Available instead of desired. Consumer demand in the face of austerity

The reality that has changed in the last two months threatens another round of deterioration in the life of the population. Consumer incomes will drop markedly this year, there will be more unemployed people, and food demand will adjust. Many agribusiness industries will also have to change their production strategies in order to adjust to the capabilities of buyers. However, some sectors can benefit from the current situation.

According to the VEB.RF Institute for Research and Expertise, the unemployment rate in RUSSIA will increase from 4.8% in 2021 and 4.4% in January 2022 to 6-6.2% by the end of the current year, depending on the scenario. At the same time, the reduction in real disposable incomes of the population will be 10-12%. Such a failure has not been observed since at least 2014 (before that, the indicators were calculated using a different methodology and it would be wrong to compare them with the figure for this year). Even in the year the pandemic began - 2020 - the reduction was much less significant - 1.4%. And in 2021, the real disposable income of Russians, according to Rosstat, increased by as much as 3.1% (up to 39.85 thousand rubles), which was the maximum increase since 2013. The dynamics of income was affected by the increase in salaries, the decrease in the unemployment rate, the growth of social payments and the volume of funds, 

Inflation in Russia in 2022 and 2023 will exceed previous forecasts, but at the same time, the Central Bank will not allow the inflationary spiral to unwind, Elvira Nabiullina, Chairman of the Bank of Russia, said in early spring. “The adjustment of relative prices cannot happen all at once. This means that inflation will remain elevated for some time,” she said. The latest Central Bank forecast available at the time of writing this article was made in the first half of February, before the start of the special operation in Ukraine. Then inflation in 2022 was expected at the level of 5-6%, in 2023 - 4%. Analysts polled in March assumed that this figure could reach 20%, while GDP could fall by 8%.

High inflation is the main factor in the expected decline in real disposable incomes of the population, commented Olga Belenkaya, HEAD of the Macroeconomic Analysis Department at FG Finam. With a consensus forecast of inflation of about 20% this year, in the case of zero growth in nominal incomes of the population, it will be possible to talk about a drop in real incomes by 20%, she believes. And this is with rising unemployment. “At the same time, the authorities announced their intention to index all social payments, pensions, salaries of public sector employees, announced assistance to needy families with children, support for maintaining employment,” the expert recalls. “This should slow down the rate of decline in real disposable income, but indexation parameters are not yet known.” Also, income can be supported by the growth of bank interest rates on deposits, and a similar increase in the cost of loans, on the contrary, will reduce disposable income. Taking into account all factors, at the end of the year, the decline in the indicator can be from 7 to 12%. However, it is possible that the decline will be less, adds Belenkaya.

According to the head of the Center for Economic Forecasting of Gazprombank, Daria Snitko, in recent years, household income has been one of the most difficult indicators to predict, and now it is especially difficult to give estimates. For the most part, it consists of wages, income from entrepreneurship, and social transfers. In nominal terms, wages will grow in 2022 — many agricultural companies received historically record revenue last year and have already indexed the salaries of workers. Indexation is also expected for social benefits and pensions. “Nevertheless, these incomes will be indexed below the level of inflation, that is, in real terms, they will decrease by about 7-9%,” the expert estimates.

How will demand be redistributed?

Food sales are quite stable even during the crisis, so there are no reasons for a sharp reduction in purchases, Daria Snitko believes. The total turnover of food products in retail in 2022 will be somewhat less than in 2021 - by 1-1.5%, but such a decrease will not exceed what it was, for example, in 2020. 

The predicted drop in household income will cause a decline in consumption, primarily of expensive products, believes the head of the All-Russian Institute of Agrarian Problems and Informatics named after A. A. Nikonov, academician of the Russian Academy of Sciences Alexander Petrikov. Demand will move to segments with low income elasticity of demand (potatoes, bread, FLOUR, rice, pasta, poultry, cheap fish, etc.). There will be an increase in the proportion of food costs in the consumer budgets of families, which is already high in Russia. According to Rosstat, in 2020, in the structure of household consumer spending, food and non-alcoholic beverages accounted for 33.2% with significant differentiation depending on the level of family well-being: if in the 10% of the richest households they are 16.8%, then in 10% of the poorest - 44.3%, says the expert.

The greatest pressure will be experienced by expensive products, agrees Alexander Raksha, partner of the NEO Center company. Import-dependent food groups will also be under pressure due to lower supply volumes and higher prices. The consumption of basic items, primarily grain products, will change to a lesser extent, he predicts.

The decline in incomes of the population as a whole will not negatively affect the markets for cereals and flour, confirms Irina Glazunova, deputy DIRECTOR general of the Institute for Agricultural Market Studies (IKAR). “These are products of prime necessity and priority demand, but we are talking primarily about ordinary, ordinary cereals and flour,” she emphasizes. - In the premium segments, a drop in demand may occur. In particular, this applies to expensive varieties of imported rice (basmati, jasmine, mixed with wild rice), various cereal-based breakfast cereals, special types of flour, often imported from abroad (for pizza, home-made noodles, pasta, etc.) ".

But there is no direct connection between the demand for fresh vegetables, especially the borscht set, and the solvency of Russians, Tamara Reshetnikova, general director of the Technology of Growth company, assures. And although vegetables have grown significantly in price (the same cabbage has more than doubled in price in different regions recently), consumers simply cannot easily replace them. “You can’t buy barley instead of cabbage or potatoes - this is the basis of nutrition,” she says. 

Among fresh fruits and berries, there is already a decline in demand. People choose what has risen in value less. For example, pears, which since February have been on the shelves only imported ones, “flyed up” in price following the exchange rate, and fruits that previously cost 140 rubles per kg were already offered at 250 rubles per kg in early April. “It is logical that consumers opt for more affordable apples - this is not a full-fledged replacement, but generally acceptable,” the expert believes.

Berries, already presented in very small volumes in the off-season, are bought by people with above-average incomes, and so far there have not been such serious changes in their lives that would force them to abandon beautifully packaged containers with blueberries, strawberries and raspberries, Reshetnikova continues. Even at a cost of 2 thousand, or even 3-4 thousand rubles / kg, they find a buyer. The rest of the population buys berries from May to July, mainly from the southern regions of the country and at completely different, much lower prices - this part of consumers will make a purchase decision this summer based on the cost. 

Of course, as part of the decline in income, the demand for pig products will adjust, says Yury Kovalev, Director General of the National Union of Pig Breeders. However, the expert does not expect a serious reduction in consumption. “Last year, the highest consumption of MEAT in the last 30 years was observed - 77 kg / person. per year, and of these, 28 kg accounted for pork, he recalls. “And now it can still be called quite affordable for buyers at a price.” Plus, the price gap between pork and broiler meat is shrinking, which could mean a shift in demand from the latter to the former.

According to the expert, pork prices will not rise much - they, again, will be limited by not growing purchasing power. At the same time, the cost price growth will continue, that is, the difference between this indicator and the selling price will decrease. Nevertheless, pork production is growing - only in the fourth quarter of 2021, the industry added 5%, in the first quarter of this year the trend continues. This guarantees relative price stability. “Although you will probably have to forget about serious discounts and promotions,” says Kovalev. Among other things, already in April, many consumers began to switch from conveniently packaged products, semi-finished products to raw meat in a simpler cut. The number of those wishing to purchase sausage products is noticeably decreasing.

“About a third of the expenses of Russian families go to buy food. The share of families that have enough money to buy exactly the food they like does not exceed half, - draws attention to the director of the Dairy Union of Russia, Lyudmila Manitskaya. — Under these conditions, the consumption of dairy products is also reduced both in quality and quantity. The emphasis is shifting towards budget segments, economy options, including products containing MILK fat substitutes.” For example, in the structure of cheese production, almost half of the total volume is semi-hard types, and another fifth is processed cheese, the most budgetary and therefore affordable for many consumers.

Business ready to adapt

The reduction in real disposable income of the population affects not only demand, but also the range of products, Rustam Khafizov, head of the innovative analytical center of the Cherkizovo group, focuses on. “In March-April, there was a strengthening of the trends that developed during the covid-19 period , when consumers began to be more economical about spending,” he said then. “In this regard, manufacturers have to adjust their assortment, replacing expensive food items with more affordable ones.” At the same time, it is clear that food spending is always the last to be cut, so there will be changes in consumer behavior only in terms of the choice of purchased products.

There was no drop in demand for the company's products in the first month of spring: the dynamics of meat sales in March of this year remained positive compared to last month, Khafizov reported. “We are not afraid of a decrease in demand, since the Cherkizovo assortment covers all popular categories of chilled meat products, both in the high price segment and in the more democratic one,” he says. - In the current conditions, it is especially important to provide consumers with high-quality products. Therefore, in order to maintain stable supplies of the main assortment, it is possible to adjust its individual positions, for which difficulties with the purchase are predicted due to disruptions in the markets for packaging, spices and marinades.”

The last two years have already changed consumer activity forever, comments Nikolay Orlov, commercial director of Essen Production AG JSC. The changes took place against the backdrop of the pandemic crisis and the resulting economic consequences. “Now we face a challenge of a completely different scale, when the logistics chains that have been developed over the years have been disrupted,” he points out. “The turbulence of the dual-currency basket causes sharp jumps in the cost of imported ingredients, which is already fully felt by many market players.” As a result, there is a shortage of some product categories on the shelves. The irrational behavior of consumers corrects the family budget, calculated on a monthly food basket, which also includes Essen Production AG products (sauces, confectionery and jams). “Based on these factors, we can state both the development of a model of pent-up demand in terms of our assortment, and the actual reduction in demand for goods in the middle and premium price segment, Orlov predicts. “First and foremost, consumers will be interested in goods at an affordable price.” 

All sectors of the agro-industrial complex have already felt or will feel in the near future a change in consumer activity, notes Maria Bocharova, First Vice President of the Eco-Culture Agricultural Holding. In the current situation, consumer demand is concentrated on mass products at affordable prices, she echoes Orlov. People continue to buy primarily the basic foods that are part of their daily family diet. But for expensive goods, premium lines, demand is declining: everyone is switching to more rational spending of money, to saving mode.

In the company's product portfolio, the main share is accounted for by social products - a round and plum-shaped red tomato. For some, this product is not the most essential, but it is used in many everyday dishes. “Our tomatoes are really a mass product, many families buy them, as studies show, on average twice a week, and we do not feel a decrease in demand for this category,” says Bocharova. “As for cherry tomatoes, which are more expensive products, we are seeing a certain reduction here, but their share in the Eco-Culture product portfolio is relatively small.” In addition, this category is traditionally focused on the most solvent markets of capitals and large cities, so the situation with the demand for exclusive varieties can generally be described as more or less stable, assures the top manager. The agricultural holding always analyzes the situation on the market, the priorities of customer requests, therefore, in the new production cycle, most likely, the range of hybrids grown will be adjusted, she adds. 

Approximately 16.1 million people in Russia, or 11% of the total population, lived below the poverty line in 2021. In 2018, Russian President Vladimir Putin ordered to halve the level of poverty in the country by 2024 compared to 2017. Subsequently, the deadline for achieving this goal was shifted by six years to 2030. According to Rosstat, the number of Russians whose incomes were below the subsistence level in 2017 was 18.9 million, or 12.9% of the population.

Impact on the industry

Changes in consumer incomes and reorientation of demand cannot but affect the agro-industrial complex as a whole. But the food sector is large and diversified, in some sub-sectors of the food industry in 2022 even growth should be expected, Daria Snitko is sure. For example, the volume of sales of goods with a long shelf life in the first and second quarters increased. It is possible that positive sales dynamics will be in segments that replace imports, the expert does not exclude. However, the bulk of the decline is expected in sales of foreign products that are particularly sensitive to exchange rates and prices in general, such as fruits, niche products and new categories, such as plant-based dairy substitutes. 

According to Alexander Chulok, director of the Center for Scientific and Technological Forecasting at the Institute for Strategic Studies and Economics of Knowledge at the Higher School of Economics (ISSEK HSE), the polarization of consumer behavior patterns will most likely allow for the active development of super discounters and other forms of providing products to the population at reduced prices. “These business models have shown tremendous growth even in the era of the pandemic,” he emphasizes. “It is possible that there will be a return to the widespread practice of self-sufficiency in food, but on a new technological basis: it is possible that various formats of farming will appear more and more, including on the basis of ecosystems that have been actively developed over the past two or three years.” The replacement of more expensive and imported products in the consumer baskets of various groups of the population with cheaper and domestic ones can also act as a driver for the growth of the Russian agro-industrial complex. But whether he will be ready for this in the current realities remains a question, the expert says.

Given the difficulties that have arisen with the supply of imported technologies necessary for the development of efficient production, in the near future we can expect at least a temporary halt in the growth of yields, as well as productivity in animal husbandry, a top manager of one of the agricultural holdings warns. At the same time, the Russian agro-industrial complex is sufficiently developed to meet all the basic needs of the population. At the beginning of 2022, the country was one of the world's largest exporters of some types of agricultural products, he recalls. Therefore, it is definitely not worth expecting a shortage of bread and meat, as well as a number of vegetables and fruits. “In the current situation, agricultural producers are well aware that in the short term, first of all, it is not about the growth of profits,

It is clear that the cost of food production is growing, but in the context of a decrease in the income of the population, it will not be possible to proportionally increase prices, Khafizov notes. In such a situation, the Cherkizovo Group always tries to optimize costs and set up production in the most efficient way. “Keeping profitability at the same level is not easy, but cost optimization will continue to improve, as will our other business processes,” he assures. — We have already begun to search for analogues of imported equipment in Russia and in countries with which we maintain trade relations. At the same time, it is important to note that the company systematically implements the principle “from field to counter”: our vertically integrated business model allows us to reduce dependence on external supply chains.”  

The "glass of cost" includes not only direct production costs, but also indirect costs - for ATL and BTL events (types of marketing communications), says Orlov. And since in any crisis the factors of affordable price and confidence in the quality of products come first, it is impossible to raise its cost in proportion to the growth of raw ingredients. “That is why Essen Production AG made a fundamental decision: to sacrifice marketing activities, to reduce the amount of direct discounts, but to maintain the consistently high quality of products,” states the head.

Our main expenses, due to the specifics of the greenhouse vegetable growing industry, are energy resources and wages, we cannot save on them, says Maria Bocharova. “As for other cost items in our budget, then, of course, we carefully control the cost of production and use the opportunities available to us,” she says. — For example, due to the rise in the cost of packaging materials, we were looking for a way to optimize packaging costs. In particular, we worked out a more economical version of a cardboard box for transporting tomatoes.” In agreement with the trade, Eco-Culture now uses cardboard boxes with fewer layers and no printing, which brings tangible savings. Buyers are unlikely to pay attention to the change in the appearance of the shipping container, and the company gets the opportunity to hold back the cost growth for a while. Although, the top manager admits, the reserves here are practically exhausted. “We, like the entire agro-industrial complex, are counting on the continuation of concessional lending, including replenishment of working capital, as well as on comprehensive support measures from the state,” she says. 

Bread consumption is supported by migrants

Russian flour production has been declining for a long time. So, if in the early 2000s it was about 12 million tons, then in 10 years it was already less than 10 million tons. In many ways, this situation was due to a decrease in bread consumption, explains Irina Glazunova from IKAR. In the previous CORONAVIRUS pandemics for several years, one could speak of a relative stabilization of the resident population and flour production. However, since its inception, the population has declined. The number of migrants has also decreased (the vast majority of them come from the countries of the former USSR, especially from Uzbekistan and Tajikistan), although it still remains quite high. “It is migrants who are the group of the population in which there is a high per capita level of bread consumption,” the expert says. “This factor is largely not recorded by official statistics, since a significant proportion of bread (including various national varieties) is produced in small bakeries that do not make reports.” The volumes of bread and bakery products baked in various trade enterprises are also not fully taken into account. As for other flour-based products, their use for the production of pasta, flour confectionery by the catering sector, as well as for the so-called industrial production is increasing every year.

Как поддержать потребителя и производителя

To support the income of the population, it is necessary to implement a number of measures already in 2022, experts from the VEB Institute believe. For this, in particular, it is necessary to carry out additional indexation of pensions, benefits, wages of public sector employees, taking into account current data on price changes. In addition, in the face of the risk of rising unemployment and an increase in the duration of the search for a new job, it is necessary to increase the unemployment benefit to the subsistence level, paid within six months to all unemployed citizens. Also, in order to achieve the goals of preserving the population and supporting the construction industry, it is advisable from 2023 to raise the amount of maternity capital to a value equal to the country's average market value of 6 m² of living space, which, according to standards, should be per person, and equate the amount of maternity capital paid for the first and second child. At the same time, indexation more often than once a year, but on a smaller scale (for example, once a quarter at a rate comparable to the inflation rate for the previous quarter), can be more effective in maintaining the level of income of citizens in the context of accelerating inflation.

A measure to support the poor through "food cards" has been widely and for a long time being discussed, recalls Daria Snitko. These are a kind of targeted payments to needy households for the purchase of certain food products, in fact, the opportunity to buy certain types of goods at a discount of up to 100%. Moreover, modern technologies make it possible to direct these costs even to the products of certain manufacturers, to focus sales of so-called social goods on certain categories of consumers. The introduction of such transfers to the population will solve the problem of the availability of basic types of food and will not become an inflationary measure, the expert believes.

The proposed measures are aimed at protecting and supporting the poorest and most vulnerable groups of the population, comments Alexander Raksha. At the same time, a significant contribution to the decline in real incomes will be made by the decline in incomes of the middle class with earnings significantly higher than the subsistence level, received through high wages, income from entrepreneurial activities, investments and rental of real estate. For this category, there are no adequate measures to preserve income or protection for the period of retraining and searching for a new job, the expert draws attention. In his opinion, the most affected groups of the population from the imposed sanctions and related restrictions are not working specialties and state employees, but urban residents, involved mainly in the service sector, construction and trade.

Alexander Petrikov, on the contrary, is sure that measures to combat rural poverty require special attention in the current situation. “Russian poverty has a rural face: in 2019, according to Rosstat, the share of the poor in rural areas was 23.6%, while in the city it was 6.9%, and in 2020 the total income per member households in rural areas was 32% less than in urban areas, ”the expert cites the data. At the same time, the highest level of poverty among the working rural population is observed among those employed precisely in agriculture, because wages in the agricultural sector are only 60% of the average for the economy.

The diversity of rural poverty, a significant proportion of the poor among representatives of various demographic and socio-economic groups dictates the need for a comprehensive approach to overcome it, and most importantly, to prevent it, emphasizes Petrikov. This implies not only social payments to the poor, but also the elimination of the causes of poverty. We are talking about the diversification of the rural economy, the development of small and medium-sized businesses in both agriculture and non-agricultural sectors, rural cooperation, increasing the marketability of household plots, and the growth of social responsibility of owners and managers of agricultural enterprises. “By the way, the last aspect is often forgotten: according to the consolidated annual report of Russian agricultural enterprises compiled by the Russian Ministry of Agriculture, the share of deductions for social needs in the cost of production in agricultural enterprises is now lower than in the early 2000s - 3.6% versus 4.6%, respectively. In addition, the ratio between the wages of a permanent worker and the head of an agricultural organization is also decreasing: if in 1993 this figure was 61%, then in 2020 it is 51%.

An effective lever against the deterioration of the quality of nutrition would be more vigorous promotion of competition in the agri-food market, and not only through FAS inspections of large suppliers and retail chains, continues Petrikov. Effective here are such measures as the organization of non-stationary trade, food fairs, cooperative marketing of products of small and medium-sized farms, peasant farms and private household plots. “It is necessary to finally create a real alternative to large retail chains and large agricultural holdings and agricultural companies through the development of a cooperative trade network and a wide fair trade,” the expert suggests. - This will be helped by measures to encourage owners of personal subsidiary plots, gardeners and summer residents to expand their farms by selling them seeds, young livestock and poultry, improving veterinary services for livestock,

A massive return of Russians to horticulture is hardly imaginable, comments Tamara Reshetnikova. “You can’t compare the time of modern history and the period of the USSR - then the distribution of residents in rural and urban areas was more even,” she believes. For comparison: over the past 30 years, the population of the Far East has decreased by almost 30%, mainly due to labor migration. Similar processes are also noticeable in Siberia, in the Far North. And residents of large cities, even having summer cottages, will not rush to grow potatoes on them, she is sure. “Therefore, it is not advisable to support personal production, it is much more important to pay attention to farmers, small farms, which, for example, in Europe and the usa are the basis of the agro-industrial complex,” the expert says.

There are many large companies in Russia, to which all financial support is directed, they have divided the market and dictate their prices and rules. And this is logical for high-tech industries, such as greenhouses, because serious investments are really required there. However, when it comes to vegetables in the open field, they are also produced in large quantities by small farmers who have difficulty accessing short-term loans and fewer opportunities for marketing, says Reshetnikova. The creation of purchasing and marketing cooperatives could significantly improve the situation, this link would deal with all organizational and logistics issues, the expert suggests. Plus, only by uniting, farmers can build expensive warehouses and storage facilities, without which year-round sales are simply impossible. “As regards the issuance of loans, then more control from the state is needed here, she believes. - Obviously, banks are more interested in large clients who are ready to immediately take hundreds of millions of rubles and have an excellent technical base and a good land bank, which guarantees a good harvest and a return on funds. It is necessary to clearly allocate funds so that not everything goes to large companies.” ​

Bread and salt: Russian food supplies to the EU grew by a quarter in January

According to Rustam Khafizov, under the current conditions, one of the most effective measures on the part of the state could be the introduction of a system of targeted food assistance that would support low-income citizens. Also, from the point of view of business processes, it is important to establish interaction with new suppliers from countries open to cooperation. At the same time, it is necessary to note the already taken and timely measures, such as support for working capital, which directly affects the financial stability of the business.