Russian shoppers react to falling Ruble

Date : 17 December 2014

Anticipating massive price increases of imported goods, shoppers in Russia have been spending their savings in the last couple weeks, trying to invest their savings into valuable products. IKEA and stores are very busy while Apple closed its online shop yesterday, for the second time since October, in order to change its pricing. All car dealers in Moscow have run out of cars, while luxury products like furs are out of stock. So a bumper time for retailers, many of whom look set to report strong revenue growth in Q4 2014. But the growth will end with the end of the year.

All that is off the back of the weakening Russian Ruble, which fell briefly to 80 per USD yesterday, in its steepest fall in a single day since the Russian financial crisis in 1998. In fact the currency has been losing its value since the beginning of the year, when it stood at 32 per USD.

Foreign retailers short on profits

The plummeting Ruble causes trouble not only to shoppers, but also to retailers. A weak Ruble has a negative impact on profits of foreign retailers like Metro Group and Auchan. Russia is for both of them a key market in Central and Eastern Europe, driving much of the revenues and profits generated in the region. However, unfavourable exchange rates will significantly cut their profits. Indeed, Metro Group published its 2013/2014 financial results yesterday, stating a strong, close to double digit, like-for-like sales growth in its Metro cash & carry banner in Ruble terms, though Metro Group’s EBIT was lower by around EUR200m due to the exchange rate.

Gloomy 2015

2015 will be a critical year in the Russian retail market. The weak Ruble will lead to a price hike not only for luxury and premium products, but also for value ranges and private label products. We estimate that up to 60% of products in grocery stores are either imported, their raw materials are imported or their ingredients are purchased in a foreign currency. Consequently, food inflation, which is already reaching the 12% level, is likely to rise further. According to the Russian Association of Retailers, the price of some products grew by up to 25% in 2014 and may further increase by 15% in January-February 2015.

As a result of the current development, we expect that the growth of the Russian retail market will dramatically slow in 2015. Retailers may expect a drop in their profits and along with restrictive access to external funding, their store development strategy may slow too.

For more insight on Russia and EU/USA sanctions read here: No fear of sanctions among Russian retailers

Miloš Ryba is a Senior Retail Analyst International at IGD. Miloš has been analysing global retailers and emerging markets for more than a decade. His deep expertise lies in Central & Eastern Europe and Central Asia. Miloš regularly presents at leading conferences in Europe, Middle East and Asia and features in European and North American media.