Sales Business in Russia. An Analysis of the Russian Market and the Russian Culture

Table of Contents

List of Abbreviations

List of Figures

1 Introduction

2 Main Part
2.1 The Russian Market
2.1.1 The Russian Economy
2.1.2 The Trading Market
2.2 Opportunities in Doing Sales in Russia
2.3 Understanding the Russians by Understanding Their Culture
2.4 Recommendations for Doing Business in Russia

3 Results and Prospects

4 Conclusion

Bibliography

Internet Sources

Executive Summary

Russia is a land with very high potentials and witnessed huge investments throughout the last years. Anyway some companies fail due just copying concepts from other markets. An intensive analysis of the Russian market and the Russian culture is vital.

Despite the current decreasing of GDP the direct invests of foreign countries, especially Germany, grow continuously. According to the World Bank Group’s “Ease of Doing Business” ranking 2014 Russia reached position 92 out of 189 countries. In comparison to 2013 the country climbed up 19 positions. Thus it tops the list of the BRIC states. Challenges in Russia are the poor infrastructure, the corruption and the bureaucracy especially according to the customer law. But Russia is Europe’s largest consumer market with a high level of disposable income and a growing middle class. This was early realised by retail companies like the Metro Group. Today it has 73 cash and carry markets and 63 Media Markt and Saturn markets in Russia.

The best market analysis in Russia can be done by participating trade fairs. Afterwards the structure of distribution has to be chosen: a foreign affiliate or support via third parties like local distributers or commercial agents. While a support via third parties has less risks and is a good initial step, especially for smaller companies a foreign affiliate is a deeper and longer-lasting penetration of the local economy. The latter is the most popular one and goes along with a founding of a limited company.

Cultural values influence the consumer habits the most. The same applies to business partners. Geert Hofstede developed a system of cultural dimensions to describe those values. The four dimensions are: power distance, individualism, masculinity and uncertainty avoidance. By using Hofstede the Russians are very hierarchy-orientated, collectively stamped, regarding social relationships more feminine than masculine aligned and have a high uncertainty avoidance index, which condenses in the bureaucracy. Furthermore, developed by Edward T. Hall, there is the different perception of time. Russians are polychronic, this means they have a low need for schedules; plans serve just as a rough orientation and are adjusted situationally. All those Russian characteristics differ from the German ones. In doing business this must be regarded in order to avoid misunderstandings and unnecessary frictional losses.

Inferring the cultural aspects in Russia consumption fulfils a strong social functions. Brands are symbols of status, wherefore the consumer is willing to spend money. Quality and durability are essential. Humility is not an embellishment. This applies as well for advertisement. Russians hold the belief that only successful companies with high quality products or services can effort such kind of advertisement. Nevertheless the family in Russia is considered to be the highest value throughout all walks of life and ages. Respect and thankfulness play a major role.

Negotiations in Russia are usually harder, more persistent and long-standing than in Germany. Due to the hierarchy only the boss takes decisions and shall be addressed. Emotional outbursts are not uncommon. A salesman shall react with confident patience.

All in all an engagement in Russia requires much energy, time and money before there will be return. Involved Personnel need to have frustration tolerance and of course knowledge about the people and their culture.

List of Abbreviations

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List of Figures

Figure 1: bilateral trade Russia-Germany- export, import, turnover (in billion euro)

Figure 2: quality seal of GOST-R

Figure 3: change of consumer expenses

Figure 4: markets of Metro Group in Russia

Figure 5: Hofstede's dimensions - Russia and Germany

1 Introduction

Belonging to the rising BRIC states Russia witnessed huge invests of foreign countries within the last years.¹ This does not surprise because this country has enormous potentials: Primary materials, labour force, a large and growing demand of consuming and a great demand of infrastructure and modern industry. Throughout western countries Germany has an advantage in doing business in Russia. Due to history and the geographical situation Germany is traditionally a bit closer to it and there are still people speaking Russian. Anyway some companies fail on the Russian market. The cause of this is often the wrong mindset: A takeover of concepts and approaches from known markets to a new country especially to Russia is very likely to fail.² It is a matter of common knowledge that business strategy is based and adapted from military. Instead of the opponent there is the business partner. Fight is the competition on the market for customers. Thus the author refers to a famous quote describing the intention of the current paper. Sun Tzu, the well-known general, strategist and philosopher of ancient China announced: “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.”

The objective of this paper is to inform and sensitise the reader in terms of doing sales business in Russia. The reader shall understand the challenges and opportunities the Russian market has to offer as well as the meaningfulness of regarding the cultural aspects in doing business.

The author applies the following methodology: In the first part the development of the Russian market within the last years is stated. Risks and opportunities are evaluated as a requirement to elaborate the possibilities how to do sales business in Russia within the following part. Each of the two parts are supported by a current case example of German Companies which entered the Russian market. Thereafter the focus is set on cultural aspects. The author approaches the topic by using cultural dimensions of the scientists Geert Hofstede and Edward T. Hall. In the last chapter the gathered knowledge is transformed and concluded to recommendations for doing sales business in Russia.

2 Main Part

2.1 The Russian Market

2.1.1 The Russian Economy

The following chapter will provide an overview of the Russian market. Up to the crisis in 2008 Russia’s economy grew annually by an average of 7%.³ After an economic pick-up following the international crisis the GDP in 2013 again fell down to 1,3%.⁴ This means Russia takes last place within the BRIC states. The inflation rose up to 5,6%, the unemployment rate was at 5,6% and salaries increased by 3,3%.⁵ Currently, an economic growth can only be gained by investments. In 2013 foreign investments in Russia grew by 6% up to 128 billion euro, direct investments grew even by 34% up to 19.6 billion euro.⁶ According to the World Bank Group’s “Ease of Doing Business” ranking 2014, Russia reached position 92 out of 189 countries. In comparison to 2013 the country climbed up 19 positions. Thus it tops the list of the BRIC states (Brazil: 116, India: 134, China: 96).⁷ This is the result of Russia’s membership within the World Trade Organisation since 2012 and the related measures taken for improving foreign investments. When it comes to German investments in Russia, it is to be seen that the accumulated investments decline since 2010 (2010: 20,9 billion euro, 2013: 16,0 billion euro) while the direct investments continuously rise (2010: 7,0 billion euro, 2013: 9,6 billion euro).⁸

Since 2012 the external trade of Russia declines lightly. Germany, being Russia’s third most important trade partner over years, is exemplarily for this development (see figure 1). This declining is due to the tightening of customs regulations and the exclusion of some products to import. One reason for this is that the government wants to incentivise settlement of foreign companies in Russia.⁹

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Figure 1: bilateral trade Russia-Germany- export, import, turnover (in billion euro)¹⁰

Remarkable is the exceeding of imports in comparison to the exports to Germany. Regarding the holistic external trade, exports exceed imports by a factor of 1,6.¹¹ The export is dominated by energy carrier, aggregate more than two third. It is followed by metal, chemical and farming products. The import is clearly dominated by plant and machinery, followed by chemical and farming products.¹²

Concerning the workforce Russia is confronted to a challenge. After the downfall of the Soviet-Union, in a time of instability, there was a low birth-rate. Added to that mortality was unusually high and well educated labour force emigrated. Only less trained immigrants from Central Asia reduced the brain drain. Post-millennial the birth-rates rose and the mortality diminished. This lack of citizens affects the labour market today and the next years.¹³ Nevertheless the general standard of education ranks among the positive criteria for foreign investors. Up to 75% of school-leavers attend a university.¹⁴ Not at least because of that, the Russian middle class is increasing in size and reached 25% in 2012.¹⁵ The middle class is due to the wealth very keen to consume.

The digital infrastructure gained progress within the last years. According the number of stationary and mobile accesses, Russia was on position four in Europe in December 2012. Since 2011 Russia has more users than Germany. The situation of transport infrastructure is different: While Russia has the second largest railway system in the world, 60% of the road network does not fulfil the minimum requirement of the Organisation for Economic Co-operation and Development.¹⁶

One of the major problems of Russia is corruption. It belongs to the most corrupt countries in the world. Transparency International ranks it 2013 at position 127 out of 177. On a benchmark from 0 to 100, meaning low score a high corruption rate, Russia scores 28. It shares this inglorious position with Lebanon, Mali and Pakistan. For comparison: Germany ranks at position 12, scoring 78.¹⁷ Just since 2008 corruption became a criminal offence. Further anti-corruption laws followed. In 2012 Russia joined the United Nations Convention against corruption. Anyway, de facto the countering of corruption leaves a lot to be desired.¹⁸ Interestingly, two of three interviewed Russians by M. Schorsch, addressed corruption as a matter of fact that must be coped with rather than a treat to business.¹⁹

Russian law is very complicated. There are various ordinances, regulations and edicts. Sometimes there is even a local law which can differ from general law.²⁰ 80% of import goods need a certificate. The CE-certificate is not admitted, because it does not meet the Russian norms and requirements. Thus there is the GOST-R certificate. It is needed for clearance and onward sale. For some products there are additional certificates to attain: For food and cosmetic products a hygiene and for animal products a veterinary certificate is necessary. All required documents should be completely and in Russian language. Otherwise problems and delays will occur. Besides restrictions of the consumer protection have to be regarded. On the packaging of the products there have to be information about ingredients, net weight and so on. Those information need to be in Russian language.²¹

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Figure 2: quality seal of GOST-R²²

2.1.2 The Trading Market

Experts of A.T. Kearney announced that Russia was Europe’s largest consumer market with a high level of disposable income and a growing middle class.²³ In the international comparing the degree of concentration in Russian retail trade is still slight. Following statements of the Ministry of Industry and Trade only one third of the retail turnover is made by major commercial chains. Half of the turnover is made by sole trader and minor trading companies. 13% of trade is done at marketplaces.²⁴ But within the last years major commercial chains are expanding rapidly. Only in the first quarter of 2013 they extended by 270.000 square meter.²⁵ This was the highest extend ever. While metropolises like Moscow and St. Petersburg saturated, commercial chains exploit middle-sized cities. The rapid expanding is due to the risen competitive constraints. The way to survive within the retail sector is to grow. Many minor trading companies are not competitive enough and register declining turnover.

Case Example: The Metro Group

One of the strong growing commercial chains is the German Metro Cash & Carry. Very early the Metro Group recognised the growing middle class being keen to consume. The first Cash & Carry markets opened 2001 in Moscow. The incentive of entering the market and a continuously expanding of the Metro Group is the growing domestic demand (see figure 3), the pent-up demand in the retail sector. For an increasing part of the population shopping became a hobby driven by higher incomes, lower unemployment rate and the facilitated access to consumer credits.²⁶ At the end of 2013 there were 14 markets only in the capital. In the whole country there are 73 markets, especially in metropolis like St. Petersburg, Jekaterinburg, Rostow, Nischni Nowgorod, Kasan, Krasnojarsk, Nowosibirsk, Samara and Omsk (see figure 4). In 2006 and 2010 the electronic market chains Media Markt and Saturn followed. Today those brands have 63 markets in Russia. Thus the Metro Group employs about 24.000 Russians. To gain well trained personnel the company started 2004 the project “METRO Education”. This is a cooperation with about 100 Russian professional schools. Since the beginning more than 14.000 students participated in the project.²⁷ In 2013 the Metro Group in Russia made an turnover of 5,8 billion euro. This is 20% of the foreign sales and 12,5% of the entire sales.²⁸ The problem of infrastructure encountered the company with an investment of 100 million euro into logistics. So for example the largest warehouse out of Germany was built in Noginsk, near Moscow.

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Figure 3: change of consumer expenses²⁹

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Figure 4: markets of Metro Group in Russia³⁰

Luxury Goods

The luxury discussion in Europe is driven by the eruption of demand in China, Russia and India.³¹ The market booms: 2011 it grew by 10% at a historic peak of 191 billion euro. This is attributable to the increased welfare especially in China, Russia, Brazil and the Middle East.³² Anyway, the buying behaviour differs from country to country. The Russian demander of luxury cars primarily satisfies his hedonistic purchasing motive.³³ In Russia new gained status is paraded for demonstration and self-assurance of it. A luxury brand cannot be loud enough. This is called Conspicuous Consumption.³⁴ Today and in the future the Russian market offers brilliant growth chances for luxury brands.³⁵

[...]

¹ Cf. Frank, S. (2012), p. 319.

² Cf. Belz, C., Reinhold, M. (2012), p. 18f.

³ Cf. Götz, R. (2014), p. 2.

⁴ Cf. Harms, M., Böhlmann, J. (2014), p. 6.

⁵ Ibid.

⁶ Cf. Germany Trade & Invest (2014), p. 9.

⁷ Cf. World Bank Group (2014), [online].

⁸ Cf. Germany Trade & Invest (2014), p. 9.

⁹ Cf. Harms, M., Böhlmann, J. (2014), p. 12.

¹⁰ Germany Trade & Invest (2014), p. 7.

¹¹ Cf. Germany Trade & Invest (2014), p. 7.

¹² Cf. Harms, M., Böhlmann, J. (2014), p. 8.

¹³ Cf. Götz, R. (2014), p. 4.

¹⁴ Cf. Germany Trade & Invest (2012), [online].

¹⁵ Ibid.

¹⁶ Cf. Germany Trade & Invest (2012), [online].

¹⁷ Cf. Transparency Interational (2014), [online].

¹⁸ Cf. Götz, R. (2014), p. 6.

¹⁹ Cf. Schorsch, M. (2009), p. 47.

²⁰ Cf. Lasch, I., Leymann, A. (2009), p. 143.

²¹ Ibid., p. 150-156.

²² Gueltig.com (2014), [online].

²³ Cf. ATKearney (2013), p. 10.

²⁴ Cf. Schulze, G. (2011), [online].

²⁵ Cf. Umann, U. (2013), [online].

²⁶ Cf. Metro Group (2014a), [online].

²⁷ Cf. Metro Group (2014a), [online].

²⁸ Cf. Metro Group (2014b), [online].

²⁹ Metro Group (2014a), [online].

³⁰ Ibid.

³¹ Cf. Meurer, J., Manninger, K. (2012), p. 14.

³² Cf. Schallehn, M. (2012), p. 53.

³³ Cf. Becker, C. (2012), p. 172.

³⁴ Cf. Kolaschnik, A. (2012), p. 186f.

³⁵ Cf. Meurer, J. (2012), p. 328.