Lina Kalyanina and Lilia Moskalenko

“Hi, pal! I’ve been looking for you forever!” With these words, Russian producer of Tinkoff beer, Oleg Tinkov, greeted famous Italian photographer and creator of Benetton’s controversial ad campaigns, Oliver Toscani. Tinkov’s new “pal” responded and soon became creative director at Tinkoff. The appearance of an eccentric creative marketer with a world reputation in Russia is no coincidence. The Russian market is increasingly in need of creative energy. The price and quality of a product are no longer the deciding factors in a company’s actual market advantage. Today market players are all thinking more about how to capture consumers’ hearts and give them the sense that Russian companies’ products are truly unique. This is the task confronting Russian companies in the near future.

A Brief Era

From the very beginning, Russian consumers proved far more demanding and pickier than in the West. The Russian market quickly jumped over the industrial consumption phase, when consumers buy goods and services to satisfy their basic, meat-and-potatoes needs. While it took the United States several decades in the last century before a chicken appeared in every pot and a car in every garage, Russians needed only 10 years to satisfy their post-Soviet hunger. Already by the 1990s, foreign importers and producers noted a tendency uncharacteristic for emerging markets on the part of Russians to evaluate products’ non-material qualities and pay more for them. For this reason, the era of standardized products at low prices was very brief in Russia. Russian producers, who had just started turning out generic products using technology imported from the West, instantly joined the post-industrial race for new models, wider selection, designer products and service innovations. In recent years, this came about due to a slowdown in consumer activity growth. Prior to 2002 the Russian market grew at phenomenal rates, averaging 25 to 30 percent a year, and in some sectors growth was as high as 100 percent. In 2002 the growth of the consumer market compared to 2001 began to slow on average by one-third. Growth continued to slow in the following year. This was accompanied by a qualitative change in demand and increased competition in the market. Considering a product’s price, quality and post-sale service have become second nature today, Russians' demands have diversified. Consumers want products to match their individual needs. In response, Russian companies have started to think about their own diversification, creating new kinds of products and searching for new market niches. Producers are focusing their attention on making products for the market and on marketing. This is where the war for unique competitive advantage is being waged today. 

To Each His Own Gel

Many producers began the new, market-oriented phase of business development by searching for innovations and creating new products. Around the world, many experts have long believed that the constant renewal of product range is the most effective approach to marketing. According to U.S. specialists, innovation in any form — whether in resources, products or production technology—will give a company a head start on its competitors and an increase in turnover of at least 50 to 100 percent a year. International companies such as Ecco, Columbia Sportswear and Danone have proven this theory. Innovations helped turn many a local company into a transnational giant and industry leader for several decades.
The Russian market for consumer innovations is still tiny, equal to a few hundredths of a percent of European markets. Putting out some new kind of straightforward chocolate bar along the lines of Twix every quarter — first with dark chocolate, then with ginger — was an impossible task for Russian companies until very recently. “Creating a new product requires remarkable human and financial resources from the company. First of all, creative people capable of setting long-playing consumer trends are always rare. Secondly, even if you have ideas that could become the core of a trend, this still does not guarantee your company a monopoly, as creating a new product based on these ideas and the lengthy process of bringing it to market require four to five times more investment on the part of the company than goes into regular products,” argues Dmitry Smirnov, director of marketing at Wimm-Bill-Dann, the Russian leader in dairy products and juices.
Product innovations have primarily taken place at major Russian companies such as Wimm-Bill-Dann, Russky Product and Nidan Foods, predominantly manufacturers of food products that felt the slowdown in their markets and increased competition before other companies. Some Russian companies have even started to outpace foreign companies in their creation of new products. “Anyway, we know the tastes of Russian consumers better,” says Smirnov. “A year ago, an imported product called Mazhitel did poorly on the Russian market, because Russians found the combination of milk and juice strange. But they are crazy about the combination of yoghurt and juice, and we used this to create our new product, Neo.” In 2004, all major Russian manufacturing companies announced that expanding their range of innovative products was their main market strategy.
Manufacturers whose products are hard to innovate are emphasizing innovative promotion. They have begun to use directed marketing actively. Beer and alcoholic drink producers mastered this strategy first. For example, Russia’s largest beer producer, Baltika, makes beers for all age and gender categories, such as progressive young people, working women or mature men. Companies in the service sector have also turned to targeting diverse groups of customers. Igor Stoyanov, owner of the Persona LAB chain of beauty salons, initiated a new project last year by opening a new chain of salons called Persona Family, which offered various services for both adults and children. Fitness clubs, too, have used targeted marketing from the moment they entered the market. Today’s biggest players, such as Planet Fitness, World Class and Gold’s Gym, have packages on hand for different categories of customers, from children to pregnant women to those over 50. Individual packages have also become a key competitive advantage in the travel industry. “Only specialized products can appear today on the overcrowded Russian travel market, such as an agency for unique trips that offers exotic tours. Agencies putting together packages for young people or retirees will also do well. Companies who are merely offering a wide variety of different tour packages won’t survive on the market,” says Andrei Ozolin, owner of the Hot Trip Shop, a travel agency chain. Cosmetics manufacturers, however, are the most highly specialized in targeted marketing today. “The notion of a shower gel for the whole family today is pure nonsense,” says Vadim Kormilitsyn, general director of Emansi Laboratories, a cosmetics company. “Today consumers are used to the idea that every family member should have his own gel.”
For retail companies, targeted marketing is no longer an effective tool in winning over customers, as the likelihood of overlapping with competitors on a highly saturated market is increasing. “We use three retail formats targeting different groups of customers: the supermarket, the hypermart and the 'corner store,’” explains Irina Telistyna, director of public relations at Sedmoi Continent, one of the largest Russian grocery retail chains. “But we won’t 'diversify’ any further, because then we would come into direct competition with Western companies. Today, in addition to 'targeting,’ you need other competitive advantages.” The majority of Russian retailers are using any means necessary to whip up sales, such as discounts, bonuses and credit services, and also expanding into regions outside of Russia’s major cities. “The main goal in an expansion strategy is to reinforce certain strict formulas in consumers’ minds via constant repetition. For example, fast food equals McDonalds, cosmetics equals Arbat Prestige, clothing equals Sela,” says Arkady Pekarevsky, owner of the Sela Clothing Company.
In the near future, the main center of competition between large retail chains will move to the regions, and this is especially true for grocery retail. While two or three years ago, chains selling clothing and household goods beat out grocery retailers in terms of the number of stores open in regional Russia, this year grocery chains such as Pyaterochka, Paterson and Perekrestok are leading the move to the provinces. 

Hitting at the Heart

It took several decades in the West for markets to expand and product lines to diversify. To all appearances, the Russian market has also jumped over this phase much more quickly. Consumer preferences have become more individualized, and Russian producers are finding it less and less in their interest to make one type of product and compete with bigger Russian and Western companies. Though not much time has elapsed since Russian companies began to grow more energetically, many of them already understand that bonuses and retail chains are not going to give them much of a competitive advantage on the market. These companies long to escape the competition by creating unique products. This is why 2003 saw a notable increase in the role of brands at Russian companies. While previously only products for elite consumption had brand names, now producers of products for the mass market, such as flour, sugar or pasta, are no less concerned with creating a brand to separate their products from others of comparable price and quality. However, supporting a brand name takes constant and significant spending, primarily on advertising, and most Russian companies are losing out to transnationals in the battle of the brand.
Around the world, local producers left the brand war with transnationals long ago and concentrated on a higher stage of development, creating unique products by implementing cutting-edge technologies. According to data from Monitoring.ru, Western companies spend around 20 to 25 percent of their revenue on R&D each year. Thanks to these efforts, the Western innovation market in 2003 approached the whopping sum of $3 trillion. Russian companies, of course, are far from willing to invest such amounts in R&D, and for this reason they are forced to search for other paths to uniqueness. Frequently this means inventing a product or service that either satisfies a “hidden” need on the market or one that hits at consumers’ hearts. For example, last year Expert wrote about the Ruyan Company (issue No. 7, Feb.24, 2003), whose operations were solely focused on creating unique products and taking over unoccupied niches at the intersection of several industries. Very recently, Expert also wrote about mid-sized food producers Dymov, Ledovo and Mortadel, who offer niche products based on proprietary recipes (issue No. 47, Dec. 15, 2003). In 2003, cosmetics companies, with no desire to compete with transnational giants, also began to strive for uniqueness. Several dozen companies with unique products appeared in Russia, such as Emansi Laboratories, Russkaya Kosmetika, Biokon, Trinity M and MB Pharma. Among the new products were conventional offerings with natural extracts from mushrooms or herbs, as well as more technologically advanced products, such as tissue-based cosmetics. 
Russian companies are searching for uniqueness not only in the products they produce, but also in various ways of influencing consumers’ emotions. This is particularly true of the companies closest to consumers: retailers. Late last year, one of the most rapidly expanding retail chains, Paterson, turned to international ad agency McCann-Erikson for help in creating a competitive advantage for the chain based on a more intense relationship with its customers. As a result, the chain launched a new slogan: “Paterson … we feel the same.” Paterson employees participated in training sessions where U.S. specialists taught them not only sales methods, but also how to greet customers, smile at them and resolve any conflicts that might arise.
It seems other chains will soon feel the same. M.Video, one of Russia’s leading home electronics and appliance retailers, also signed a contract with McCann-Erikson late last year. “Today we need more than just quality and selection, which our competitors also offer. We need consumers to think, 'There’s nothing better than M.Video,’ about our brand. The only way to get them to think this is to get at their emotions,” says Oleg Davidovich, director of advertising at M.Video.
For the moment, Tinkoff has proven most successful in winning over customers’ hearts. A shocking ad campaign helped the company boost sales by 50 percent. “We aren’t selling beer, we’re selling a lifestyle. Our product is for young Russian yuppies. That’s why our ads are in a very urban style, for them,” says Samvel Avetisyan, director of marketing at Tinkoff. This is also why the company hired Toscani: to further develop its metaphor of “an eccentric lifestyle” and win the hearts of more consumers.

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