Opportunities and Key Niches for New Brands Entering the Russian Market

Since the beginning of 2022, the tightening of European countries’ sanctions towards Russia has led to the departure of almost 1000 foreign companies from the Russian market, making around 5,000 brands inaccessible to Russian consumers. Some of these companies have left the region entirely, including major players like Sylvano paper and McDonald’s, while others have suspended production for an indefinite period.

However, this presents new opportunities for foreign brands in promising niches of the Russian market, particularly in the absence of major competitors like IKEA or Coca-Cola. Furthermore, statistics suggest that most Russian consumers are loyal to brand substitution.

Quantifying Russians’ Attitude towards Western Brands’ Departure

In light of significant market changes, social network TenChat conducted a survey to gauge how Russian consumers felt about the departure of foreign companies. Over 13,200 Russians participated in the survey.

Results showed that 66% of respondents were not bothered by the departure of foreign companies. Notably, 58% of respondents were aged 18 to 34 years old, 24% were aged 35 to 54 years old, and 18% were over 55 years old. Residents of the Siberian and Ural Federal districts were more accepting of the market changes, while residents of Moscow and North Caucasus regions were more anxious.

Russian consumers have already found alternatives to foreign online services. 77% of respondents replaced streaming platforms for watching movies and TV series with domestic alternatives, 55% switched to Russian music services, 54% began using social networks developed by Russian companies, followed by e-commerce platforms (47%) and services for booking hotels, airline tickets, and travel arrangements (33%).

These trends indicate that brand substitution in Russia is a promising economic trend, with the majority of the audience reacting positively to the changes. However, not all sectors of the Russian economy can be replaced with domestic goods and services, as only 23% of respondents believe that it is necessary to create copies of foreign brands in Russia.

Using these insights, QB Agency specialists conducted further research to identify the most in-demand niches on the Russian market, taking into account the expectations and needs of the target audience in the region.

Food and drinks, alcoholic beverages, and tobacco items

The sphere of food products was among the sectors of the Russian market economy that were affected, and companies responded differently to the exit from the market. While Coca-Cola Company suspended the operation of some factories, PepsiCo and Danone continued to produce baby food and dairy products, and Nestle temporarily (or not, it is unspecified) halted investments and advertising campaigns in Russia. Other companies that can be included in this list are as follows:

• Dairy products: Chudo (Wonder), Domik v derevne (House in the village), Vesely Molochnik (Happy Milkman), Agusha, Inmarko, Valio.
• Confectionery products: Mars (Snickers, Twix, Bounty, Milky Way, Orbit, Whiskas and Pedigree), Lindt, Fazer, Mondelez, Dr. Oetker.
• Coffee and tea: Brooke Bond, Lipton, Paulig, Starbucks, Lavazza.
• Soft drinks: Coca-Cola, Fanta, Sprite, PepsiCo, Schweppes, BonAqua, Aqua Minerale, Rich, J7, Moya Semya (My family), Dobry (Kind), Russky Dar (Russian Gift), Lyubimy (Favourite), Ya (I), Fruktoviy sad (Orchard), Mountain dew, Adrenaline Rush, Pulpy.
• Alcoholic beverages: Diageo (Guinness, Johnnie Walker, Smirnoff, Baileys, Captain Morgan brands), Brown-Forman (Jack Daniel’s, Finlandia), Budweiser Budvar, Velkopopovick Kozel, Carlsberg, Heineken, Absolut, Pilsner Urquell, Bernard, Gambrinus, Staropramen, Pernod Ricard, Chivas Regal, Jameson, Ballantine’s, Havana Club.
• Tobacco products: Winston, Imperial Brands, Davidoff, Richmond, Philip Morris.
• Fast food: McDonald’s, Yum! Brands (KFC, Pizza Hut, Taco Bell), Hesburger.

The findings of the Online Market Intelligence (OMi) survey indicate that, in general, Russians intend to economize on all products except food. Merely 1% of all participants are willing to completely forego purchasing food, while 27% and 32% of respondents expressed willingness to abstain from buying alcohol and tobacco products, respectively.

Furthermore, changes in the economic and political situation in Russia have influenced the mindset of its citizens, thereby impacting their purchasing power. Experts have observed an upsurge in Russians’ economic confidence index, marking the highest level in the last ten weeks. Additionally, there has been a decrease in the percentage of those who perceive the country as being in crisis.

These findings align with other data indicating a gradual increase in Russians’ weekly expenditures. According to Romir Research Company, this metric was considerably lower in the previous months of 2022, but now, it has risen by 2.7% and 3.4% in comparison to last year’s trends.

All these factors indicate that the Russian market, which underwent an economic downturn due to the departure of several companies at the start of 2022, is gradually recovering. Nonetheless, there is still a high demand for food products.

Medical products and health supplements.

The supply of essential medicines in Russia remains unaffected, although some pharmaceutical companies have limited their activities in the region. Pfizer, Sanofi, Bayer, MSD, Novatris, Roche, Bristol Myers, and J&J are among the companies planning to move their clinical trials outside of Russia, while AbbVie has discontinued the supply of botox and fillers, and Eli Lilly and Company have suspended investments and exports of certain medications. This situation could potentially affect Russians in the future since medications that have not undergone clinical trials may not be produced locally, and analogs will be required. According to Romir, the demand for medicinal products in Russia has increased by 3.7%.

The situation is worse for dietary supplements, which are highly sought after by Russian consumers. According to ROIF Expert, the Russian dietary supplements market increased by 36% in 2021 due to online sales, mainly on large marketplaces like Ozon, Wildberries, and iHerb. However, logistical issues have led to iHerb stopping deliveries to Russia, Belarus, Moldova, and Ukraine, depriving consumers of popular products in the segment. Additionally, Gilead, the largest pharmaceutical holding, has suspended part of its operations in the Russian market, while GlaxoSmithKline has ceased deliveries of dietary supplements and vitamins.

Despite these challenges, the steadily increasing demand for medicines and dietary supplements among Russian buyers creates opportunities for new companies in the pharmaceutical industry. The situation presents promising prospects for foreign brands, buyers, and the Russian market as a whole.

Electronics and Gadgets

According to a survey conducted by educational company MAXIMUM Education and the IC Rossgosstrakh Life, despite the majority of Russians adopting budget-saving measures in 2022, only 17% are willing to forego purchasing household appliances and gadgets. Smartphones, which are the top-selling item in this category, have gained particular attention.

A survey conducted by the analytical center of Senergy University in 2021 revealed that 87% of respondents are not interested in buying used smartphones now or in the future. Of those surveyed, 5.2% purchase a new smartphone annually, 17.1% buy a new phone every two years, and 77% do so every 3-5 years.

The current market situation is characterized by significant challenges for Russian consumers. In the smartphone segment, Apple has suspended sales (except for purchases in the AppleStore for Russian users), while Samsung has stopped delivering phones and chips due to export logistics problems. Additionally, Xiaomi, Oppo, and Huawei have decreased their presence in the market, and Siemens and Nokia have completely withdrawn from cooperating with Russian companies.

As for computers, Dell, AMD, Asus, Acer, and Intel have all temporarily left the market due to issues with shipments and dollar fluctuations. In the gaming gadget category, both PlayStation and Nintendo have stopped all sales and software supply to Russia.

Furthermore, various companies engaged in heavy industry, such as Otis, Komatsu, and Vestas, have ceased operations in Russia due to the sanctions policy. Additionally, Japanese manufacturers Epson (copying equipment), Ricoh (printers, photo equipment, etc.), Panasonic (various types of household appliances), and Canon (one of the world leaders in photo equipment production) have all withdrawn from the Russian and Belarusian markets.

Therefore, this particular segment of the Russian market is lacking in major international players. Consequently, it represents one of the most potentially lucrative niches at present. Moreover, several countries that are supportive of Russia have already established successful brands in this field within their own domestic markets. For instance, India’s Lava is a leading manufacturer of smartphones and components.

Video Games

Moving on to the technical aspect, it’s worth mentioning the almost empty gaming sector. Many leading companies in the industry have suspended sales in Russia, such as Activision Blizzard, Electronic Arts, CD Projekt RED, Rockstar Games, and Ubisoft, while Steam and VALVE platforms have limited payment methods for Russian users. Even companies such as The Sandbox and Animoca Brands have blocked their services for players from Russia. However, Epic Games and GSC Game World have shown more leniency towards Russian users, with Epic Games retaining access to their products and GSC Game World only stopping offline sales of S.T.A.L.K.E.R. 2 edition. In 2021, the gaming sector’s share in Russia increased on average by 14% for mobile games, 4.2% in the PC games segment, and 8% for console games, but many analysts predicted a decline in the industry in 2022. Despite this, industry experts remain hopeful for the emergence of large Chinese gaming platforms.

Clothing and Accessories

From the end of February 2022, many clothing and accessory brands have been shutting down their stores in Russia, citing different reasons for their departure. H&M, the world’s second-largest clothing retailer, stated that it stood with all the people suffering from the tragic developments in Ukraine. Inditex, which owns Zara, Bershka, Massimo Dutti, and other brands, as well as Uniqlo, Nike, and Adidas, cited the unstable economic situation and changes in exchange rates as reasons for their exit.

Despite the presence of domestic fashion brands in the market, experts believe that their range of products may not be able to meet all consumer demands due to the Russian retail companies’ dependence on raw imports such as fabrics and accessories.

The following clothing and accessory companies have closed their stores and suspended operations in Russia:

Mass market: H&M, COS, Arket, Inditex (and all its brands), Marks & Spencer, Mango, Mohito, Mothercare, Cropp, Reserved, Matches, The Other Stories, Sinsay, Uniqlo, Victoria’s Secret, Adidas, Nike, Reebok, Puma, Levi’s, Crocs, Vans, and Pandora.

Premium and luxury: Balenciaga, Chanel, Coperni, Burberry, Hugo Boss, Ganni, Golden Goose, Gucci, Hermes, Karl Lagerfeld, YSL, Nanushka, Monki, Prada, Louis Vuitton, PVH Corp (Tommy Hilfiger, Calvin Klein, Warner’s, etc.), Cartier, Swarovski, and Samsonite.

Multi-brand online platforms: ASOS, Farfetch, and Mytheresa.

The departure of the world’s leading brands from the Russian market, as seen from the list, has created an urgent need for new companies in the fashion retail niche. The market is particularly in need of brands that offer a wide range of family-oriented basic items, both in online and offline storefronts, as Russian consumers have a preference for various shopping methods in this segment. Anna Lebsak-Kleimans, CEO of Fashion Consulting Group, shares the view that the fashion industry should adopt a multi-channel approach as it has a noticeable synergistic effect, with over 70% of Russian customers expressing the desire to continue shopping at physical stores, while online shopping continues to grow.

Cosmetics

The beauty industry in Russia has always been a promising market for new brands, especially now that major cosmetic leaders have left the segment. Sephora, Estee Lauder (which includes Aveda, Bobby Brown, Tom Ford Beauty, Clinique, MAC Cosmetics, DKNY, Smashbox, and others), L’oreal (including Garnier, Lancome, Bioterm, Giorgio Armani Beauty, Kiehl’s, Maybelline NY, NYX Professional Makeup, Matrix, Vichy, and others), Unilever (including Rexona, Camay, AXE, Dove, Black Pearl, and others), and the multi-brand cosmetics chain Il de Bote have all left Russia.

However, promoting cosmetic products has always been more affordable than in other industries, and there are already successful examples of Korean, Israeli, and Indian brands reaching the Russian audience. For instance, Israeli Zielinski & Rozen has been operating in Russia since 2018, with offline stores in Moscow and many online partners. Holika Holika, a Korean manufacturer, is available offline and online at leading cosmetic sites in the country (such as Rive Gauche, L’etaul, etc.), as well as through their own online store. Furthermore, Israeli professional cosmetics are popular among beauty salons.

The departure of European and American corporations has accelerated the process of brand substitution in the Russian market, with audiences increasingly interested in and purchasing cosmetics from lesser-known companies from other regions of the world.

In Addition

During our analysis, we focused on the essential needs and trends of the Russian audience. We identified several promising niches in the market, including food products, pharmaceuticals, gadgets and household appliances, gaming, fashion retail, and beauty.

This list is not exhaustive and could also include the automotive sector, which is awaiting new Korean and Chinese auto companies, and the market for home goods, which is struggling after the departure of IKEA, Zara Home, and H&M Home. Additionally, there is a need for online tourist services in Russia.

Despite the differences between each niche, one thing is clear: the Russian audience is financially stable and open to purchasing goods from new brands. The success of sales in these niches will largely depend on an effective promotion strategy.

For this reason, it is important to entrust this task to QB Agency’s competent and experienced experts, who are familiar with the nuances of the Russian market and have a variety of marketing tools at their disposal to achieve faster and more effective results.