- Consumers started to save long before the inflationary shock of 2014-2015. A demand shift towards cheaper products started with durables in 2011 and reached food products in 2013, resulting mainly from a halt in sustainable growth of real disposable income.
- Russians started to save on food in 2013. Demand for food is inelastic, and on this market the trend to save manifested itself in opting for cheaper “calories”, with buyers choosing either less expensive brands or more nutritious substitute products. In 2015, despite a fall in physical volumes of food consumption, calories per capita consumed stayed flat.
- Owning more goods, Russians downshifted on price more than five years ago. Consumers either prefer less expensive products (like housing, clothing, shoes), or tend to use them longer (like cars, home appliances).
- Real incomes will continue to fall or stagnate in 2016-2018, which will prompt people to look for more effective ways to satisfy their basic needs and thus entail relevant changes in consumer behavior.
- The realization of pent-up consumer demand is unlikely. One should not expect the goods markets to show a recovery growth in 2017 similar to the one seen in 2010. Real incomes stagnation and a limited potential for drawing loans will entice Russians to a more “economical” lifestyle in the years to come.
Russians exist in a new shrinking income reality since 2013
Economic slowdown in Russia started long before the external shock and was related to the exhaustion of two main drivers that emerged in 2008 – the building up of new international economic and financial ties and the recovery of labor and capital following the transformational recession. The upturn seen in 2010-2012 was regenerative in nature and was due to reintroduction of resources that fell out in 2009.
This trend was signified by real incomes stagnating since 2013. Even then, the transition to the new shrinking income reality started affecting consumer expectations and behavior motivating Russians to maximum efficiency while satisfying their primary needs amid tightening balance between incomes
An increasing share of borrowed funds and personal savings used for consumption (in 2013–2014 it ran into some 11.5%) was another significant driver that changed consumer behavior.
Figure 1. Stagnation of real incomes since 2013 to be followed by a decline in 2015-2018
Figure 2. Share of borrowed funds and personal savings in disposable income
Consumers are buying more calories while spending less on food
A 6% decline in real disposable incomes in 2015 determined a slump in real retail turnover: the physical volume of non-food consumption fell 20%, by our estimates (the Federal State Statistics Service data were adjusted to account for available food balances, field studies and sector analysts’ estimates), while food shed just 4.2%, which is understandable, as food belongs to essential commodities and is prone to lower demand elasticity.
Contraction of the food market is mitigated by a structural change in the consumer basket, with the latter getting skewed towards cheaper substitute goods. The shift to cheaper food compensated 5 pps of 19.1 pps of food inflation in 2015.
This trend emerged in 2013 and may persist until 2018, i.e. until the end of the expected period of real income deterioration (see “Russia: Economic Outlook 2020” published March 21, 2016).
In 2015, despite a fall in physical volume of food consumption, the amount of calories consumed did not decline, thanks to changes in the basket structure. This was related not only to the transition to cheaper substitutes, but to a cross-substitution favoring more nutritious products (per ruble spent). Vegetables, excluding potatoes, fruit, fish and fish products, as well as alcohol, showed the steepest consumption slump, while bakery, potatoes, and dairy products, on the contrary, significantly increased their share in the basket. Further on, consumer preferences may keep on sliding towards cereals, flour, oil, seasonal vegetables and sugar.
Figure 3. Consumption shift to cheaper substitutes mitigates the decline in food product turnover
Durable goods tend to stay in use longer
Starting 2011, following a reduction in volume and subsequent finalization of the utilization program, Russia has seen a steady increase in the average age of passenger cars, despite a stable growth of their count per capita. This is related to old cars recycling rates lagging new vehicle purchases and partly reflects the modest dynamics of real incomes and conservative expectations with regard to their growth, which emerged in the aftermath of the 2009 crisis. Given the prospects of economic growth in Russia and globally in the coming years, these expectations will persist and the average car age will continue to grow.
Figure 4. Average car age is on the rise in Russia
We note without exaggeration that an increasing age of the car fleet coupled with the growing number of cars owned is a global trend, which can be traced at least between 2006 and 2015 in the EU, USA and Japan, and in recent years even in China. The similarities in consumer behavior may be due to both, a common dependence on slower global economic growth and similar demographic and social trends. In particular, the vast majority of countries see their population aging, which means that a growing number of people are less inclined to buy new products and tend to finance their consumption not from income, but from savings.
By our estimates, the trend of aging consumers will affect other durable goods as well, such as home appliances, furniture, electronics, while a compensating release of pent-up demand may not occur at all in the absence of real or expected growth in disposable income.
New housing offers less square meters
Since 2009, the average square space of new apartments in Russia has been declining (in shed 16% since 2009), as developers reacted to the above mentioned trend of more efficient use of resources in consumption and investment by households (in the absence of income growth) and increased the share of small one-bedroom apartments in the total volume of housing construction. That said, the number of square meters per capita and the level of satisfaction with living conditions are still on the upside because the average size of existing apartments in Russia is still 25% smaller than the average square space of new apartments, while the housing stock tends to change faster than population.
A revision of income expectations relative to both, the automobile and housing markets, is just part of a broader global trend. The decreasing square space of new apartments also reflects a reduction in the size of households, relocation of families, as well as growing density of urban population.
Coupled with the likely stagnation of real incomes, these factors can provide for a persisting decline in the living space of new apartments, although the most significant reduction of this indicator is already behind us.
Figure 5. Average new apartment size shrinks due to a growing share of smaller one-bedroom apartments
Russians intensify consumption while adapting to shrinking incomes
According to ACRA’s long-term forecasts, real incomes are to keep on declining for another two years and a half, followed which a stagnation is likely, if no significant sources of economic growth transpire. Considering that changing income dynamics began to impact consumer markets as early as 2013, the expected transformation may be comparable in duration with the 1990s crisis.
Adaptation of consumer behavior is manifested in an emerging trend to save money and use consumer and investment goods longer and more intensively in order to meet basic needs. Despite declining incomes, intensifying consumption has resulted in continuing transition to more nutritious food, an increasing number of motor cars owned, better housing conditions (in terms of square meters per capita) and higher satisfaction with living standards. However, the flipside of this trend is a decline in quality of consumed food products, lower road safety and inferior domestic comfort.
In these conditions, we are unlikely to see formation and realization of pent-up demand in most markets, as it was in 2010. However, the anticipated decrease in interest rates by 2017 will reduce population’s debt burden (so as the proportion of expenditures on debt servicing), which will at least partially mitigate a tight balance of current income and expenses.
Industries and markets that will benefit from continuation of the mentioned trends are: services, spare parts repair, manufacture and sale and economy-class food.