Industry Trend Analysis - Inflation and Low Incomes Limit Ukraine's Food Spending Outlook - JAN 2018

BMI View: The Ukrainian consumers' dietary shift shows consumers eating more diversified food goods, a sign of a better-balanced diet. However, low-income levels and persistently high levels of inflation will limit spending to low-cost and staple foods as the consumer remains highly price-sensitive. This outlook supports the growth and expansion of discount grocery chains while also allowing hypermarkets to develop in major cities.

Ukraine's total household spending is projected to grow by 4% over our medium-term forecast period (2017-2021), pushing household spending to USD65.7bn in 2021, up from USD48.9bn in 2017. The majority of this growth in consumer spending will be attributed to food and non-alcoholic drinks which is estimated to account for 54.4% of household spending in 2017. This figure is expected to shrink only slightly to 53.6% in 2021.

The significant portion of household spending that goes toward buying food and non-alcoholic drinks reflects relatively low levels of disposable income in Ukraine, with consumers focusing their purchasing habits on buying essential goods. Discount grocery retailers are therefore in the best position to benefit from this outlook, as the Ukrainian consumer remains highly price-sensitive although hypermarkets and convenience stores will also continue to play an important role in major cities.

Ukrainian Consumers' Diet Becoming More Diversified
Food Segment Sales, % of Total
f= BMI forecast. Source: BMI/National Statistics

Further analysis of the Ukrainian consumer's dietary preference indicates a shift in spending in food segments . Meat and poultry will continue to dominate food spending, accounting for more than 21% of projected spending in 2021, although this is down from 25.5% in 2007. The most significant change seen is that the Ukrainian consumer's diet is gradually becoming more diversified, with consumers prepared to spend increasing amounts of their budget on fresh fruit and dairy. Fresh fruit sales is set to move up from eighth position in food sales ranking in 2007 (making up 6.1% of total food sales), to a projected fourth position in 2021 at 9.8% of total sales. Dairy sales were in sixth position at 9.5% of total sales in 2007 but will move up to second place at 13.3% of total food sales in 2021, based on our forecasts. This is at the expense of breads and cereals which is projected to move down in the rankings from second position to seventh position between 2007 and 2021.

Inflation To Limit Spending Growth
Consumer Price Inflation, % y-o-y, eop
Source: State Statistics Committee

Although the Ukrainian consumer's diet is becoming more diversified, we note that the persistent high levels of inflation will weigh on consumers. Ukraine's y-o-y inflation peaked at 43.3% in 2015 and averaged 16.5% per annum between 2012 and 2016. While we do forecast inflation to come down to 8.3% annually over 2017 and 2021, we highlight that the still high inflation rate will dampen consumer's spending power.

Low-Incomes To Keep Spending To Essentials
Household Disposable Income, % of Total Households
e/f= BMI estimate/forecast. Source: National Sources/BMI

Furthermore, the majority of households in the Ukraine fall below the middle-income bracket (disposable income of USD10,000-25,000), limiting growth opportunities for spending on premium foods products. We estimate that nearly 99% of households have a disposable income of less than USD10,000 in 2017, the benchmark level we use to indicate the size of a middle class in emerging markets. Almost 88% of households have a disposable income of USD1,000-5,000 in 2017, with this figure expected to fall to 68% in 2021. Meanwhile, the households with a disposable income of USD5,000-10,000 will grow from 11% of households in 2017 to 30% in 2021. As a result, discount grocery stores and hypermarkets will continue to play a dominant in the grocery market in Ukraine.

Discount grocery retailers operating in the Ukraine are rapidly expanding owing to the low incomes but hypermarkets and convenience stores will still have a role to play in major cities in the Ukraine. Discount grocery chain, Billa, under Germany's REWE Group has increased its footprint in Ukraine with Billa-Ukraine operating 34 supermarkets across the country. Hypermarkets are also ramping up their operations. French hypermarket chain, Auchan, is expanding its footprint in the Ukraine with the acquisition of local retailer, Karavan. The deal will help Auchan increase its presence in Kiev and four new cities: Kharkiv, Dnipro, Zhytomyr and Chernivtsi. Supermarket, SPAR International, aims to add 15 new SPAR stores by the end of 2017, with long-term plans to add 50 stores over the next three years.