Today’s European consumers are indifferent to brands and advertising. They increasingly give preference to quality, safety, and naturalness. Russian consumers will soon begin to demand this as well.

“Good cosmetics are edible,” as one European manufacturer of cosmetics joked at the International Bio Fach Exhibition recently held in Nuremberg. Naturalness, or all plant-based ingredients, is the common feature of the bio-products presented at the exhibition, be they food, cosmetics, furniture, or textiles. The Western markets for these products are booming today. Despite their higher cost, people at different income levels, millionaires, pensioners, and students, buy them. Striving to consume only natural and high-quality products has become a sort of new religion for Europeans. They are ready to economize on entertainment and recreation in order to shop at least once a week in supermarkets selling natural products. McDonald’s closing in Switzerland and the development of the Slow Food movement in Europe–in contrast to fast food–serve as indirect evidence of the changes in European consumer attitudes.
The natural product industry has come to Russia as well. Any day now, the Russian company Grunwald will open the first bio-supermarket in Russia. They will sell natural products–furniture, groceries, and cosmetics–from European manufacturers. The project organizers believe that the potential demand for natural products in Russia is great: Russian consumers still remember the taste of the unprocessed products of the Soviet era, and nowadays many visitors to expensive supermarkets are looking not so much for brands as high quality. For the present, the supply of natural products on the Russian market is limited to the small selection (mainly bread and bottled water) at Kalinka-Stockman. 

100% natural

In the West, commercial natural products were finally established in 1990s, when the market for traditional consumer goods became saturated. For many manufacturers, the transition to bio-production was the only opportunity to enter a niche free of competitors and therefore more profitable. However, it is much more difficult to set up bio-production than traditional manufacturing. Thus, for example, farmers need at least three years go organic, the period of time during which the mineral fertilizers applied in traditional agriculture leave the soil. Furthermore, producers cannot expect quick returns from organic production. During the first few years, crop yield tends to decline. Since finished natural products, as a rule, are handmade, their production takes much more time, and the product itself is therefore more expensive (prices are 50-80% higher). In addition, bio-production assumes tighter quality control at every stage of production. Nonetheless, Western retailers became immediately interested in ecologically pure products. Organic sections appeared in supermarkets, and later specialized organic and natural food stores began to open. At present, there are about 150 such markets per million inhabitants in Europe.
Today, the natural products market in European countries is estimated at $25 billion (about 2-3% of the European consumer market as a whole) and has had the highest growth rates. 
However, in the last couple of years, competition on the European natural market began to grow, and organic certification alone was not enough. Many decided to turn to marketing. For natural producers, marketing does not mean branding or packaging; it means increasing selection. Thus, for example, apart from traditional organic products, such as handmade sausages and cheese “made from the milk of cows grazing on Alpine meadows,” more technologically sophisticated products were presented at this year’s Bio Fach Exhibition. For example, an Austrian company offered “intelligent” furniture that monitors a person’s health by promoting proper posture and normal blood pressure.

Bio-country

In their search for ways to reduce costs, Western producers are setting up organic production outside their home countries. They are looking closely at Russia. Russia, in experts’ opinion, has good prospects and a large potential for organic production. Firstly, over the last ten years, in Russia, mineral fertilizers have been applied less than anywhere else. According to Ministry of Agriculture statistics, no more than 8 kg per hectare have been used, whereas under the intensive agriculture currently practiced in the West, the average runs about 320 kg. According to Timiryazev Agricultural Academy data, 70% of Russian agricultural enterprises haven’t used pesticides or herbicides at all over the last few years because of the shortage of working capital. Thus, about two thirds of cultivated areas in Russia could be used for organic farming right now. Secondly, Russia has an extremely organic-friendly labor force. “In our country, the rural population accounts for 25% of the total population – that’s a lot. In European countries, it doesn’t exceed 2-3%,” Hodus says. “Only 16% of the rural population is permanently employed in Russia.” In experts’ opinion, for these reasons, organic farming in Russia could be even cheaper than traditional agriculture.
Despites these prospects, only a couple of foreign organic companies are present on the Russian market, and their business comes from exporting Russian wild fruits and plants, such as cranberries, buckwheat, and mushrooms, to developed countries. Foreign companies are afraid to engage in more technologically sophisticated production in Russia because of the general backwardness of Russian agriculture, specifically the mentality of Russian farm workers, and because of the lack of independent organic certification in Russia. At present, Russian agencies lack the standards to certify this new type of production.

Start with retail

To all appearances, Russian, not foreign companies, will take advantage of Russia’s organic farming potential. Specialists believe that the natural products market will emerge in Russia in the next couple of years. Thus, for example, divisions of large Western certifying companies have started operations, and independent Russian certifying companies have appeared. However, regulatory documents and certifying companies are merely the pre-conditions for market development in Russia. Retailers will make this market. In contrast to the West, where organic products were actively promoted to a greater extent on traditional supermarket shelves, the organic market development in Russia should start with specialized shops. Existing Russian retail chains focus on popular brands and big volume, and they don’t want to change their selection policy at present.
The first specialized natural shops under the brand name Grunwald will open as early as March in Moscow. The total area of the shops will amount to over 3,000 sq. m. For the time being, as one might expect, natural foods supermarkets will target the luxury segment of the retail market. However, Grunwald leaders don’t deny that their strategy is to enter the medium-price segment with time. The company intends to reduce costs and, consequently, prices by gradually replacing European suppliers with their Russian counterparts. “In the beginning, we’ll deal only with European suppliers, giving preference to German ones,” Mr. Trostentsov, General Director of Grunwald, says. “But already by the end of the year, we’ll have Russian products on sale at our shops.” The company will work only with small and medium-sized enterprises producing no more than 50 tons a day. “It’s simply impossible to maintain the required quality when daily production output exceeds 100 tons. Let alone the fact that large companies will never be able to certify their production as organic under present circumstances,” Hodus says. In Trostentsov’s opinion, there are many small agricultural enterprises in Russia today that make products of the required quality, “These enterprises don’t have the funds to promote their products, but they produce, for example, their sausage under the correct Soviet state standards. Their sausage contains 100% meat. Natural supermarkets could provide incentive for these enterprises to develop.”
The main problem Russian organic producers will have to face is that there are no good-quality inputs, especially for meat and dairy products. Today, many successful medium-size manufacturers of high-quality meat products have to purchase ingredients from Brazil, Poland, or Belarus. Small producers will find imports beyond their means. Therefore, Grunwald Company plans to supply livestock (piglets) and fodder from Germany to some farms. In addition, the company is building a sausage plant in Tula Province, which will produce organic meat products.
One can judge by Grunwald’s steps alone that in order to launch the natural industry, it will be necessary to set up vertically integrated companies. Independent market players – farmers, producers, and retailers – will appear only when new shops demonstrate a real demand for organic products, and when existing retail will be sated with mass-produced products and looking for unique niches.

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