“We bake freshness” is the slogan of the Engelpekar bakery, located in the very centre of the Russian capital. And this should be taken literally: the bread here is not only born under the eyes of the purchaser, it is even kneaded here as well, exclusively from natural products and without additives of any kind.
Martin already had good contacts with the Russian capital, and I had recipes for baking amazing bread. So we agreed to do it. We spent two years together working through the project, and then everything worked out well.
Statistics confirm that over the last decade bread production in Russia has been falling. By 7% each year. Due to a drop in consumer demand. According to data from Rosstat, in 2013 each Russian ate 258 g. of bread every day, rather than the 303 g. of 10 years earlier. This notwithstanding, almost all of us eat bread on a daily basis. And there are almost 20m people living in Moscow. It is not difficult to see that this market is massive. Not to mention that several analysts maintain that the segment of this market in the capital is in fact growing. And owing to the fact that the average retail price for wheat bread made with high quality flour in the area cost 35.3 roubles per kilogramme on the 1st of March, 2015, one can calculate using the crudest of formulae that Muscovites and visitors to the city eat such bread on average to the value of 5,295,000,000 roubles a month (!). This clearly demonstrates the attractiveness of the bread baking business to investors.
Furthermore, in Russia today, there is on average only one producer of baked goods per 10,000 of the country’s population. At a time when, in developed countries, this figure fluctuates from 3-4. Which also bears witness to the relatively low level of competition in this industry.
Output of mass-produced types of bread is contracting annually in Russia by 3–5% along with the simultaneous increase in the proportion of basic bread, rolls and buns, speciality bread, and cakes/pastries. And within the structure of today’s market, it is rolls and buns which represent a significant segment.Over recent years, their number has increased several times over.
The development of this market and the growth in consumption of better quality products is still hampered by a lack of advertising to shape demand and encourage sales.
Thus, against the background of the competitiveness of the large bread producers, it is the small bakeries which are gaining more of the advantage.Their main competitive advantages are the freshness of the products on offer, their flexibility, and smaller capital intensity.
This is exactly why our company deals with the issues for interested parties around offers of ready-made businesses. This sector included. As well as helping with the necessary choices in arranging property deals. These days in Russia and in Moscow, this is very much in demand.
— But we are still negotiating and hoping to get the leasing costs reduced. (They both laugh.)
— We base our price formation on the fact that our products are of high quality. For example, in Moscow you can buy a baguette for 40 roubles, but it will have quite different properties to ours. And in the Moscow Azbuka vkusa [Alphabet of price] chain of stores, you can get baguettes from Austria but baked in Moscow from raw ones. They cost about seven euros, that’s about 500 roubles at today’s rate of exchange. But we decided to offer our products at a fair price, so that they will be available to students too.
Some of the customers greeted the staff in German as they came in: “Guten Tag” and “Grüß Gott“. The smiling girls behind the counter, dressed in dirndls, the national costume of the German-speaking Austrian regions, replied in the same way.
The overall size of the market in bread-based products in Russia is around 500bn RUB. The proportion made up by small independent producers is around 20–25%. The market’s dynamics are positive.
Operating in Moscow there are in the order of 400 independent bakeries, about 100 of which belong to large enterprises. On the whole, the market is growing precisely due to medium-sized and small enterprises. They quickly adapt to what the consumer wants. The independent bakery market in Moscow differs significantly from that in Russia as a whole. Primarily in the way supply and demand are structured. There is in the capital a varied product mix and pricing policy. As well as the fact that Muscovites like to buy goods “straight from the oven” and closer to home.
The bread production capacity in Moscow of the large bread factories is 720,000 tonnes per day. Independents produce 480,000.
The major difference with the Russian market for baked goods is that the main competitors to the independent bakeries are the big factories. Their products have been on offer for many years now and at extremely low prices. For a long time they had the monopoly. Their product mix policy is limited. Which makes it possible for small private bakeries to open and succeed.
The financial threshold for entering this market is a high one. The amount of initial investment depends on the location of the business. In Moscow, rental rates are significantly higher than in the regions. The main costs of running a business come in the first year. They include outlay on premises, staff, equipment, and documentation. Cumulatively the amount comes to around 10m RUB in Moscow, and around 7m in the regions. One ought not to forget about additional costs either: water and electricity – 110–120,000 RUB per annum; raw materials – 1.1–1.3m RUB.
The average bill at a Moscow bakery is750–800 RUB, and at one in the regions is500–600 RUB. The average footfall is in the area of 40–50 people a day. Anticipated monthly takings:900–950,000 RUB in Moscow, and 600–650,000 in the regions. Business profitability for the first year:10–12%. After the recoupment period, this can rise to 35–40%. Recoupment period: 1–1.5 years.
According to estimates by NeoAnalytics, in the medium to long-term (2016–2017) market growth will reach approximately 15% per annum. We are observing stable effective demand. In the future, production of speciality products (bread baked according to luxury recipes of the XVIII–XIX centuries, for example) will grow. Yet another trend is expansion into the regions. After all, Russians there want fresh and delicious bread too.
— The main thing is, we already have regular customers! They are people who live, work or study nearby. We also have customers from other districts of Moscow of course, who learned about us from the Internet. We’re also on the social media: Facebook, Instagram and VKontakte. And we are also active with Austrian partners in holding various events and actions, because we are trying to represent Austria, of which we are part.