Luxury food off menu as inflation bites

The Economic Development Ministry says inflation in Russia will exceed its target of 8.5% and reach at least 9.5% this year.

Rising prices are partly a feature of strong consumer demand: in February alone retail sales went up 17%.

However, a growing proportion of Russian income goes on basics, like food.

As inflation accelerates around the world, the gap between value and premium products is increasing, with consumers going for cheaper options. Russians are no exception. During several years of rising purchasing power, Russian consumers developed a taste for high-end goods. Now they are taking the first hit.

Consumer analyst of Troika Dialogue Group, Viktoria Grankina, says the squeeze began last year.

“We have seen a similar evidence of this happening in the fourth quarter of 2007. The consumers opted for lower-premium traditional products. In a way this was a factor of the inflationary pressure,” Grankina said.

This plays into the hands of own-label products that are usually about 15% cheaper.

The president of 36.6 pharmacy chain, Jere Calmes, says his firm has seen increased demand for own-label products.

“Our private label has actually been very successful. In 2007 it already grew to about 2.6-2.7% of all the turnover which is in line with our plans. Our longer-term plan is to increase that turnover to 10% of total revenues by 2010,” Calmes said.

However, top international food makers, like Nestle, say that despite increasing prices, Russian incomes are growing faster than inflation, and that is protecting their purchasing power.

“For the moment the consumer does not seem to be intended on saving money on food products,” Bernard Meunier from Nestle Russia said.

Salaries may be going up, but statistics suggest, more of that is going on basics, like food. 90% of Russians already spend more than a quarter of their disposable incomes on food – well above the European average, which is hardly good news for retailers of non essential items.