When considering the business landscape in Russia, it is often only the urban population that is considered, missing almost 38 million people that make up about 27 percent of the rural country population. This equates to the whole population of Poland and almost seven times the population of Denmark. As the biggest country in the world by square kilometers/miles, Russia’s emerging rural landscape is brimming with opportunities for expansion.
The growth rates of disposable resources in rural Russia are impressive. Even considering inflation rates of 8.8 percent (both in 2009 and 2010), real disposable resources of rural households grew by about 10 percent since 2008. Rural Russia is transforming. And this has awakened the interest of marketers looking for expansion opportunities.
Signs of Growth
If the maturity of telecommunication infrastructure is one of the key growth indicators for market development today, Russia’s rising Internet and mobile phone penetration rates show positive signs. Since 2009, the number of Internet users in Russia increased 30 percent, according to the International Telecommunications Union.
And while the highest Internet penetration of users is still found in urban Russia, development of Internet usage in rural Russia is growing rapidly. Growth rates in rural households are almost twice as high as in urban homes, which can be attributed to the recent deep transformations in rural Russia.
A Changing Retail Landscape
Retail infrastructure in rural and urban Russia differs considerably—an important factor when considering marketing and distribution strategies. There are almost twice as many retail outlets in urban Russia than there are in rural regions. And while the majority of retail stores in rural Russia are introduced as minimarkets and food stores of traditional trade, an interesting dynamic is emerging as growth rates of modern trade formats in rural Russia are high and they sometimes even surpass modern trade development in urban Russia.
In 2011, two of the biggest retail chains announced plans for further expansion in small communities. Expanding the modern trade universe in rural Russia will offer tremendous potential for FMCG-businesses to establish positions in the rural market.
And while the establishment of a strong market position in the rural landscape can be challenging due to logistical distribution difficulties, rural Russia is not an isolated part of the market. Market concentration levels in rural Russia, as well as the main market players for the majority of categories analyzed by Nielsen, are generally similar to the urban market, indicating that rural Russia is aligned with—not separate from—urban Russia.
The Battle for Shelf Space
Most retail outlets in rural areas are traditional stores and the sales area is typically limited, which makes the distribution of goods a battle for shelf space. To succeed, a deeper understanding of rural consumer demand is necessary.
Given the restricted shelf space in rural Russia, an increase in the number of brands and SKUs in retail outlets is limited. Increasing share in rural areas is mainly possible through product range streamlining and replacing brands and SKUs with new ones that are in higher demand. It is becoming increasingly important to better understand how rural and urban consumer choice differs. A comparison of the top 10 SKUs in urban and rural Russia suggests at first glance that consumer choice does not differ much.
On average seven out of the top 10 SKUs are the same in rural and urban Russia. However, the penetration of brand leaders in the urban market is significantly lower in rural Russia. This disparity between the demand of rural consumers and the supply of rural Russia generates a potential for those manufacturers who are able to enter the market with the product range that can satisfy the unmet demand of rural consumers.
As the average disposable resources of rural households per household member are only about 60 percent of those in urban households, rural consumers are price sensitive. However, a shopper in a rural store actually pays from one to 11 percent more than they would in an urban store. More challenges for direct distribution, a longer supply chain and higher transportation costs drive prices up in rural stores.
In the days of high competition, being proactive is one of the main secrets to success. The first to seize new opportunities will likely also be the first to profit the most. Rural Russia is no doubt a challenging market to satisfy, but it is also big and changing. And change always offers new opportunities to those who can see the latent and emerging demand and are proactive enough to satisfy it first.