Source: Mintel
Eastern Europe has been a target of investment for multinational CPG companies since the dissolution of the Soviet Union in the early 1990s. The frozen food market, however, remains under-developed. Demand has only begun to grow in the region in recent years, as rising incomes and changing consumer lifestyles drives expenditure on convenient food.
Russia’s frozen food market experienced a compound annual growth rate of 16.9% between 2006 and 2010 and is forecast to enjoy further CAGR of 9.9% until 2015. In 2011, the market was worth around $4.6 billion, a figure that is estimated to rise to $6.7 billion by 2015. This makes it the largest market in Eastern Europe by both volume and value, ahead of Ukraine, which was worth $1.1 billion in 2011. The Polish market enjoyed even higher growth in the mid-2000s, with annual value gains of 17.2% between 2005 and 2009. This is expected to strengthen further in the next few years, with CAGR predicted to rise to 20.3%. A similar picture was evident in Hungary. Volumes in the country’s frozen food market increased by an average of 8.4% annually between 2006 and 2010, with further gains of 4.1% expected up to 2015.
Growth in these countries has dwarfed that of more developed Western frozen food markets. The US and UK are still undeniably bigger in both value and volume than their Eastern European counterparts – value sales of frozen food reached $42.3 billion in the US and $6.9 billion in the UK in 2011. However, in the UK, volumes actually declined by an average of 0.6% between 2006 and 2010, while value CAGR was just 2.7% in the same period. Figures from the US were remarkably similar, with volumes falling by 0.7% in the four-year period and value CAGR hitting just 2.6%. And yet, Eastern Europe did not escape the recession either. Countries previously dubbed the ‘rising stars of capitalism’ endured declining exports and incomes. The economies of Estonia, Latvia, Lithuania, Ukraine and the Czech Republic all shrunk amid global turmoil in financial markets during 2008/09.
This had an impact on their respective frozen food markets. For example, Ukraine, which saw gross domestic product decline by 14.8% in 2009, recorded a 34% drop in volume sales between 2008 and 2010 and has only just returned to marginal growth. The Czech Republic economy also shrunk by 4.7% in 2009 as demand for Czech goods plummeted abroad. This caused frozen food value sales to fall by more than 27% and they are not expected to return to pre-recession levels until well beyond 2015. Russia, which is less integrated with Western European, was one of the few countries to emerge unscathed and has continued to enjoy solid growth in recent years. The European Bank for Reconstruction and Development predicted earlier this year that the country would grow by 4.2% in 2012, provided commodity prices remain high. Poland has also remained resistant to the woes in the Eurozone, despite it being its largest export market. Accordingly, the country’s frozen food market has achieved strong growth over the last four years.
Low per capita consumption underlines potential
Despite the collective gains made in recent years, Eastern Europe still has significant room for further development. Per capita spend on frozen foods throughout the region still lags more developed Western countries. The vast markets of Russia and Ukraine, for example, are home to more than 186 million consumers combined, according to World Bank estimates. And yet, spend per capita on frozen food was just $32 in Russia and $23 in Ukraine in 2011. By comparison, annual spend per consumer was $134 in the US, $110 in the UK and $110 in Germany. This will certainly rise in years ahead. Total food retail sales are forecast to almost double from 2010 levels by 2015 in Russia, with the average consumer expected to spend $47 annually on frozen food by then. Similar gains are expected throughout Eastern Europe, with the worst effects of Europe’s debt crisis over for the region.
Tradition is hard to break in Russian frozen market
Russia is the most prosperous of the BRIC countries, which have come to symbolise a shift in global economic power away from the developed world. It has a large, urban population base with higher GDP per capita than Brazil, China or India and significant scope for frozen food growth. Ready meals currently account for the largest share of frozen food value and volume sales in Russia, worth more than double the next segment. Launches in this category are, however, heavily skewed towards traditional foods, such as dumplings, stuffed pancakes and pirogi pies, rather than Western-style complete ready meals. In fact, sales of frozen pelmeni/vareniki, which is similar to dim sum, were worth as much as $900 million in 2009. This emphasis on local is also reflected by the leaders of the Russian frozen food market, MLM Food and Pitiana, which focus on providing ranges of traditional Russian foods. Some Western frozen concepts, such as pizza, are beginning to enjoy uptake, but very slowly.
Per capita expenditure on frozen pizza in Russia reached just $1.48 in 2010, with the average Russian likely to eat only one or two per year. A lack of debt and low taxes are forecast to increase disposable incomes by 60% by 2015, pushing 80% of households into the middle class. These demographic and economic developments are already having an impact on the market. Provenance is now a selling point, indicating authenticity and premium quality and encouraging brands to list the source of specific ingredients on-pack.
Frozen food struggles in Ukraine
While the Russian frozen food market shows strong prospects of growth, its neighbour Ukraine is only beginning to recover from a deep recession in 2009 that seriously damaged consumer confidence and household expenditures. The country is one of the most populated in Europe and offers a huge potential target audience for frozen manufacturers. However, relatively low disposable incomes have been squeezed further by high inflation in recent years. In fact, consumers spent around 50% of their incomes on food in 2010, suggesting that added value, convenient foods, such as frozen, will struggle to achieve significant gains. This is backed up by market data. Spend per capita on frozen food is predicted to rise only marginally in Ukraine by 2015, while total market value is projected to reach $1.2 billion in 2012, still significantly less than the pre-recession figure of $1.5 billion recorded in 2007. It has also had a significant impact on innovation, with more expensive Western-style frozen food concepts, such as ready meals, shunned by manufacturers.
Pizza, for example, accounted for more than a third of frozen launches in Ukraine in 2009. Just two years later, this figure had dropped to 2%. Similarly, meals and meal centres accounted for over 40% of total frozen launches in 2009, but just 5% in 2011. In their absence, brands have focused new product development on more basic frozen vegetables, as well as meat, poultry and fish. The future may offer some hope for the Ukrainian frozen food market, however, with the government predicting that gross domestic product will expand by 4.5% in 2013.
Convenient frozen food more welcome in Czech Republic and Hungary
The convenience food culture has been quicker to evolve in some former Eastern bloc countries, such as the Czech Republic and Hungary. Per capita spend on frozen food is higher than in Russia in both countries and has not had to grow from such a low base. The Czech Republic, in particular, is also far more accepting of Western frozen food concepts and has a well-developed premium segment. In 2011, 13% of all frozen food products launched in the country had a premium positioning, compared to just 3% in the Ukraine, 8% in Russia and 7% in Poland. The Czech Republic was identified as a strong potential market by food retailers and manufacturers before the economic downturn. As a result, the top six retailers in the country are of overseas origin, which explains its greater acceptance of Western food.
Poland escapes recession and embraces frozen food
Poland was the only member of the EU to escape recession in 2009. Economic growth remains healthy, with GDP increasing by more than 4% in 2011, but this is projected to slow noticeably in the next two years. Frozen processed food has been booming in this market. Consumers did not significantly cut back on spending throughout the economic downturn. In fact, frozen food thrived in this more frugal environment, offering consumers a cheaper alternative to eating out. In 2011 alone, the frozen food market grew in value by 20.7% to around $750 million (PLN 2.4 billion). This is expected to surge in the next two years to around $1.3 billion (PLN 4.2 billion). Demand for convenience foods in general has also increased in recent years, driven by demographic changes.
The number of single and two-person households is increasing and working hours are getting longer. At the same time, consumers have greater disposable incomes. Spending on food and drink increased by 26% between 2006 and 2010, while volume sales rose by just 0.1%. This reflects both rising food prices and the desire for premium and quality goods. As a result, there are now a huge variety of frozen foods available in Poland. Frozen meals dominate the market, accounting for more than 40% of value sales. Frozen vegetables still hold the most volume sales, but the overall development of the category is being driven more complete meals.
Target the individual, not the collective in Eastern Europe
Eastern Europe is an emerging frozen food market that offers huge opportunities for domestic and international producers. Collectively, it is home to a whole new generation of consumers unburdened by the bread lines and black markets of communism. Incomes are rising, but so are working hours, and time is now at a premium. However, each market has its own complexities. Tradition is more important in Russia than Poland. Western foods and flavours are more welcome in the Czech Republic and Hungary. Ukraine has high volumes, but low spend per capita. Economic growth projections also vary by country. All of these factors need to be considered by brands operating in the region as a uniform approach looking to meet the needs of many, will actually appeal to few.