Food Service - Hotel Restaurant

An Expert's View about Sales in Russia

Last updated: 19 Mar 2011

The Russian Hotel Restaurant and Institutional (HRI) sector is set to return to its dramatic pre-crisis growth. Before the crisis, sales increased 10 to 12 percent annually from 2005 to 2008 together with consumer income growth.

THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT POLICY Required Report - public distribution Date: 3/3/2011 GAIN Report Number: RSATO1102 Russian Federation Food Service - Hotel Restaurant Institutional HRI Food Service Sector Approved By: Deanna Ayala Prepared By: Alla Putiy Report Highlights: The Russian Hotel Restaurant and Institutional (HRI) sector is set to return to its dramatic pre-crisis growth. Before the crisis, sales increased 10 to 12 percent annually from 2005 to 2008 together with consumer income growth. Restaurant players have noted renewed growth in the food service market since autumn 2009. Most of the HRI sector?s growth is in the fast-food, coffee shop, and casual-dining segments. Since imports make up the vast majority of HRI products (more than 65 percent), opportunities for U.S. products are significant. Post: Moscow ATO Executive Summary: The Russian Hotel Restaurant and Institutional (HRI) sector is set to return to its dramatic pre-crisis growth. Before the crisis, sales increased 10 to 12 percent annually from 2005 to 2008 together with consumer income growth. After the autumn of 2008, when the Russian economic crisis began, consumers were more cautious and pragmatic in their foodservice spending. But since then we?ve seen some turn-around. Restaurant players have noted renewed growth in the food service market since autumn 2009. Most of the HRI sector?s growth is in the fast-food, coffee shop, and casual-dining segments. Since imports make up the vast majority of HRI products (more than 65 percent), opportunities for U.S. products are significant. Russian consumer markets offer many opportunities for American producers as domestic competitiveness is still low. There are significant opportunities for U.S. companies to benefit from this growth, as many importers, distributors, and managers in the HRI sector have expressed an interest in buying marbled meat, cheesecakes, sauces, wine, tree nuts, high-quality ingredients, and other products. The majority of HRI customers are price sensitive, but they are nonetheless interested in new and innovative products. To succeed, American exporters must be prepared to do extensive marketing and to educate potential buyers on how to use their products. Logistics may be a problem, especially as shipping traffic overloads the St. Petersburg port, Russia?s primary gateway for American food imports. American products also face substantial competition from Western Europe, Asia, and South America. While the main markets for American products are still in Moscow and St. Petersburg, the HRI sector is rapidly developing in other large cities. These include Nizhniy Novgorod, Yekaterinburg, Kazan, Novosibirsk, Samara, Ufa, and tourist cities on the Black Sea such as Sochi, the site of the 2014 Olympic Games. Operating outside major regions, however, adds an additional layer of logistical complication for American exporters. To overcome these difficulties, they will need to collaborate with strong importers or distributors. SECTION I: MARKET SUMMARY Before the economic crisis in autumn 2008, Russia had one of the fastest growing economies in the world. Rising incomes in the 2000s boosted consumer optimism and spending on non-essential goods and services. Real GDP growth rate was 8.1 percent in 2007, but in 2009 real GDP shrank by 7.9 percent. Real GDP growth of 4.0 percent was reached in 2010 with high oil prices and a government policy geared toward economic growth. Table 1: Russia: Social and Economical key figures 2005 2006 2007 2008 2009 2010 Population, million. 143.5 142.8 142.2 142.0 141.9 141.9 Unemployment, % of labor force of eap 7.1 6.7 5.7 7 8.4 7.3 Average monthly salary per person, RUR 8554.9 10633.9 13593.4 17290.1 18638 20798 Real GDP growth, % change y-o-y 6.4 7.4 8.1 6.8 -7.9 4.0 Inflation, % 10.9 9 11.9 13.3 8.8 8.8 Source: Federal State Statistics Bureau (Rosstat) 1 USD = 29 Russian Rubles in 2010 Russia is the ninth most populous country in the world, with almost 142 million people. However, the Russian population has been declining in numbers since 1995. European Russia, geographically west of the Urals, hosts over 75% of the total population, although it accounts for 25% of the country's territory. According to Rosstat, 73% of all Russians lived in urban areas in 2010 and over 10% of the total population lived in Moscow (10.5 million people) and St Petersburg (4.6 million people). Beyond the two largest Russian cities there are nine cities (Novosibirsk, Nizhniy Novgorod, Yekaterinburg, Samara, Omsk, Kazan, Ufa, Chelyabinsk, Rostov-on-Don) with a population of more than one million people. The unemployment rate of the economically active population had declined to 5.7 percent in 2007, but soared to 8.4 percent in 2009. That situation has turned around somewhat with unemployment down by 1.1% (1.8 million). In addition, individuals' real incomes in 2010 increased by 11% compared to 2009. Russian consumer price inflation in 2010 was 8.8%, the same as in the preceding year. The government had expected inflation to decline to 8.5% in 2010, but it hiked its inflation forecast several times, primarily because of the abnormal heat and drought last summer, which boosted food prices. According to the State Statistics Service?s data, prices of food products in Russia increased by 12.8% in 2010. Since August 2008, when the financial and economic crisis began in Russia, the ruble has lost almost one fifth of its value against the Dollar. The Ruble:Dollar exchange rate in August, 2008 was 24:1; in December 2008 it was 27:1; in February 2009 it was 36:1; in April 2010 it was 29:1 and at the beginning of January 2010 it was 30:1. Although the Ruble is recovering, it is still weak against the Dollar and Euro compared to pre-crisis exchange rates, so imported food prices have risen respectively. Figure 1. Russia?s Central Bank?s exchange rate of $1 USD to Ruble and $1 Euro to Ruble from January 2010 to January 2011 Source: Central Bank of Russian Federation, and http://valuta.investfunds.ru/indicators/view/39/ Consumer markets flourished in Moscow and St. Petersburg as the incomes of their residents grew at a faster pace. As a result, Moscow and St. Petersburg are Russia?s largest restaurant cities with market shares of 30 % in Moscow and 8-10% in St. Petersburg. HRI Sub-Sectors Restaurants Russian HRI sector sales had increased at a rate of 10 to 12 percent annually from 2005 to 2008 together with consumer income growth. During that period, Russians spent a greater percentage of their income on food than any other country in Europe. Since the advent of the Russian economic crisis, consumers have become more cautious and pragmatic in their foodservice spending. Table 2. Units, Transactions & Value Sales in Russia Restaurant Industry 2005 2006 2007 2008 2009 # of cafes, restaurants, food outlets 52.3 53.8 54.8 55.6 54.7 Transactions, mln 1251.2 1312.0 1383.6 1428.4 1396.4 RUR, billions 248.1 257.3 306.1 343.1 334.2 Growth Year on Year, % 10.9 11.1 12.1 -3 US Dollars, billion* 8.77 10.12 12 13.81 10.53 Source: Euromonitor *Average exchange rates by years: 2005 ? $1 = RUR 28.3; 2006 - $1 = RUR 27.2; 2007-$1 = RUR 25.49; 2008-$1 = RUR 24.84; 2009-$1 = RUR 31.72. Although the beginnings of an economic recovery were seen in the third quarter of 2009, consumer confidence remains relatively low, with high unemployment and rising poverty bringing a decrease in spending. Despite the difficulties faced by much of the foodservice market, fast food was the only channel to see positive current value growth in 2009 and 2010, albeit at a significantly moderated rate compared to previous years. Growth was driven by the generally rising popularity of fast food due to busier lifestyles and the emergence of more outlets in new locations. All foodservice operators were fairly unanimously hit by the recession and considerable declines in consumer spending. The crisis mostly affected restaurants belonging to the higher price category (falling by 30-50%) while sales at casual dining restaurants declined by 15-20%. However, the market remained largely stable compared to the previous year in terms of company shares, as the leading players were in the best position to weather the storm by addressing their menus and costs and adapting to new market conditions. Smaller and independent players in particular were worst hit by declining consumer confidence, although this appeared only to compound a fairly established trend of consumer migration to chain outlets. The leading players in various segments of the restaurant market made efforts to consolidate their positions through offering lower-cost meal solutions, and extending their services to areas such as home delivery or catering. Franchising has become a very popular tool for multinational players in Russia. Franchising offers an easier way for investors to enter the Russian market with a lower level of investment, since the materials required for the setting up of outlets and apparatus are often included as part of the franchise agreement, cutting expenses and bringing about profits more quickly. As the economic situation stabilizes and the business environment becomes more transparent in Russia, franchising in general is set to grow. This is particularly true as more domestic players come to appreciate the benefits of this style of business, including high profits and a degree of autonomy. Major Restaurant Operators in Russia According to FoodService magazine there are currently 30 to 40 restaurant chains operating in Russia, each of which manages between 20 to 400 outlets. McDonald?s, Rosinter Restaurant Holding, Arkadiy Novikov Restaurants, Markon, and Coffee House are the largest restaurant chains in different foodservice segments in Russia. Rosinter estimates the value of its cafes and restaurants in Russia at 443 billion Rubles. The Russian restaurant market consists of several market niches: Fine-Dining/Full-Service Restaurants: higher priced/exclusive outlets; Casual-Dining Restaurants: affordable, family dining outlets; Quick and Casual Restaurants, which include coffee shops Fast-food/Quick Service Restaurant (QSR), which is divided into two separate segments: Stationary fast-food and street/mobile fast food (kiosks, stalls, etc.) Fast food outlets, casual restaurants, and coffee houses are the most popular and fastest-growing sectors in Russia. Table 3. Russia: Restaurant Sales by Sub-Category, Billions of Rubles 2005 2006 2007 2008 2009 % change 2008/2009 Cafes/bars 35.8 38.5 42.2 47.7 45.7 -4.2 Fast-food 132.6 150 170 193 194 1 Self-service cafeterias 4.1 4.5 4.8 5.2 4.9 -5.8 Street stalls/kiosks 19.2 20.3 21.2 22.6 21.4 -5.4 Full-service restaurants 54.3 59.6 64.5 71.2 64.4 -10 100% Home Delivery/Takeaway 2 2.3 3 3.7 3.8 2.7 Total 248 275 306 343 334 -3 Source: Euromonitor International Three main segments of the market stand out clearly. The highest-priced segment, ?fine-dining? in Western terminology, has an average check of more than $70 per person. Patrons receive refined cuisine, unique design, good service, and the availability of private dining space. The medium-priced or casual segment has an average check of $20 to $70 per person, and it includes chains such as Il Patio, Yolki-Palki, Goodman, and Planet Sushi. The lowest-priced segment, fast-food, mainly consists of chains such as McDonald?s, Rostik?s-KFC, and Kroshka-Kartoshka. The number of cafes, restaurants, and other food outlets in Russia currently stands at about 60,000. Although Moscow and St. Petersburg are still by far the largest restaurant cities in Russia, leading foodservice operators have begun regional expansion into other wealthy cities. The markets of Moscow and St. Petersburg are expected to reach saturation in the near future, so modern retail formats such as shopping malls and business centers, and entertainment hubs play a significant role in regional expansion of foodservice competitors. Table 4. Russia: Consumer Foodservice by Independent versus Chain Outlets (2009) Outlets Independent Chained Total % of Total Fast-food 15,663 4,698 20,361 34.9 Street stalls/kiosks 12,811 1,869 14,680 25.1 Cafés/bars 9,177 846 10,023 17.1 Full-service restaurants 6,101 1,158 7,259 12.4 Pizza consumer foodservice 2,981 768 3,749 6.4 Self-service cafeterias 1,668 74 1,742 3 100% home delivery/takeaway 511 153 664 1.1 Total Consumer Foodservice 48,912 9,566 58,478 100 Source: Official statistics, trade associations, trade press, company research, trade interviews, and Euromonitor International estimates Table 5 shows foodservice chain leaders in 2010, their brands, types, and number of outlets. Table 5. Russia: Leading foodservice chains, 2010 Holding # outlets in % change # outlets in Brands Type company Russia 2010/2009 Moscow Markon 401 15.2 352 Stardog!s, Bageteria, Street + OnTime QSR Rosinter 362 2.6 197 Il Patio, Planet Sushi, Casual other Kroshka- 326 4 273 Kroshka-Kartoshka Street + Kartoshka QSR McDonald?s 251 12 91 McDonald?s, McCafe QSR Coffee House 229 5 128 Coffee House, Asia, QSR Vinegret +casual Shokoladnitsa 225 5.1 160 Shokoladnitsa, Vabi QSR Sabi +casual Teremok 181 5.2 93 Teremok, Bitte Gril Street +QSR Planeta 158 3.9 68 Sbarro, Vostochnyy QSR gostepriimstva bazaar, Viadzhio +casual Yum!Brands 155 -2.5 84 Rostik?s-KFC QSR Novikov Group 148 2.7 126 Different concept Fine restaurants +casual BRPI 145 -19.4 32 Baskin Robins QSR Podorozhnik 130 -21.7 0 Podorozhnik QSR Subway 127 76.3 58 Subway QSR Grand Food 121 1.7 9 Tashir pizza, Kebab tun, QSR other +casual Eurasia 103 14.4 2 Eurasia Casual Vesta centr 77 0 57 Yakitoria, Gin-no Taki, Casual international Menza, other Ginza Project 75 22.9 42 Yaposha and different Fine + concept restaurants casual Chaynaya lozhka 69 16.9 0 Chaynaya lozhka QSR Foodmaster 52 10.6 0 Vilka-lozhka, Pechki- QSR lavochki, other +casual AmRest 49 -14 13 Pizza Hut, Rostik?s-KFC QSR Starbucks 43 130 43 Starbucks QSR RP-Com 30 0 29 Goodman, Kolbasoff, Casual other Total 3452 5% 1857 Source: FoodService magazine, #12, 2010 Rosinter Restaurants Holding (Rosinter) is a major player on the Russian restaurant market. The company gained its leadership role by its early deployment of chain restaurants in the casual-dining segment of the market where Rosinter helds 16.7% of the market in 2009. As of December 31, 2010, the holding company operated 362 outlets, including 113 franchised restaurants in 40 cities in Russia, the CIS, Central Europe, and the Baltic states. It had 339 a year ago (88 franchises). The company offers Italian, Japanese, American, and Russian cuisine under its proprietary brands (Il Patio, Planet Sushi, and 1-2-3 Café) and its licensed brands (T.G.I. Friday?s and Sibirskaya Korona). In addition, Rosinter is developing the Costa Coffee chain with Whitbread PLC, which had 32 outlets at the end of December 2010. Table 6. Rosinter restaurant brands Brand name Type First year of operation # # outlets in Russia outlets, 2010 Nov 2008 Planet Sushi Casual 1999 110 129 (Asian) Il Patio Casual 1993 114 139 (Italian) (rebranding in) 2005 T.G.I. Friday?s Casual 1997 24 30 (American) American Bar & Grill Casual 5 5 (American) Sibirskaya Korona Casual 17 19 (beer- restaurant) 1-2-3 Café Casual 2007 6 (Russian) Costa Coffee Coffee house 2008 26 Other casual and fine-dining 5 restaurants Total 270 362 Source: Rosinter web-site In May 2007, Rosinter Restaurants Holding held its IPO. Rosinter reported consolidated revenues of 6.73 billion Rubles in 2007, of 8.36 billion Rubles in 2008, and of 8.34 billion Rubles in 2009. Rosinter's consolidated revenue for 2010 went up 16.9% year-on-year to 9.17 billion Rubles. The company holds three main objectives. The first is to accelerate the expansion of its coverage in Russia, the CIS, and Europe. The second is to increase its presence in transportation facilities, trade centers, and Moscow residential areas. The third is to develop new formats of its brands for high-traffic locations. Following the aforementioned objectives Rosinter opened about 30 restaurants in 2009, half of which were franchises, and about 20 new restaurants in 2010, 18 of which are franchises. In summer 2010 the company sold a chain of fast-food restaurants under the Rostik?s-KFC brand to its partner American Yum!Brands, with which Rosinter has had strategic alliance since 2006. McDonald?s, the largest chain of fast-food restaurants in the world, entered Russia in 1990 and opened its first restaurant in the center of Moscow. As of December 31, 2010 McDonald?s had 270 restaurants, including 43 McCafes, operating throughout Russia and serving 950,000 customers daily. There are 91 McDonald?s restaurants in Moscow. The company operates in 60 Russian cities. On McDonalds?s 20th anniversary in Russia in January 2010, company reported about serving 2 billion customers. All McDonald's restaurants operating in Russia are corporate facilities rather than franchises. McDonald?s operates in 120 countries and Russia is one of the ten top countries by sales volume. McDonald?s growth rate in Russia is between 20 to 30 percent annually. The fast-food giant opens about 40 new restaurants in Russia every year. The company spends between $1.5 million to $2 million to set up each new restaurant. Opening one cafe costs about $250,000. McDonald?s also plans to expand its McCafe chain, its premium class coffeehouse format. The first McCafe opened in Russia in 2002 and now there are 43, most of which are in Moscow and in St. Petersburg. McCafe also operates in Yaroslavl, Nizhniy Novgorod, Yekaterinburg, Volgograd, Kazan, and Ufa. The corporation also owns the McComplex, the Moscow-based food processing and distribution centre, which supplies the fast food giant McDonald's in Russia and the CIS. It has invested $45 million in the McComplex. McDonald?s currently supplies 80% of needs from 130 local companies. Since February 2010, when Inalca JBS opened a new meat production and distribution facility near Moscow, JBS? partner Marr Russia became the supplier of frozen hamburger patties to McDonald's restaurants is Russia. The company's main operators in Russia are CJSC Moscow-McDonald's (47 restaurants in the capital city) and LLC McDonald's (the remaining restaurants in Moscow and sixty other cities). According to the SPARK database, these two enterprises reported combined sales revenues to Russian Accounting Standards of 33.2 billion Rubles last year, and net profits of a little over 2.8 billion Rubles. Baskin Robbins, the world's largest chain of ice cream specialty shops, entered Russia in 1990. In 1996, the company opened a major ice cream plant in Moscow -- the biggest in Europe -- able to churn out 16,500 tons annually. The company sells more than 125 flavors of premium ice cream. The company's turnover for 2009 came to 585.5 million Rubles, for the first six months of 2010 sales went up 20% to 315 million Rubles. Last year was the company?s most successful year in Russia. In 2010, the company expanded its assortment range and increased the number of prepackaged ice-cream products offered at its outlets. Baskin Robbins Production International opened 33 new ice cream salons in Russia in 2010. Baskin-Robbins' network in Russia consists of 145 outlets in 68 cities, most of them franchises. Arkadiy Novikov Restaurant Group (Novikov Group) includes nearly 88 restaurant-retail- entertainment projects of various formats and price ranges. The company has launched and managed restaurants since 1992 and has continued to lie in second position in full-service restaurants. The Novikov Group is slightly less chain-oriented. It operates more than 30 different Moscow high-end concept restaurants, along with a five casual-dining restaurant chains such as Yolki-Palki, Malenkaya Yaponiya, Sushi Vesla, Prime Star, and Kish-Mish. It also operates the premium grocery chain Globus Gourmet, the Russian branch of the French gourmet chain Hediard, the greenhouse complex OOO Agronom, and the Premium Class catering business. RP-Com (Restaurant Professional Company) is one of the top 10 foodservice operators in Moscow. RP- Com currently owns the following restaurants in Moscow: ten Goodman steakhouses, four Filimonova & Yankel fish-houses, eight Kolbasoff beer-restaurants, and three Italian Mamina Pasta restaurants. While RP-Com is not the leader in any one foodservice format, the company?s future growth seems promising because it has built a reputation on quality and service. During its eight years of foodservice experience, the company has gained success in the niche of North American full-service restaurants. This type of restaurant is less developed in Russia, and currently only a few independent operators specialize in grill menus. The Goodman chain became the third largest chain of North American full- service restaurants in Moscow as well as in the whole of Russia. RP-Com is a part of the Food Service Capital Group of companies which also includes Comfis, and Legion, based in St. Petersburg. Comfis is a prepared food manufacturer and Legion is a food provider, together they service passenger meals for Sapsan high-speed trains. Ginza Project is one of the largest and the most dynamically developing consumer foodservice businesses in Russia. The company operates various restaurants and entertainment venues with different formats and price segments, although there is a bias towards various fine dining options. The restaurant holding Ginza Project began developing a nationwide network of Yaposha cafés in 2003. Since 2008, Ginza Project has continued to invest heavily in its expansion. In 2007 there were 22 Yaposha outlets in total, with this number rising to 50 by the end of 2009. Besides regional development of the Yaposha chain, the group doubled the number of its themed restaurants in Moscow. As of December 31, 2010 company operated 75 outlets, including 42 restaurants in Moscow. Fine-Dining/Full-Service Restaurants Haute cuisine appeared in Russia in the mid 1990?s, and there is no shortage of high-end restaurants with extravagantly expensive checks at meal?s end in Moscow and St. Petersburg. Fine-dining restaurants are associated with names such as Arkadiy Novikov, Andrey Delos, and Ginza Project, but most experts agree that the top-category restaurant sector is saturated. Restaurateurs are moving toward casual restaurants where tables turn over more quickly and profit margins are higher. Nevertheless, there is still an opportunity for U.S. products in the fine dining segment because consumers are loyal to high- quality imported products such as marbled beef, seafood, high-end wines, and spirits. Casual-Dining Restaurants Casual dining was one of the fastest-growing segments of the restaurant market, with growth rates between 15 to 25 percent in 2005-2008. The leading position in this segment belongs to the chain operators, including those specializing in Russian, North American, Italian, and Asian cuisines. The poor development of independent operators across most full-service restaurant formats means it is heavily concentrated with chains, especially in Moscow and St. Petersburg. Independent restaurants face strengthening competition from cafés, bars, and fast-food outlets, which provide good quality food at lower prices. Russian consumers prefer a diverse menu at affordable prices. The average price for a meal at one of these restaurants ranges from $20 to $70 per person. Although meat dishes are a staple of almost every Russian restaurant, North American?style steakhouses are not yet widespread, accounting for only 3 to 4 percent of the Moscow market. Experts attribute this to the fact that opening a steakhouse cost 15 to 20% more than opening the average restaurant, due to the need for special grilling equipment and a downtown location to attract a profitable number of customers. Rent is significantly higher in the city center than in the suburbs. Another added expense is the marketing and education necessary to promote steakhouse culture. Currently, the main American-cuisine restaurants in Moscow is the American Bar & Grill chains (operated by Rosinter), Goodman steakhouses (operated by RP-Com), and five Torro Grill restaurants. Even though the number of steakhouses is growing slowly, overall consumption of steaks is increasing steadily. These restaurants use imported meat, usually from Australia or the U.S., since local suppliers do not provide consistent quality. In 2011 there is the big interest in using American marbled beef at steakhouse restaurants. Recently a new big player, Chili's Grill & Bar, entered the Russian market. This American restaurant chain is owned by restaurant holding company Brinker, which opened the first Chili?s in Moscow on February 1, 2011. The network in Russia will be developed by a local franchise partner company Trio Group. According to the franchise agreement, which was signed in August 2009, the Trio Group shall open 25 restaurants in Russia by 2017. Chili's Grill & Bar is the main rival of the American chain T.G.I. Friday's, which operates in the Russian restaurant market through the holding Rosinter. The enormous popularity of Japanese cuisine made Asian full-service restaurant chains the most ubiquitous category of casual restaurants, with a value growth rate of 25% before the crisis. Japanese restaurants, with sushi and fish menus, are heavily represented among fish and seafood-concept restaurants in Russia. As Russian consumers become increasingly health conscious, sushi?s image as a healthy food is an essential component of this growth. Very few casual chain restaurants have a centralized system of purchasing. Most decisions regarding products and purchasing are made at the restaurant level. On the one hand, there are many more opportunities for sales, since each restaurant is a separate account. On the other hand, individual sales are smaller and do not allow for the development of exclusive distribution rights and consistent volumes. According to industry experts, casual eateries use imported meat, seafood, desserts, seasonings, and a variety of ingredients. While quality is of some concern, prices dominate purchasing decisions. American products will need to be cost-competitive to attract business in this segment. Fast-Food The Russian fast food market is relatively young compared with those in Europe and the United States. It has been 20 years since the first McDonalds opened in Moscow on January 31, 1990, and in the intervening two decades Russia?s fast food market has grown and ranks 12th in the world by volume. In the years prior to the crisis, the fast food market was the fastest-growing restaurant category in Russia with an annual growth rate of 25 to 30% over the 2004 ? 2007 periods. According to Euromonitor International, Russia's fast-food market was valued at 194 million Rubles in 2009 and is 58% of total foodservice sales. Nowadays it is one of the few segments of the restaurant business to continue growing after the onset of the crisis. Moreover, the popularity of fast food in Russia has grown dramatically ever since the crisis first hit the country. Fast food restaurants account for about one-third of all public eateries and account for as much as 70% of clients served. Presently about a dozen large fast food chains operate in Russia. The McDonald?s, Rostik?s-KFC and Sbarro chains together occupied 52.8% of fast-food chain sales in 2009. McDonald?s remained the absolute leader with a 43% value share of fast-food chain sales. The biggest local fast food brands that offer traditional Russian dishes, such as Teremok- Russkie Bliny, and Kroshka- Kartoshka, have a much smaller share of the market. Table 7 shows the market shares of fast-food chain operators. Table 7. Russia: Market Shares of Fast-Food Chain Operators Company Global Brand Owner 2006 2007 2008 2009 McDonald's McDonald's Corp 41.4 42.6 40.8 43 Rostik's- KFC Yum!Brands Corp 2.3 5.0 4.0 4.2 Sbarro Sbarro Inc 4.3 5.1 4.8 4.1 Rostik's-KFC AmRest 1.0 1.7 1.5 Teremok Teremok - Russkie Bliny 1.0 1.3 1.5 1.6 Kroshka-Kartoshka Tekhnologiya & Pitanie Ltd 1.2 1.4 1.5 1.7 Chaynaya Lozhka Solo OOO 1.4 1.5 1.4 1.4 Baskin-Robbins Dunkin' Brands Inc 1.1 0.9 0.9 0.8 Subway Subway Russia LLC 0.4 0.6 0.7 1.0 Others 46.9 40.6 42.7 40.7 Total, % 100 100 100 100 Source: Official statistics, trade associations, trade press, company research, trade interviews, Euromonitor International estimates Since autumn 2008 consumers have tried to decrease their restaurant spending and are frequenting less expensive restaurants, with simple menus, good-quality food, and affordable prices. Consequently, more Russians started visiting fast-food outlets with average checks of 150-300 Rubles ($5-$10) on a regular basis. According to restaurant consulting company Synovate data, as of October 2010, 23% of Russians aged 16 to 50, both male and female, purchase fast food at least once a week. Before the crisis only 18% of customers visited fast food outlets. Quick service outlets have captured many new customers who used to eat at casual-dining or fine-dining restaurants. About 70,000 people visit the 155 Rostik?s- KFC restaurants daily, most of them teenagers, young people aged 20 to 29 years old and families with children. The average order nowadays comes to 200 Rubles ($6.50), a price that hasn?t changed since 2008. Russia?s fast food market still isn't saturated in spite of the development that has taken place for the past decade. It?s a very attractive segment not only for existing large players, but also for domestic restaurant operators and multinational companies alike reaping the benefits. Experts predict that the fast-food and street-food market will not reach saturation until 2014. Pancakes, burgers, chicken, pizza, and baked potatoes are the most popular types of fast-food in Russia. The food-court format is gaining popularity among fast-food operators. The most dynamic chains -- including Rostick?s-KFC, Kroshka-Kartoshka, Sbarro, and Baskin-Robbins -- have opened numerous outlets in shopping malls and hypermarkets. While Americans often move quickly through food courts, stopping for a quick bite while shopping, Russians usually visit food courts to socialize. In Russia, the food court is a popular venue for young people to spend time together. Stand-alone kiosks are popular in Russia, but there is some consolidation in the industry. The number of independent stands is decreasing, but sales and the number of chained outlets are increasing. Domestic chains dominate the street fast-food market. Chains such as Stardog!s (hot dogs), Kroshka-Kartoshka (potato stand), and Teremok (Russian crepes) are ubiquitous throughout the major cities and are expanding regionally as well. Table 8 shows the growth of fast food restaurant chains in Russia. Table 8. Growth of fast food restaurant chains in Russia Chain name Country of Year est. in # outlets # % change origin Russia Nov. outlets 2010/2008 2008 2010 Kroshka- Ka Russia (Moscow) 1991 304 326 7 rtoshka 2003 new Stardog!s Russia (Moscow 1993 () 283 401 42 brand) McDonald's USA (Canada) 1990 197 270 37 Teremok Russia 1998 159 181 14 R 1993 (2005 new ostik's - KFC Russia/USA 152 155 1 brand) Baskin Robbins USA 1992 117 145 24 Sbarro USA 1997 126 158 25 Chaynaya Russia (St. L 2001 58 69 19 ozhka Petersburg) Subway USA 1994 47 127 270 Burger King USA 2010 11 Dunkin Donuts USA 1996/2010 8 Carl?s Junior USA 2007 6 11 83 Source: Restaurateur Magazine, trade press Subway, the world?s largest sandwich chain, is one of the most rapidly developing fast food chains in Russia tripling the number of its outlets in 2009-2010. The national Subway franchise for Russia is co- owned by three Californians, all of whom originally invested in the franchise in the early 1990s. Despite the profitability of their first restaurants, a long-running legal dispute with Russian partners jeopardized the venture in the mid- and late-1990s. With that behind them and with the impetus toward the QSR format afforded by the financial crisis, Subway has quickly developed in Russia. In St. Petersburg, the popularity of the Subway brand is underscored by the fact that, from May to July 2010, one local Subway restaurant had the highest sales turnover out of 31,000 Subway restaurants worldwide. Subway has an ambitious plan of expansion, intending to reach 1,000 stores by 2015. Fast-food restaurants tend to use a higher percentage of local ingredients (around 50 percent) as compared to other restaurants. This decision is driven by high turnover and the need for a consistent supply-chain more than by direct preference. Several fast-food chains have created internal supply- chains based in Russia. For example, McDonald?s created McComplex to produce nearly 56,000 hamburger patties daily, but McComplex cannot produce enough to meet its needs. The company therefore buys additional hamburger from meat suppliers. Since the beginning of 2010 Marr Russia supplies frozen hamburgers to McDonald's, Rostik?s-KFC and Carl?s Junior restaurants. Produce, dairy, and egg products are usually sourced locally, but import opportunities do exist. Many chains use imported sauces and ingredients. Smaller fast-food restaurants that do not have the capital or scale to justify creating their own production facilities may also import meat and produce. Poultry and beef are the leading imported meats in this category. Most of the larger international chains have an internal distribution network, while some independent and smaller chains rely on traditional or specialty distributors. Fast-food is an increasingly attractive market for overseas investors and the appearance of new fast-food players in Russia is not surprising. Experts explain the active interest of global restaurant chains in the Russian fast-food market by its high, steady annual growth rate. Franchising in consumer foodservice is undoubtedly now most evident in the fast food environment, from its beginnings in street stalls/kiosks, with some trade sources indicating that more than 90% of fast food chains in Russia work under various franchise agreements. Burger King, one of the largest fast food corporations in the world, has established a presence in Russia by opening its first restaurant in Moscow on January, 2010. Burger King, which operates more than 12,000 restaurants in 73 countries, has entered the Russian market as a part of its expansion strategy in Europe, the Middle East and Africa. The company is using its traditional franchising scheme to expand the chain. In order to launch operations in Russia, Burger King has established a daughter company Burger Rus, managed by Alexander Kolobov who has successfully established a well-known coffee - shop chain called Shokoladnitsa. Under the terms of its franchise agreement, Shokoladnitsa is required to give 5% of its turnover to Burger King, while Burger King is obliged to pay for the opening of each restaurant. The company also signed an agreement in February, 2011 with company Ginza Project, a second franchising partner in Russia. Burger King currently has eight restaurants in Moscow and four restaurants in St. Petersburg. Burger King plans to increase the number of its outlets in the Russian regions to 30 before the end of 2011. The average bill totals 120-150 Rubles ($4-$5). Burger King restaurants in Russia get most of their food from domestic suppliers. The company has about 30-40 suppliers in Russia, of which more than half are local producers. The hamburger patties, for example, are being supplied by Russian Inalko. Franchises are required to buy product only from Burger King-certified suppliers. Dunkin' Donuts, the U.S. doughnut chain that left Russia after a three-year stint in the 1999, returned to Moscow in 2010 with big plans for rapid expansion. The Russian company Donuts Project received exclusive franchising rights for development of the chain in Russia and the Ukraine. According to the company?s plans, the brand will be situated in both street and business centers. Dunkin? Donuts opened its first outlet in May 2010 and currently has eight restaurants in Moscow. Dunkin? Donuts plans to open no less than 50 establishments in Moscow. Dunkin? Donuts outlets operate in a low price format (average bill $5-7), which as noted above became a key factor for consumers during and after the crisis. To cater to Russian tastes, the chain offers more substantial food choices, such as salads and sandwiches, alongside the doughnuts. Dunkin? Donuts has ambitious plans to beat competition in the underdeveloped takeaway market through more convenient packaging and also to inspire a love of doughnuts in young Russians. Wendy's/Arby's Group, one of the world's leading fast food operators entered the Russian market in 2011 and will open 180 restaurants there over the next 10 years. Last year the company signed a franchising agreement with Russia's Food Service Capital group, owned by Mikhail Zelman. Food Service Capital initially plans to open 10 outlets in Moscow and St. Petersburg. Wendy's/Arby's have around 10,000 restaurants in 24 countries. Wendy's main competitors in the world are McDonald's and Burger King. Coffeehouses The popularity of coffeehouses among urban consumers in the largest Russian cities is growing faster every year with 2009 being the only exception in the last five years, when Russians experienced a significant decline in income due to the crisis. The recession resulted in a 20-30% decline in customers on average and a decline in sales of 23% to $152.44 million that year. However, currently the largest coffee shop operators are experiencing improved sales and forecast recovery to pre-crisis levels in the short term. Before the crisis, the coffeehouse business in Russia showed impressive annual growth of 36% in value terms on average. Current growth is seen in Q3 2010 when sales reached $185.96 million. Currently there are about 3000 coffeehouses in Russia and the market is far from saturation. Indeed, it has great development potential. Nowadays, coffeehouses are prevalent in Moscow and in St. Petersburg with 400 and 350 coffeehouses respectively. There is an increasingly high concentration of the leading chains, including Coffee House, Shokoladnitsa, McCafé, Starbucks, and Costa Coffee in these cities, so in the short term many coffeehouse chains plan to expand to the Russian provinces. Non- chain coffee shops are significantly less common. The rapid development of modern hypermarkets, trade centers, shopping malls, and business centers is helping leading chains, more so than independents, to enter regional markets. Two leading coffee-shop chains Shokoladnitsa and Coffee House together own about 450 outlets and have value shares of 8% and 7% respectively. Shokoladnitsa is closer to an Italian type of café with a cozy interior, while Coffee House is a more American-style coffee shop, with the décor being airy and uncomplicated. As a result, the clientele differs: Coffee House is preferred by consumers under 30, while Shokoladnitsa is favored by a more mature audience. Most of the Coffee House and Shokoladnitsa outlets are located in the food courts of new shopping malls and business centers. Local chains such as Traveler's Coffee in Novosibirsk, Kofeynya No. 7 in Yekaterinburg, and Pit Kofe in Rostov-on-Don have strengthened their competitive positions in local markets. Currently the Traveler?s Coffee brand name is used by about twenty franchises in different Russian cities. In 2007, two leading multinational coffee shop chains appeared on the Russian market, adopting different development strategies. The world leader, Starbucks Coffee Company, opened its first outlet in Moscow in September 2007 and currently is number three by coffee sales after Shokoladnitsa and Coffee House. As of February 2011, Starbucks operates 40 coffee shops in the capital. Following Starbucks, Whitbread and Rosinter Restaurants Holding signed a joint-venture agreement and announced their intention to launch the Costa Coffee chain in Russia. Costa Coffee outlets are not only concentrated in Moscow and St. Petersburg but also in other Russian regions. The appearance of these leading multinational coffee chains on the Russian market has changed the position of the coffee shop segment. Table 9 shows the growth of Russia?s coffee shop chains. Table 9. Russia: Coffee-Shop Chains Number of Chai First Year of n Name Locations Op outlets eration 2008 2010 Coffee - House Moscow, St. Petersburg, 187 216 1999 regions Moscow, St. Petersburg, 175 225 Shokoladnitsa 2001 regions McCafe 2002 n/a 43 Traveler?s Coffee Novosibirsk, Siberian regions 1997 n/a 36 Idealnaya St. Petersburg, Moscow, 13 18 C 2000 hashka regions Coffee - Mania Moscow 2001 12 9 Coffee Bean Moscow, regions 1996 12 12 Starbucks Moscow 2007 4 40 C scow, St. Petersburg, 10 26 osta Coff Moee 2007 regions Kofein Moscow 2006 n/a 17 Source: Restaurateur Magazine, trade press The typical Russian coffee shop format differs from Western standards because Russian consumers prefer a larger assortment of drinks and food items. According to industry sources, coffee accounts for 80 percent of sales for Idealnaya Chashka and Coffee Bean, but only 40 percent of those for Coffee House and 15 percent for Shokoladnitsa. Coffee shops in Russia constantly increase their non-coffee selections to include alcoholic drinks, dairy cocktails, salads, hot dishes, desserts, and tea. The average bill at one of these coffee shops is between $15 and $25, and drinks average only 30 to 40 percent of the total check. Russian coffee shops that sell a variety of desserts and confectionery products have created a new market for U.S. exporters of nuts and dried fruit. Hotels According to Russia?s State Statistics Bureau (Rosstat), Russia had approximately 6775 functioning hotels able to accommodate guests in 500,000 rooms at the end of 2010. Almost 20% of hotel rooms are in Moscow, 13% are in Russia?s popular Black Sea resort area Sochi, and 9% are in St. Petersburg. Russia?s hotel industry is facing a severe room shortage. Jones Lang LaSalle and Colliers International, the real estate money management and services firms, estimate that there are currently only 16,000 Western business-style hotel rooms available. In fact, most existing four and five-star hotels in Moscow and St. Petersburg were built during the last decade. As a result, Moscow currently has 10,000 Western business-style hotel rooms, and St. Petersburg has only 3,000. Total visitation to Moscow grew at an annual rate of approximately 13% from 2006 to 2008, according to figures provided by the Committee for Foreign Economic Relations of Moscow City. According to Moscow?s Committee for Tourism, total tourism arrivals for the first half of 2009 declined 19% to just over 1.5 million visitors. This was caused by the economic crisis which started to affect Russia during the last quarter of 2008. Table 10. Hotel Industry Sales in Russia 2005 2006 2007 2008 2009 RUR, billions 60.1 74.7 92.4 107.5 105.9 Growth Year on Year, % 24.3 23.7 16.3 -0.02 US Dollars, billion* 2.12 2.75 3.62 4.32 3.34 Source: Federal State Statistics Bureau *Average exchange rates by years: 2005 ? $1 = RUR 28.3; 2006 - $1 = RUR 27.2; 2007-$1 = RUR 25.49; 2008-$1 = RUR 24.84; 2009-$1 = RUR 31.72. Moscow is one of the largest cities in Europe and remains the country?s main city for hotel development. According to NAI Becar, as of end 2010 about 242 hotels were operating in Moscow with approximately 36,800 rooms. According to the British research company Hogg Robinson Group, since 2005 Moscow has taken first place as the city with the world?s highest accommodation cost. Table 11. Accommodation costs in Moscow Hotels (rubles/per night) Star rating 2008 2009 2010 # of rooms in 2010 Market share, % 5 17,087 12,236 11,500 4,115 11 4 14,442 9,615 9,500 7,421 20 3 9,718 6,476 5,800 15,795 43 economy 6,397 5,153 4,000 9,466 26 Total 36,797 100 Source: Consulting Company Cushman & Wakefield, NAI Becar After peaking in 2007, the overall performance of hotels in the Russian capital has shown weaker year- to-August results compared to 2007, with a year-to-August 2010 occupancy decrease of 13% on 2007, and average rate decreases of 20% in Rubles. Figure 2. Hotel occupancy in Moscow for 2007, 2009 and year-to-August 2009 Source: STR Globel Figure 3. Moscow Hotels Occupancy rate Q3 2008 ? Q3 2010 Source: STR Global, GAO ?Moskva?, Blackwood research Hotel occupancy dropped in 2009 as a result of many factors which affected the Russian economy, including lower oil prices, decreased levels of oil production and a decrease in demand for the country?s industry. Since 1991 Russia has seen the emergence of more international brands and there remains further opportunity for investment in the hotel sector across all categories. Moscow and St Petersburg alone account for around 30% of the country?s hotel capacity. While the high-end sector is close to saturation, there is a strong demand for midlevel hotel rooms. The highest level of unfulfilled demand is for quality three star and economy hotels. The budget brands of Western hotel chains are not represented in Russia. Table 12. Russia: Five and Four-Star Hotels Managed by International Corporations First year of H Other # of otel Operator Moscow Hotel Nam # ofe R operation in ooms Locations Rooms Russia R Swissotel Krasnye affles H 233 2005 olmy 5* Marriott Renaissance Moscow 1991 International H 475 Samara 196 otel 4* Courtyard Moscow C 218 St. Petersburg 316 ity Center 4* Ritz Carlton Moscow 334 5* Marriott Grand Hotel 392 5* Marriott Royal A 230 urora Hotel 5* Marriott Tverskaya H 162 otel 4* Renaissance Monarch 366 H Ararat Park Hyatt yatt International Mos 97 2002 cow 5 219 Yekaterinburg 2* Inter Holiday Inn 154 Samara 177 1998 Continental Hotels Vinogradovo 4* Chelyabinsk 54 Group St. Petersburg 557 Holiday Inn 312 Sushev ski 4* Holiday Inn 523 Sok olniki 4* Holiday Inn Lesnaya 301 4* Crown Plaza 577 Holiday Inn 217 Sim onovskiy 4* Starwood Hotel & Le Meridian National R 221 1997 esort 5* Le Meridien Moscow C 131 ountry Club 5* Sheraton Palace Hotel 204 5* Best Western Art-Hotel 4* 85 St.Petersburg 2005 International Kempinski Hotels Balchug Kempinski & 232 St.Petersburg 197 1992 Resorts 5* Accor G Novotel roup 488 St.Petersburg 233 1992 Sheremetievo 4* Novotel Moscow City-C 257 Yekaterinburg 168 enter 4* Small Luxury Hotels of the Wo Savoy 5* 84 rld Rezidor Hotel Radisson SAS 1991 G 410 Sochi 415 roup Slavjanskaya 4* Radisson SAS R 150 Rostov on Don 82 iverside 4* Radisson SAS Belorusskaya 4* 264 St.Petersburg 164 Radisson Royal 543 Kaliningrad 178 Ukraine 5* Source: Department of External Relations, Moscow City Government and Industry Data The regions outside of Moscow and St. Petersburg represent a small fraction of the travel industry, but some areas such as Sochi, Rostov-on-Don and Vladivostok are growing quickly. Yekaterinburg, Novosibrisk, Nizhny Novgorod, Krasnoyarsk, Kaliningrad, and Kazan are other regions where travel and tourism are growing, particularly for business travel. Major hotel chains are opening facilities in these regions, and the Rezidor Hotel Group (including Radisson brands) is currently targeting some 35 key cities in Russia with a population of 500,000 and above to further develops its portfolio of hotels and brands. Other international operators, such as InterContinental Hotels Group, Hilton Hotels Corporation, Kempinski Hotels, Marriott International, and Accor have built two-three new hotels in cities with populations over one million in the last five years. Though many new hotels were opened in 2010 it should not be taken as a sign of a revival in hotel investment. Hotel projects usually have a four to five-year development cycle, so the projects coming online in 2010 were planned and, in many cases, financed prior to the start of the global recession. Table13. Moscow Hotels: New openings and future developments Hotel name Star Cost per room, Number of Opening rating rubles rooms Date Lotte Hotel Moscow 5 12800-13800 304 2010 Ukraine/Radisson Royal 5 12800 543 2010 Grand Hyatt Residences & Spa 5 368 2010 Four Seasons Moscow 5 185 2011 Kempinski Hotel Nikolskaya 5 200 2011 Kempinski Hotel Beryozki 5 200 2011 Mandarin Oriental Moscow 5 237 2011 Raffles Moscow 5 130 2011 Shangri La Moscow 5 400 2012 Aquamarin 4 6800-7980 159 2010 Renaissance Moscow Monarch 4 366 2010 Center Garden Ring 4 7600-9600 86 2010 The Mandarin Residences 4 45 2010 Courtyard Marriott Moscow 4 170 2010 Paveletskaya Radisson SAS Riverside 4 150 2010 Radisson SAS Belorusskaya 4 264 2010 Scandic Khimki 4 300 2010 Mercure 4 103 2010 Radisson SAS Olimpiyski Hotel 4 382 2011 Holiday Inn Circus City 4 1000 2014 Katerina Park 3 260 2010 SK Royal 3 170 2010 Azimut Otel 3 144 2010 Total: 6166 Source: www.prohotel.ru, Blackwood research, H/S Research As many experts predicted, the 2014 Sochi Winter Olympic Games is spurring hotel development in the region. All in all, 390 new hotels are expected to be built across Russia by 2012, with many in Moscow and several in major regional capitals. International hotel operators are building hotels before upcoming events in the Russian regional centers. The following events are planned for the near future: the APEC Summit in Vladivostok in 2011, the World Students Games in Kazan in 2013, and the Sochi Winter Olympic Games in 2014. Russia also won the right to host the 2018 FIFA World Cup. Matches are to be held in 13 cities, including Moscow, St. Petersburg, Kaliningrad, Kazan, Yaroslavl, Nizhny Novgorod, Rostov-on-Don and Sochi. There are usually two restaurants in four-star hotels and three restaurants in five-star hotels. According to industry sources, tourists often eat breakfast and dinner in their hotel, but they eat lunch in the city. In an attempt to attract more of the tourist industry, hotels are offering special catering services for different events. On average, room rentals account for 70 percent of hotel income, services account for 10 percent, and food and beverages account for 20 percent. Luxury hotels represent the best opportunity for selling American products to hotels. Other sub- categories usually have very limited foodservice offerings. Hotel restaurants operate like other restaurants and purchase items through distributors. American meat, fish, wine, spirits, and fruit are some of the better prospects for this segment. Institutions Institutions are challenging customers for American producers. Before the 1990s, catering was a miniscule segment of the Russian hospitality market. Now, catering is a quickly evolving industry, with Moscow claiming 62 percent of the market and St. Petersburg at 22 percent. There are an estimated 500 catering companies operating in Russia, including 30 major ones. Each year, 15 new companies enter and 20 companies exit this intensely competitive industry. Russia?s leading caterers are Sodexho, Mega Foods, Parad Catering, Brizol, and Master foods which have total market share about 50 percent of catering services. The Russian catering market consists of several segments, each of which has a different service audience, number of players, average bill per person, and profit, including: Lunch deliveries; Corporate catering; and Off-premise catering. Urban dwellers have less time to prepare their own meals, so they often dine out or have lunch delivered to the office. Lunch deliveries are a strong component of the catering business. The estimated value of the lunch catering business in Moscow was $100 million in 2009. There is room for development, however, as only 15 percent of Moscow?s office employees eat lunch prepared by qualified chefs. Office cafeterias form another changing segment. Until recently, most cafeterias operated in the Soviet fashion, offering few choices and low quality. As incomes grow, however, the office cafeteria is transforming. Corporate catering firms manage stationary foodservice facilities, placing them in office buildings, business parks, shopping centers, administrative complexes, and industrial facilities. Their goal is to give people high quality meals in these institutions on a daily basis. The average bill in office cafeterias is $5 to $7. Newer cafeterias are beginning to use higher quality ingredients. They still prefer to buy whole, non-processed items, and they are very price sensitive. Like many restaurants, they monitor prices weekly and do not hesitate to change suppliers or menus if they encounter a better price. Catering for private events and parties, especially those in the premium segment is another attractive and profitable area of foodservice. Consequently, well-known restaurateur Arkadiy Novikov entered the catering business at the beginning of 2006. Other restaurateurs and five-star hotels are also rushing to enter this lucrative market, including Gurme (?Gourmet?) Catering, Baltschug Kempinski, and Swissôtel Krasnye Holmy. Their teams of culinary professionals are willing and able to delight customers. Hotels are attractive caterers because they are flexible enough to deliver a five-star experience in any venue, and they have an extensive wine knowledge. The average bill for mid-level off-premise catering is $45 per person, but prices can be significantly higher in the premium class. Caterers use many categories to tailor their products to the client, and they usually work with the same distributors as restaurants. Like restaurants, caterers use a variety of distributors and suppliers depending on their needs. Mid-level and high-end caterers import a variety of food, presenting an attractive opportunity for U.S. products. There is a particular demand for specialty items such as seafood, meat, wine, and nuts. While there is not yet a national school lunch program in Russia, there is interest in creating one. The Russian government is working closely with the U.S. government to improving the school lunch program in Russia. Packaged food for institutions may have some potential in Russia, but the cost and logistics of importing U.S. products may deter potential customers. Nevertheless, potential demand exists for rice, peas, beans, and lentils. Soup bases, spices, and institutional food packs could also appeal to some companies. Universities, hospitals, and the army could be other potential customers for catering companies, but tenders are often not competitively bid for catering contracts with government institutions. In 2008, Russian Railways created the joint venture Yedinaya Set Pitaniya with RP-Com, one of the top 20 foodservice operators in Moscow. This enterprise manufactures ready meals for passengers of the Russian high-speed railways, which currently operates on three lines: Moscow-St. Petersburg, Moscow- Nizhny Novgorod and St. Petersburg-Helsinki. By the end of 2010, the company produced 20,000 meal trays per day from its first catering facility near St. Petersburg. Other catering facilities will be built in Yekaterinburg, Novosibirsk, Sochi, and Rostov-on-Don. According to RF Government plan, 8 Russian cities hosting 2018 World Cup matches should be linked by an integrated high-speed rail network. Operators at the major airports in Moscow and St. Petersburg usually function more as part of a restaurant chain than as an institutional operator. According to airport statistics, 30 to 40 percent of passengers eat in airports. Leading Russian foodservice operator Rosinter has opened and operated restaurants in Russian airports since 2003. Its experience earned Rosinter the responsibility of being the primary foodservice operator in St. Petersburg?s Pulkovo airport in 2007. In addition to operating the airport?s restaurants, Rosinter also feeds the airport staff. Rosinter built a kitchen facility in the Pulkovo airport. The volume of passenger traffic in Russia exceeded 50 million in 2010. The volume of passenger traffic through Moscow?s two main airports, Domodedovo and Sheremetyevo, exceeded 40 million passengers in 2010. Airlines contract with professional catering companies for in-flight meals for passengers. JSC Domodedovo Air Service is the largest Russian company serving up to 60,000 in-flight meals and rations per day in Domodedovo airport. AeroMar has provided in-flight catering services to the passengers of Sheremetyevo airport since 1990. Joint-stock company "Rossiya Airlines" is the leading air carrier in North-West Russia. Rossiya Airlines is located in St. Petersburg and operates up to 40% flights from Pulkovo airport for more than 70 destinations. Since 1993, the airline has its own catering division. Daily, Rossiya Catering produces up to 20,000 portions of in-flight meals for all domestic and international airlines flying out from Pulkovo airport. Considering the increasing demand for high-quality airline food, airline foodservice could become an attractive niche market for U.S. food and beverage exporters. Another great opportunity for American producers and Russian foodservice operators will be the Sochi Olympic Games in 2014. Last year the Russian government renovated the Sochi airport, increasing capacity to serve 1,300 to 2,500 passengers per hour. In the buildup to 2014, Russia will construct restaurants, stadiums, and 57,000 hotel rooms to serve sports teams and guests in Sochi. These will all provide a valuable potential market for American producers. SECTION II: ROAD MAP FOR MARKET ENTRY Distribution Channels for HRI Products in the Russian Market Do mestic and i mported fo od products for Russian foodservic e establishm ents come through importers, distributors, and wholesalers. Large suppliers are typically also importers. For smaller restaurants and hotels, most foodservice purchases are made through a wholesaler or importer/distributor. Large chains may choose to purchase directly through customized growing agreements or through a central buying office. Most hotels and restaurants choose to purchase the majority of products through foodservice importers/distributors in the HRI sector, both large and small. Specialty and seasonal products are purchased through smaller distributors or directly from local producers. Table 14 . Russia: Advantages and Challenges for U.S. Exporters Advantages Challenges Paying in dollars is advantageous for Ruble/$ exchange rate has led to an increase in the exporting to Russia compared to Europe price of U.S. products, mitigating some of the due to the lower cost of the Dollar positive effects of the advantage over the Euro. relative to the Euro. Official government opposition to growth in food imports. Russia with population of around 142 Still not fully recovered from economic crisis million people is one of the largest which had a profound impact on purchasing power consumer markets in Europe. among the middle class. Rising disposable incomes in the long Economic vulnerability, dependence on oil and term will allow Russians to spend more mineral extraction for most wealth. on food and beverages. U.S. products have a reputation for Logistics can be difficult. There are often long consistency and high quality. shipping times from the U.S., the major Russian port in St. Petersburg operates slowly and handles volumes way beyond capacity, and there are complex customs regulations. The HRI sector has a lot of room for Customers can be very price sensitive. growth. Restaurant chains are expanding out of Moscow and St. Petersburg to other cities with populations over one million. Russian trade and investment policy is Russia is not yet a World Trade Organization converging with international standards. (WTO) member and accession is moving slowly. Entry Strategy Entering Russia?s market can be incredibly rewarding, but it requires hard work and careful planning by U.S. exporters. Different types of products require different marketing strategies. Several meat, seafood, wine, and spirits companies, however, are selling to the HRI sector, and their businesses are flourishing. Several general recommendations may be helpful for developing a successful entry policy: Work with a Russian Importer: Direct importation is difficult without a large customer base, so it is best to find an importer. To work with Russian Customs, it is essential to have a physical presence in Russia. U.S. exporters can approach the Russian HRI food and beverages market through a general importer, with whom good relations are essential. Selecting the right trading partner is one of the most important decisions for exporters when developing their businesses in Russia. A local Russian partner who is familiar with market conditions and the regulatory environment can help exporters navigate the Russian HRI market, resolve issues, and increase the likelihood of success. The importer should be able to handle customs clearance, veterinary and phytosanitary inspection requirements, any necessary guarantees, and all licensing procedures. Logistics must be carefully considered and monitored, so close contact with the importer is also necessary in order to avoid logistical problems and shipping delays. Consider the longer shipping time for U.S. products compared to products from Europe. It is essential, for example, that all required documents be filled out as quickly and efficiently as possible. Most products will enter Russia through St. Petersburg, but if a U.S. exporter wishes to operate in the Russian Far East, Vladivostok is another option. Consistency and necessary quantities of production in the supply chain are frequently cited as primary concerns for the HRI segment. Exporters representing U.S. companies may contact the Moscow ATO for assistance in locating importers. Performing due diligence is nevertheless important, and exporters are expected to verify the banking and supplier references of potential importers. Local and U.S.-based organizations in Russia can also provide helpful information to exporters. Credit reporting, however, is a relatively new practice in Russia, and credit-reporting agencies may not have complete information on potential Russian business partners. We recommend the exporter ask for 100% payment for the first shipment. Work with a Russian Distributor: U.S. exporters will need a distributor in order to sell their products. Large suppliers are typically also importers, and most HRI outlets rarely import products directly, preferring to procure supplies through local distributors. International chains with internal distribution networks within the country are the exception. The larger distributors are suited for commodity and large-volume sales. Smaller distributors work well for specialty, high-end, or new products that require marketing and product education. The most promising categories of products fall into this segme
Posted: 18 March 2011, last updated 19 March 2011

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