A Rising Middle Class Will Fuel Growth in Russia
Stable gross domestic product growth, declining inflation and a record-low unemployment rate are pointing to positive consumer purchasing power in Russia. The Russian middle class, which stands at 104 million strong, is fueling that power. This segment of the population is projected to rise 16 percent between now and 2020, at which point it will represent 86 percent of the population and amount to $1.3 trillion in spending—up 40 percent from 2010, based on a global study of the emerging middle class and related databases by Dr. Homi Kharas of The Brookings Institution.
“There is an equal share of money at the top and in the middle,” said Dr. Venkatesh Bala, chief economist, The Cambridge Group, a part of Nielsen. “Russia’s middle class today has the same share of income as the upper class and has remained an untapped opportunity by many international corporations.”
While the top 20 percent of income earners in Russia represent 47 percent of the country’s total income, the middle 60 percent accounts for 48 percent, according to federal statistics from The Bank of Russia (2012). The bottom 20 percent comprise the remaining five percent of income.
Lucrative, Less Saturated and Room to Grow
While many companies have focused on Russia’s Central and North West districts, where Moscow and St. Petersburg are located and the wealth is more concentrated, the South, Volga and Ural districts have an almost equal share of income and are growing at a faster rate. But marketers will need to take initiative in order grow Russian consumption. Retail trade turnover in Russia has slowed from double-digit year-over-year growth in 2008 (14%) to single-digit growth in 2012 (6%). Furthermore, household consumption remains low (49% of GDP) compared with other countries, and has fallen from 54 percent since 1996-1997, based on data from the Bank of Russia and Cambridge Group analysis.
Consumption growth will come from two main sources: the growing middle-income consumer base and an expanded regional retail distribution network. Dr. Bala says that a deep understanding of middle class consumer segments will be necessary to deliver a strong portfolio of products that provide the benefits consumers want at the right price. Developing meaningful innovation and offering trade-up strategies will appeal to consumers’ existing and aspirational needs and desires.
On the distribution front, Russia’s retail landscape is fragmented, and the sheer size of the country makes logistical efficiency a challenge. Overcoming operational challenges, logistics and resource allocation in order to expand distribution outside the main cities will be vital to reaching the millions of consumers that represent untapped demand potential.