Video: Consumer boom

By Steve Liesman Sr. Economics Reporter
CNBC
updated 9/24/2004 9:58:47 AM ET 2004-09-24T13:58:47

Wall units, bunk beds and lamps — a Russian consumer boom has meant plenty of normal sales for the Ikea store in Moscow.

But shopping carts are also filled with some unusual items, such as white New Zealand sheepskins and mosquito netting.

“You know that is a gadget for small teen girls, normally. Suddenly we have sold more of these nets in Russia than all of Ikea together,” said Lennart Dahlgren, general manager of Ikea Russia.

Dahlgren, Ikea's man in Russia, doesn't know — or even care — why Russians covet these items.

What he dies know is that sales are 20 percent ahead of last year as the company has adapted to a peculiar but surging Russian consumer market.

And he is extremely bullish when it comes to Russia's potential.

“Without limits, without limits.   When I say 'without limits' it is for us.  We can make two Ikea stores a year and we will never reach the limits,” Dahlgren said.

Al Breach, the chief economist and strategist at Brunswick UBS, said money is being pumped into the economy. “[There's] a huge amount of free cash flow ... huge amount of wealth being generated in cash and people are starting to spend it and enjoy it.”

Russian incomes have surged with the booming Russian economy. Russians now have money to buy the latest goods, from the latest electronics to washing machines. Foreign products are flying off the shelves.

“Compared with five years ago, two or three times the amount of people are buying more expensive technology,” said appliance salesman Roman Yudin.

The Russian consumer market doubled in the past ten years. Analysts say it will double again in just the next five years.

The wellsprings of retail are oil dollars and low living expenses.

Privatization of apartments at moderate prices has given Russians relatively low housing costs.

And Russian President Vladimir Putin slashed taxes to just 13 percent, putting more rubles in Russians' pockets.

“Russians, you know, being dressy and liking to look nice ... tend to spend a much higher percentage of their income on makeup and clothes,” said Cosmopolitan Russia Editor Elena Nyasnikova.

Disposable income, adjusted for inflation, has grown a stunnning nine percent for each of the past three years.

But western sales practices have not always translated well in Russia.

For example, one Audi dealership's sales have doubled every year for the past four years, but it found a cultural problem offering western-style service.

“Now, we tell our guys to say hello to people,” said Audi salesman Matt Donnelly. “So they walk in and say 'hello' and they go, 'Wow! What do you want? Leave me alone!'

But in some ways, Russian consumers are just like their western counterparts. They love shopping in malls.

“I like it because everything is all at one place, very comfortable,” said Elena Zatchcova, a Russian shopper. “[There are] a lot of stores, there is food here so you can spend the whole day here. There is parking ... it is very convenient.”

The Mega Mall was built and financed by furniture giant Ikea, and offers over 2 million square feet of retail bliss for eager Russian shoppers. This year alone, they expect over 40 million customers.

That would make it the most heavily trafficked mall in all of Europe.

But such malls remain the exception. Many Russians still shop in open-air bazaars.

And others lack the incomes to partake in the consumer boom.

But for all their shopping, one thing is missing in Russia: credit. Almost all transactions are in cash. Russian consumers carry almost no debt.

Not yet, anyway.

“Debt per capita in Russia, including mortgages and consumer credit, is about $20 per head,” said Renaissance Capital's Roland Nash. “In the U.S., it's $20,000 per head.”

Much of the consumerism in Russia is taking place in the major cities, but many companies consider the outer regions of the country as the biggest growth opportunity.

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