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The Riddle of Marketing in Russia

CMO Survey Results

This post was co-authored with Evgenia Barkanova, Irina Kudryashova, and Irina Melnik, all MBA students at the Fuqua School of Business, Duke University.

Winston Churchill said, “Russia is a riddle wrapped in a mystery inside an enigma.” This becomes clear when thinking about U.S. companies marketing in Russia (more properly called the Russian Federation). Results from the last CMO Survey indicate that Russia is the international market with the highest sales growth rate. Sales are reported to have grown an average of 57% for U.S. companies that designate Russia as their largest international market. This compares with India at 38%, China at 26%, and Brazil with 19% growth.

Where is the enigma inside the Russian marketing mystery? Consider these facts. Russian is the world’s 6th largest economy. A member of G8 and G20, identified among the BRIC economies, and a recent entrant to the WTO, Russia is an emerging economic powerhouse. Strong earnings from the oil/natural gas industry have grown the overall economy and allowed the country to diversify its economy while retaining an above average GDP growth rate of 4.1 % from 2010-2012 according to the World Bank (compared to 2.4% for the USA). Even with these impressive credentials, Russia remains a difficult market for many foreign companies for a variety of reasons. What should U.S. marketers know about this Russian riddle? We collected the following case studies involving non-Russian and Russian companies as well as several interesting facts to offer these insights.

1. Sochi 2014:
All eyes on Russia: The 2014 Winter Olympics in the Black Sea resort of Sochi promise a wealth of opportunities for foreign firms and investors. An estimated $50 billion will be spent on more than 40 transport, housing, stadiums, and other modernization projects along with upgrades in telecom, energy, and environmental protection to convert Sochi into a winter sports wonderland. Participating in this important international event could help non-Russian firms make inroads for future projects. Official sponsorships as well as using the Olympics for independent marketing events that piggyback on individual events and athletes could help build brand awareness among Russian customers. One threat is that the games may not go off as well as sponsors hope. The opening ceremony glitch with the Olympic rings is well-known by now and public perception of the games is so bad that @SochiProblems has already racked up ten times the followers compared to @2014Sochi—the official Twitter account for the games. The Olympic experience may serve as a metaphor for doing business in Russia … full of opportunities, but one is wise to prepare for more than the usual amount of the unexpected.

2. Russia’s growing urban middle class:
Between 15-25% of the country’s 142 million population belong to the middle class or middle class periphery. It is expected to grow 16% between now and 2020. Russia is mostly an urban country. According to the census results, 74% of Russians live in urban areas. Everyone knows Moscow and St. Petersburg, but there are ten other Russian cities with populations over one million that offer plenty of opportunities to reach stable middle class customers. This sociological fact is a key attraction to enter the Russian market. Auchan, a French grocery, has successfully penetrated the Russian interior to reach these middle class customers. Auchan opened its first Russian store in 2002 and, through organic growth and acquisitions, now has 75 hypermarkets, 101 supermarkets, and 27 shopping centers under The Auchan, Auchan City, Radouga, Atak, and Immochan names. Auchan’s strategy has been to gain relevance with the Russian consumer as a store where quality products are sold 10-20 percent cheaper than in other stores. Auchan also offers a wide range of products which makes shopping faster and easier for customers. The Auchan model of “modernity, choice and discount” has created a consistent image that is a hit with the middle class Russian shopper.

3. Russia is a big place … really big:
Russia’s land mass is 1.74 times that of the USA and covers 9 time zones. The population is concentrated in the western part of the country with other major cities far away. This makes distribution a challenge and significant expense, especially given Russia’s lack of reliable, inexpensive postal service and its poor road, rail, and air infrastructure. Retailers must therefore understand that competing effectively may require innovative go-to-market strategies not used elsewhere. Four strategies are worth noting. First, some companies have chosen to complement big box stores with smaller storefronts and even kiosks to penetrate markets. For example, O’key, a major hypermarket chain, launched a set of supermarket storefronts to take advantage of these growth opportunities. As of today, company owns 60 hypermarkets and 34 supermarkets. Second, other businesses with store-fronts also sell products online and distribute them to standard delivery locations where customers pick them up using an access code to enter a postal box. For example, ULTRA, a successful on-line computer and gadget store in Moscow and St. Petersburg, launched its own postal boxes and pick-up outposts in both cities. Third, several distributors offering “pick-up lockers” have now emerged to capture this demand. For example QIWI Post and PickPoint have delivery terminals in convenient locations where on-line purchases are delivered and held for pick-up by customers. Fourth, established retailers with a national presence also serve as pick up locations for online companies without this capability. For example, cellular-phone seller Euroset, which has hundreds of retail locations, formed a partnership with OZON (a Russian version of Amazon) to distribute its products.

4. Big opportunities to reach consumers via digital and mobile:
Perhaps because the infrastructure is so poor, Russians have been very quick to adopt technology. Russia is the largest internet marketing audience in Europe (over 53 million). Mobile phone penetration is among the highest in the world. Beyond using digital media to advertise and promote products, firms use it to overcome the poor infrastructure. The specialized delivery and pick-up services mentioned above incorporate mobile tracking of orders and text messaging alerts to notify customers when and where pick-ups are available.

5. Traditional media are strong in Russia:
Reports indicate the Russian media market grew by 13% and is now worth USD 20.5 billion, while the global media market increased by only 4.6%. Furthermore, research predicts that by 2015 Russia will be the fifth-largest TV advertising market in the world, behind only the U.S., Japan, China, and Brazil. This same report indicates that growth rates for offline advertising in Russia are double worldwide rates.

6. Segmenting the Russian market:
Counts vary, but most sources list over 170 different ethnic groups in the Russian Federation. Russians are by far the largest group at 81%, but five other ethnicities have populations over 1 million. The country is divided among 83 federal subjects (members of the Federation), among which are 21 national republics designated as homes to specific ethnic minorities. These republics are authorized to establish their own official languages and constitutions. As the official language of the country, Russian is spoken by almost everyone. However, there are 27 other official languages and more than a hundred other languages without official recognition. Our research shows that most marketing activities in Russia ignore these ethnic differences. For mass market offerings, this may be wise. However, there may be opportunities to reach underserved niche ethnic markets with specialized products and services.

7. Ambivalence toward foreign and domestic products:
Russians are attracted to foreign products, believing them to be higher quality. Italy means fashion, Germany represents reliability, and France stands for romance. Yet many Russians also suspect foreigners of dumping inferior goods into Russia. Local goods, especially foods and beverages, are often preferred by Russians, given their belief that these Russian products are more authentic and given their loyalty to Russian companies. At the same time, they often doubt the quality of these same domestic brands. These conflicting perspectives put Russian customers, and those companies marketing to them, in a complex situation. How to sort this mix of beliefs? First, non-Russian brands in Russia may be most successful when they operate in luxury categories, such as automobiles, fashion, beauty, hospitality, and watches. A 2012 study of most-searched for luxury brands in Russia were all non-Russian brands—BMW, Audi, Chanel, Louis Vuitton, Hilton, Sheraton, Rolex, Swarovski, and Bulgari. Second, Russian companies have tried to capture the high perceived value of western consumer goods by giving their products or companies foreign sounding names. For example, in the early 2000s, the big Russian home products retailer “TechnoSila” introduced a successful home appliance brand called “Bork” and registered the brand in Germany, which allowed the company the legal right to market it as a “German product.” Similarly, a Russian shoe company took an Italian name “Carlo Pazolini” and registered the brand in Italy.

Still other foreign competitors have chosen to buy existing Russian companies and promote the local brands, often with no apparent association to the non-Russian parent company. PepsiCo’s purchases of Will-Bill-Dann and Lebedyanski and Coca-Cola’s acquisitions of Milton and Nidan are two examples. Using this strategy, PepsiCo decided to sell oatmeal using WBD’s Chudo brand rather than its own Quaker Oats name. Similarly, Danish brewer Carlsberg sells beer using the Baltika brand and Klinskoe beer is an InBev brand.

8. Tradition!
We associate this word with Tevye from “Fiddler on the Roof” and companies marketing to Russian consumers need to understand how Russian values and traditions play a role in purchasing decisions. A complex history of Czars, Soviets, and spirited re-birth after the collapse of the Soviet Union makes for a perplexing cultural context for foreign competitors to understand. We uncovered the following observations about this context from the literature. First, Russians have an intense pride in their country and culture. Although they may happily criticize it themselves, they tend not to appreciate others doing so. Second, Goehner and Richmond note that “Russians are more likely to be cautious and conservative defenders of the status quo. Their cruel climate, harsh history, and skeptical outlook on life has caused Russians to value stability, security, social order, and predictability, avoiding risk. The tried and tested is preferred over the new and unknown. Americans, as a nation of risk-takers, can have their patience tested by Russian caution, and anticipation of the negative.” Third, the role of women is complex. Russia remains a male-dominated society, but woman tend to be viewed as stronger and more responsible. Ninety percent of women are in the work force, but most occupy secondary positions.

Reflecting this history and important cultural values will be important to accessing Russian consumers’ wallets. Several foreign companies have successfully built advertising strategies around key Russian values or elements of Russian history. An outstanding example is Mars’ Snickers commercials celebrating 20 years in Russia in which they tied the brand as a constant through changes in Russian history. A current example is Volkswagen’s television campaign for the Sochi Olympics in which one man rescues a comrade whose generator fails and cuts off from listening to the Olympics on his radio. This ad evokes the concept of “true men”—a core value evoked by many brands targeting men in Russia. Straddling traditional ideas about women’s roles while reaching modern working female consumers has been a challenge for companies ranging from Unilever to Campbell’s. Deep insights should guide any go-to-market strategy that taps into these values.

9. Prepare for stronger local competitors:
Russia’s entry into the WTO in 2012 will over time lead to lower tariffs on imported goods and make global brands more competitive with Russian brands. To prepare for a potential explosion of Western goods available in Russia, and to compete outside of Russia, President Vladimir Putin challenged the nation’s businesses to develop their own strong brands. In 2013 Russia placed a respectable 18th in Bloomberg’s Global Innovation Index Top 50 after placing 14th in 2012. Some commentators attribute this success to the Skolkovo Innovation Center—a government-sponsored research campus located outside of Moscow. Among technology players, Yandex, a Russian search engine, has a 60% market share compared to global counterparts such as Google. Likewise, Vkontakte (VK) outperforms Facebook and Kaspersky’s Labs antivirus is one of the strongest software brands in the world. Sberbank (banking) recently made several acquisitions to gain a global presence. Russian Standard has become a fast growing global vodka brand by emphasizing adherence to traditional and rigorous Russian vodka standards. YotaPhone is an innovative mobile phone manufacturer that features a two-sided Android combination smartphone and e-reader. Splat is a very successful and innovative oral care products company that is a leading brand at home and in many other countries. These and other Russian companies are fast becoming sophisticated marketers able to compete effectively at home and abroad.

10. Russian roulette:
Russia is ranked 133 out of 144 countries in the World Economic Forum’s Global Competitiveness Index. One reason for this poor showing is that competitiveness requires strong institutions that create a level playing field for firms entering and investing in markets. Russia’s lack of such strong institutions allows corruption or capriciousness to often trump competition. Weak institutions also lead to consumers not trusting companies or markets, which makes developing strong relationships with customers particularly challenging. This will evolve over time, but companies should consider this when making entry decisions. Do they want to help build the institutional environment in the hope that it will create long-term goodwill or should they let competitors bear the brunt of this effort?