Author: Zhanna Martynova, General Director, expert of “growth points” in foreign trade Member of Marketers Guild
Today maybe only the lazy ones do not discuss musutual sanctions between the West and Russia. Experts think that sanctions can stimulate development of Russian economy or switch Russian foreign trade to Asia and Latin America. In this context “import displacement” became one of most frequent phrases in press and on TV.
This review addresses businessmen interested to change foreign trade links with Russia. Let us talk about the first step in this direction — marketers already guessed it would be gathering of market information. However, before we “split” the whole algorithm into small steps it should be mentioned that businessmen can follow two ways.
The first is good for investors interested to benefit from this economic situation, it is a global approach. And the point here is to find a product enjoying robust growth of demand for future foreign trade with Russia.
The second way is good for businessmen who already have a range of products for trade and the task here is to increase export to Russia offering products and categories to substitute the banned ones.
In any of these variants a businessman should get deep knowledge of export to Russia before he makes his first move. Potato has not been planted yet but a good businessman should already know who would buy it and at what price. Still, vegetables and fruit are not mushrooms and they would not grow in a day. So, another hard task is to get the required information fast before all the best Russian importers are picked by someone else.
Where all this information can be found? The answer is simple — search in customs statistics.If the first way is chosen, there are no rocks under water, you should just do the math. Look what products demonstrated the best import dynamics and pick the ones with the most robust growth. Of course, climate and geography should be considered, too (bananas would hardly give a good crop in Kazakhstan, for instance). Another important thing to be considered is the number of market operators. If there are a few importers on the market or a lion’s share of import is controlled by one importer then in the future it wouldn’t be easy to make importers switch to a new supplier in an instance. A large wholesaler with a welldeveloped distribution chain in Russia could be a very good solution.
“VVS’s” practice (the company’s analysts monitor Russian import for four years) shows that practically any food category has several dozens of super niches.
For instance, in Q1 2014 the list of categories best for import included whole cream with no sugar. Import of this category reached $ 8.2 with 267% growth over same period of 2013. It should be mentioned that dynamics of import of milk and cream to Russia (TN VED code 0401503900) demonstrated robust growth for almost 18 months before the ban was laid. The leader among supplies of this category to Russia was Latvia with 43% of import value. Total number of foreign trade operators in this category in Q1 2014 constituted 12. We can only guess how trade flow would redistribute between them and who would be “the last man standing” when import ban is lifted. Maybe it would be Russian companies or Byelorussian partners? Or maybe there will be absolutely new players on the market of imported dairy products?
Another example is completely peeled medium grain rice (TN VED code 1006309400); in Q1 2014 this category demonstrated 169% growth. In value terms import of this category constituted $ 3.6 million during the named period. With 28 players in the category USA controlled 45% of it.
When the product is picked you need to investigate the market of interest in every detail: peculiarities of product range, leading suppliers, prices, etc. This more refers to the second way of import displacement.
So, first of all we should set the period to be investigated. Analysis of import in any category should cover at least two years. This allows comparison of two years’ performance, reveals seasonal fluctuations. It should be mentioned that most precise conclusions and correct strategic solutions can be made after investigation of import during 3–5 years — this period covers prerecession, recession and afterrecession years.
The next step is to look into the market even deeper, because some information can be missed. It seems very simple to search for the product in interest by TN VED code. But actually in customs statistics database you can find product of interest under several different TN VED codes and “VVS’s” practice shows that import volume of such TN VED categories can be larger than import of products under traditional TN VED code.
Step three is investigation of market structure. No secret every business tries to split the market into as many segments as possible to find the best niche. Customs statistics allows this.
For instance, analysis of soft drinks import in 2013 showed that the highest demand was enjoyed by juice and nectars; in 2013 Russia received almost 7000 supplies of the named category worth more than $ 46 million. Import of lemonades was almost twice smaller — about 3000 supplies worth $ 16.7 million. And import value of the rest of soft drinks categories — kvass, flavored water, energy drinks, juice containing drinks and cold tea — constituted a little more than $ 7.7 million (2106 supplies).
Changes of market structure in time should also be investigated before key product is picked.
There is another way to trade with Russia. We can assume that in current situation Russian manufacturers would buy more machinery/equipment or accompanying products needed to organize domestic production of the banned categories. However, organization of local production has many challenges.
Example is the answer of the Ministerial Advisor of the Department for Support of Trade and Investments of the Embassy of Poland to Moscow Marek Ochepka about the secret of popularity of Polish apples. According to him, the secret of apple trade is not cultivation but storage; storage facility should respond to the strictest demands to keep the apples as fresh as if they have been just picked from the tree.
So, here is the idea: if import of food category has accompanying goods, machinery or equipment then customs statistics will show everything about these categories, who to sell it to or who to buy it from.
For instance, in the category of meat and poultry processing equipment (TN VED category 8438500000) among foreign suppliers the strongest were European companies in Q1 2014. The leader was French “Armor Inox” SAS with 17% of import value in the category. The leader was followed by “Renner Schlachthaustechnik” GmbH (Germany) with 10% and “Private Limited Liability Company Mps Red Meat” SLA (Netherlands) with 8%.
It is interesting that categories demonstrating the best dynamics of import increasingly coincide with categories related to foreign investments to development of local production. Quite a sudden conclusion — maybe development of production facilities in Russia is a better idea than direct import? There are many examples of success.
For instance, in Russia manufacturer of “Lay’s” and “Cheetos” chips — “Frito Lay Manufacturing” LLC — is the leader of vibrant market of export of extruded and extracted products (TN VED code 1905905500) in Q1 2014; the company belongs to German “SVE Russia Holdings GmbH”.
How to get prepared to establishment of company with foreign capital? Of course, one should get started with market analysis with a strong accent on import analysis. Difficulties make us stronger. We hope that challenges faced right now by Russian importers and economy of the country due to mutual sanctions between Russia and Western countries / USA will end up with profitable business solutions.