Since bread products are present in the diet of practically every Russian, this segment of the market is fairly stable in terms of production and consumption. At the same time, however, there are factors that drive both change of the market share and redistribution of the demand inside a product group. Having specified these factors, and having reviewed in further detail the trends of the bakery market in individual regions, we can understand the prospects of the market segment of bread products in this country in the near term.
Global Drivers of Russia’s Bakery Market
A major trend in all the food industries is consumer interest for a healthier life style, which is growing year by year, and, consequently, interest for healthy eating. Therefore, the level of bread consumption, both on a global scale and in Russia in particular, is decreasing. In the last 10 years the bread products output in this country has decreased by 1.4 million tonnes: if 8 million tonnes were produced in 2005, the production rate in 2015 has only reached 6.6 million tonnes.
Economic crises also have an impact on the dynamics of the bread market development. For example, in 2008 there was growth of consumer demand for bread products due to a recession in household income level, and consequently their production rate grew. After some stabilization of the economic situation the demand for the goods started to decline again.
Today, there has been yet another decrease in the household income level by 8-9%. That makes it possible for us to forecast that there will be a growth of bread products consumption in 2016. However, chances are this is going to be temporary, and after the economic situation in this country has stabilized again there will be less demand for baked goods.
Yet another driver of Russia’s bakery market has been the fact that the country has been joined by Crimea. About 50 th. tonnes of goods are produced in the Crimea region per year. Preliminary figures indicate that in 2015 the rate of bread production in Russia is expected to increase by 90 th. tonnes as compared to last year. It is obvious that this increase will happen owing not only to the fact that now Russia has one more federal district, but also to an overall increase by 40 th. tonnes in the total volume of the baked goods produced in the other regions of the country.
Supply and Demand inside a Product Group
All the baked goods produced in Russia can be divided into two major segments: traditional and non-traditional. The traditional ones include inexpensive products that have been well-known to Russian consumers ever since the Soviet period, the non-traditional ones include original formulas, national bread varieties, health functional food, and therapeutic food products. The total share of short-term storage traditional products in the Russian market is 90% of the overall amount of bread products. However, the rate of non-traditional baked goods production is fast growing. In particular in 2015 the traditional bread production rate has increased by 1.3%, whereas that of the non-traditional one has increased by 7%.
Notably, this growth trend in the non-traditional baked goods production is essentially common to almost all the regions of Russia. In particular, in the Central Federal District the rate of production of the non-traditional baked goods has grown by 63% in the last five years, fast growth in the output of these products may also be noted in the Siberian Federal District and in the Far East.
There is also an interesting situation in the northwest region, where the volume of production of all types of bread is declining. This is probably due to the fact that the cost of bread in the northern regions is higher due to the price of flour also being higher than in the other grain-growing territories of the Russian Federation, where the cost of the raw materials does not include logistics costs.
As regards the per capita consumption, it is falling in respect of traditional bread varieties throughout this country. Whereas in 2010 it was about 50 kg per capita across Russia, today it is 46 kg. At the same time, the situation is different for each single district.
The consumption of traditional bread varieties per capita is highest in the Southern (50 kg) and the North-Western (49 kg) Federal Districts. The consumption per capita is minimal in the Urals Federal District (38 kg). The reason is that in the Urals there is a high level of consumption of pasta and grain, which have displaced bread products in the people’s diet.
As to popularity of the non-traditional bread, it is on the contrary fast growing: whereas in 2010 the consumption of the non-traditional products across Russia was 700 grams per capita per year, in 2015 this index is already as high as 1 kg.
Traditional bread products do not have a long storage life, and for this reason the producers are with increasing frequency improving their formulas. For the period from 2010 to 2015, the rate of production of long shelf-life bread has increased by 6.5%, whereas production of parbaked bread has increased by 46%, owing to expansion of consumption of freshly baked bread, which is produced by chain food stores and is generally made from frozen intermediate products. It's safe to say that production of these bread products in Russia will continue to grow.
Dynamics of Prices
Experts of the Institute of Agricultural Marketing have been monitoring the changes of the prices of bread through the example of white bread products. It turned out that the prices of this category of products increase most in the regions that do not cultivate the grain for producing flour suitable for making these products. Summarizing the results of 2015, the prices of white bread grew most in the Northwestern Federal District and in the Volga region, where the growth rate has been roughly 10%. The average increase of the price of the product across Russia is 5%. The growth of the prices of white bread is lowest in the Southern Federal District and in the North Caucasus, as these regions remain the key producers of wheat.
The above-noted facts suggest that there may be some structural changes in the market. Thus, considering the increase in the production of frozen bread and long-life products and the fact that the cost of bread production in the south is considerably lower than in the North regions, it can be assumed that bread production will grow in the south of Russia, and will decline in the regions where no or little grain is grown.
Additionally, the grain industry has a striking feature, that is, a very limited number of vertically integrated holding companies. At the same time the number of such enterprises is fast growing in the meat, vegetable, and milk industries. However, it can be assumed that in the near future, that is, by 2020, producers of baked goods will also start creating agricultural holdings in the grain-growing regions. This step will make it possible for enterprises to significantly reduce logistical costs and to become independent from fluctuation in the raw material cost.
It is also worth noting that the finished product price is dependent on the cost of grain. Whereas a few years ago we observed that bread price increase was proportional to the increase in the price of grain and flour, today we see that the price of bread has increased by 5% even though 3rd class wheat and flour are down 4%. This points to the fact that the bread market does rely on imports. Many ingredients that are used to make baked goods are produced outside of Russia; consequently their price in rubles has gone sky-high due to the depreciation of the ruble that occurred at the end of 2014. However the consumers have higher demand for products reinforced with functional supplements, vitamins, and cereals, which cannot be produced without the imported raw materials. We can assume that, having observed such dynamics, Russian entrepreneurship will start to consider developing in-house production of ingredients that will be adequate analogs of those that are currently imported.
Generally speaking of the specifics of why the consumers prefer any given variety of bread, we can make a conclusion, based upon opinion polls, that advertising has no effect on product purchasing decision-making, as the buyer makes a choice directly in the store, and at the same time it is important for our fellow countrymen that the product is fresh, and the packaging is familiar. There is every indication that stable output of quality products, as well as reputation and brand awareness largely ensure success in the sale of bake goods.