Kazakhstan 2017 | TOURISM & RETAIL | B2B

Kazakhstan offers unique challenges, but companies are finding creative ways to address the problems and reap the country's unique benefits.

Mark Pothast
Country Manager
Mikhail Bazanov
General Manager
Mars Kazakhstan

How do you deal with the limited consumption of chocolate here?

MARK POTHAST It is limited because of culture and tastes; it is also affected by finances, especially in the last year and a half, with all the currency devaluations. For most Kazakhstani people, chocolate, for example, is not a necessity. We have had to significantly raise our prices along with our competition as a result of the devaluation; a bar of chocolate a year-and-a-half ago was half the price it is now. For people with local salaries the prices have obviously affected them. Consumption figures are basically falling across the board. Most categories that we do business in, especially at the beginning of 2H2015 and the beginning of 2016, saw double-digit falls. People were either buying cheaper products or downsizing. We do advertising and a great deal of sampling, but it is not just us; our competitors are also in the same boat. In terms of investments, together with some of our competitors in coffee, we spent a great deal of money but there was no significant increase in the amount of coffee consumed.

MIKHAIL BAZANOV Compared to Europe, per capita consumption here is certainly lower. In Switzerland annual consumption is 10kg while in Russia it was about 5kg, though probably less now. In Kazakhstan, the figure is about 3kg; however, in China it is only 100g, so it depends on with what country we are comparing. There is a great deal of potential not only in the chocolate segment but also in the confectionery category as a whole. To develop this potential, we need to invest in building capabilities of our associates and work collaboratively with our partners: key national customers, regional customers, distributors and retail shops.

What are the main challenges of doing business here?

MP The main challenges are trying to be as efficient as possible and working with the right partners. We have the right distributer partner so it is about making sure you have full trucks going everywhere. Transportation over huge distances is still a challenge because the infrastructure is not that well built. About 60-70% of our business comes from small mom-and-pop stores, which always presents a logistics challenge. Modern trade is growing quite rapidly but companies focus on building stores and not their logistics infrastructure. Their biggest focus now is to build as many stores as they can, either to sell to one of the big retailers in Russia or just block many other retailers from coming in; it is still early on but that is the idea. We do a good job with logistics; 85% of what we sell comes from Russia so we have good routes.

MB There are both similarities and differences if we compare the market to that in Russia or China. For example, both Kazakhstan and Russia experienced a disturbance with the currency in the past few years. As a confectionery and pet care company, we purchase a large amount of ingredients for our products from overseas. We do not grow cocoa in either country and thus need to purchase it on the international market, so for us the currency is an important element of our cost structure that increased significantly in 2016. However, we managed to overcome the challenge and with the currency and oil price stabilizing, we set ourselves for the growth trajectory in both markets.

What are your expectations for the future?

MP I see people becoming smarter shoppers. In terms of the number of goods we have on promotion compared to a few years ago, the figure is much higher because that is what people seek out. The bigger key accounts here demand a bigger discount because they see the same thing. People are becoming smarter with the money they spend so companies have to make sure they give the customer what they want. Another challenge is that even though we get products from Russia, there are still many parts of our products and our P&L that are exposed to foreign currency. Nestlé buys cocoa in pounds and coffee in dollars so the two biggest components of our products are exposed to currency fluctuations. In general, we are doing better than expected; however, I do not expect developments in 2017 that will show a significant increase in consumers' point of view, which means we will have to be smarter.

MB Annual chocolate consumption in Kazakhstan could grow further, which will result in the confectionary category growth. We see also huge potential for growth in pet care, as many people have pets and start feeding their pets with prepared pet food. However, pet food currently accounts for only 4% of every 100 calories in dogs' daily diets in Kazakhstan, while the remaining 96% comes from food off the table. Our expectation that this percentage will increase and the pet care category will grow in the next several years.