka-Kartoshka, each of which have grown to over 100 outlets within the last decade. Yum! Brands also recently acquired 100% ownership of Rostik's-KFC, a 160-unit chain that had previously been a co-branded partnership between Yum! Brands and chicken fast food-competitor Rostik's International. Acquisitions like this will likely become more common as additional players ramp up their attempts to secure a Russian presence.
The growth potential in Russia is clear: Per capital spending on foodservice is still very low, consumers have demonstrated a preference for fast food, and the country's considerable wealth is concentrated around two large cities that offer widespread expansion opportunities. Given these factors, operators that invest in Russia are poised to reap considerable benefits relative to those in other developing markets, many of which feature tougher competition from independent operators and less enthusiasm for fast food. What's less clear, however, is exactly how much risk may be involved with this volatile market. Given the country's turbulent political history and economic dependence on natural resources, the health of the Russian market depends, in large part, on unpredictable external forces. Furthermore, the Russian consumer population is incredibly diverse, and rural and urban demographics are often subject to wildly different economic conditions. As such, Russia offers real opportunities for foodservice players, but any growth in this market won't come without exposure to real risk, as well.
