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. Last Updated: 07/27/2016

Russian Consumer Goods Trail in Technology, Image

Where other sectors walk, the Russian consumer goods industry crawls. Despite breezy Gorbachev-era expectations, in the end fewer Russian rockets did not mean more domestically produced yo-yos.

"It is disappointing that the consumer goods industry has collapsed as far as it has," said Marshall Goldman, associate director of Harvard University's Russian Research Center and a professor of economics at Wellesley College.

Not that it ever was that much to begin with: Communist society was known more for long lines and shortages than Wal-Mart-style selection.

Several million Snickers bars later, imports today make up 54 percent of all food and other consumer products available in stores across Russia, according to data from the State Statistics Committee. In Moscow, the figure rises to as high as 80 percent, by some estimates.

Although the lack of a thriving domestic food industry "doesn't matter" in countries that boast booming exports of manufactured products, in the case of Russia, "you can't dismiss it," Goldman said in a telephone interview.

"Russia prior to the revolution was a big exporter of grain, it was self-sufficient" until Stalin's collectivization destroyed much of the Soviet agricultural sector, he said.

Now, faced with a floundering manufacturing industry, Russia has ended up exporting its natural wealth to finance imports while sidestepping domestic investment in food output and consumer goods production, said Goldman.

Unprepared for the invasion of imports, Russian consumer goods businesses missed what could have been a golden opportunity to cash in on a virgin market, comment foreign businessmen.

As a result, Russian producers' traditional price advantages have been cancelled out by inferior product quality and packaging, say representatives of Western consumer product companies.

While Russian shoppers still have relatively low purchasing power, they are increasingly "willing to spend more money for a better product," said Dmitry Krylov, assistant director of marketing for Colgate-Palmolive.

For example, although Russian companies dominate the household cleaners market by volume, Western firms have a higher share by value, he said."The trend in this market is definitely toward a growing share for international brands," Krylov said.

Domestic firms present no threat, now or in the foreseeable future, say Western consumer product companies. Exceptions are largely limited to the food sector alone.

"Cotton wads are our biggest competitor where feminine hygiene is concerned," said Mark Pothast, sales manager for consumer goods at Johnson & Johnson, which markets the Carefree maxi pads and o.b. tampons lines here.

"If Russian firms could get their act together, maybe they could compete on a price basis, offering generic products, but they couldn't compete with us on technology," Pothast said. In Russia's growing skin-care market, foreign firms have already captured over 90 percent of sales, he said.

If only given the time for some managerial housekeeping, domestic companies could identify the right market niche for their products and easily stand up to outside competition, concurred Dmitry Nikologorsky, head of the economic policy committee at the Experts Institute of the Russian Union of Industrialists and Entrepreneurs.

Meanwhile, flagging management techniques mean the Western share of Russia's consumer goods market could just keep on growing, said Charles Blitzer, chief economist for the World Bank in Moscow.

"Most enterprises are controlled by directors who cut their teeth in the old system and who don't know how to compete in markets," Blitzer said.

Even if they did, they would lack the money to compete with the television advertising campaigns launched by such deep-pocketed Western competitors as Mars or Procter & Gamble, added Tatyana Maleva, an economist at the Institute for Economic Analysis.

So long as inflation remains high and bank credits short-term and expensive, Russia will stick with importing consumer goods rather than making them, Maleva said.

"Importing is more profitable than producing," she said. "Firms don't want the expense involved in manufacturing. If we ever have financial stabilization, then firms would be reoriented toward industry."

With the exception of beverage giants Coca-Cola and Pepsi-Cola and chocolates king Mars, many Western firms have chosen a similar route. Low-quality supplies, an underdeveloped distribution system and fragmented markets are among the reasons cited by foreign companies for not manufacturing their products in Russia.

But that situation could change.

While a Russian Procter & Gamble may not be on the horizon, the very fact that consumer goods production has been largely left on the sidelines makes some sectors promising candidates for outside investment, analysts say.

Aided by familiar brand names that can undersell imports and a growing perception among consumers that foreign products are often overpriced junk, Russian food products are returning to store shelves, he said.

"I think you will see increased investment in this sector over the next six to 12 months," the analyst said.