Functional Dairy Products on the Russian Market Versus Dairy Alternatives

November 18, 2021  •  David Pring-Mill

By David Pring-Mill

The following text has been excerpted from Sections 8.1—8.1.3 of the Policy2050 report “Functional Beverage Market in Russia, 2021,” in order to serve as a product sample and fulfill Policy2050’s mission “to keep the most socially-relevant insights outside of any paywall.”

In a recent interview, Aram Galstian, Executive Director of the All-Russian Dairy Research Institute, pointed out that low lactose and lactose-free products have already eclipsed regular dairy sales on the U.S. and European markets. “We see this trend just starting in Russia,” he remarked.

In the United States, the sales of milk dropped by about $1.1 billion in 2018 while the nut and plant-based milk market increased (by 9% in a year, according to the Plant Based Foods Association).

The transition in Russia has, thus far, been much more limited.

In the first quarter of 2018, sales of dairy alternatives in Russia increased 2.5x compared to the same period in 2017, according to Nielsen. In quantitative terms, 1.057 million liters of plant-based milk were sold, which financially amounted to 461.4 million rubles. Sales of cow’s milk for the same period amounted to 120 billion rubles.

In the United States, there was a 686% increase in the oat milk category alone in 2019.

Sady Pridonya reportedly spent about 20 million euros on the launch of the Nemoloko oat-based drinks line, with 2018 revenue amounting to about 2 billion rubles. Their website highlights different possible uses.

During an evaluation of the social media landscape, Policy2050 observed that Russian influencers with lifestyle/wellness brands have been increasingly showcasing their own consumption of dairy alternatives.

Globally, it has been determined that APAC accounted for over 50% of the plant-based milk industry in 2019, owing to lactose intolerance, increased purchasing power, and other factors.

Currently, there are strong drivers pushing the Russian market in two very different directions:

  • Foreign consumer trends do seem to get imported into the Russian market, even though there’s a delay. The rise in health/wellness consciousness, accelerated by the pandemic and social media, means that some Russian consumers might be ready to swap out dairy for dairy alternatives.
  • At the same time, there is a very long history of milk being heralded as healthy, if not essential, within Russia, and those cultural impressions won’t just disappear overnight. Furthermore, it’s not just a matter of impressions; there are policies sustaining the dairy industry in Russia. These market characteristics, in combination with the rise in health/wellness consciousness, create an opportunity for dairy products with enhanced functional benefits.

For these reasons, we could conceivably see both developments take place in the Russian market, whereas the prospects for milk, in the traditional sense, appear much bleaker in Western markets.

Within Russia, these in some ways opposing developments will be influenced by geography. The preference for alternative dairy products has been and will continue to be strongest among residents of Russia’s largest cities, and it isn’t guaranteed to spread beyond them.

Relevant policy drivers

Vladimir Putin signed a law extending the exemption from the value added tax (VAT) for products of livestock breeding. If this extension hadn’t occurred, the VAT rate would be 20% or 10% depending on the type of animal.

Functional dairy products

Almost 13 thousand tons of milk powder and baby formula were produced in the Moscow region from January to September 2020, which is 6% more than in the same period last year, according to the region’s Ministry of Agriculture and Food.

Dairy products are also relevant to the sports nutrition market.

Russian consultant Ekaterina Mikhaleva told a trade publication that the domestic sports nutrition market is still in an early stage of development, with these products being consumed by less than 1% of the adult population in Russia versus 25% in the United States. The last Russian financial crisis impacted this category. Mikhaleva expects the domestic market to reach $65 million by 2024.

According to Maxim Nikitochkin, a senior manager at EY, the domestic sports nutrition market is unlikely to be a strong motivator for dairy processing facilities within Russia. Due to COVID-19, previous estimates of 4% annual category growth have been decreased to 1-2%. The volume of dry whey consumption in Russia is small, about 200 thousand tons, and the volume attributable to sports nutrition is even less — 5-10 thousand tons.

Looking at exports, there is an uptick. Over the course of 10 months in 2020, Russia moved 5.5 thousand tons of milk whey to other markets, which is 4.9 times higher than a year earlier.

In 2020, the Chinese market was opened up to the supply of Russian dry products.

According to the ITC Trade Map, China is the largest importer of whey, accounting for about 18% of the world’s supply last year. It is followed by the Netherlands. Whey is defined by the ITC as follows: “whether or not concentrated or containing added sugar or other sweetening matter; products consisting of natural milk constituents, whether or not containing added sugar or other sweetening matter.”

If not through sports nutrition, how might functional dairy products be relevant to the Russian market?

The strong cultural belief in the powers of dairy creates numerous opportunities.

Consider this advertisement for a fermented milk drink called Imunele:

The commercial shows a fuzzy little creature that is colored white, like milk, and is said to represent the human immune system. The creature narrates the commercial. It also wears glasses, presumably lending it some sort of intellectual credibility.

A mother, father, and son are seen drinking the Imunele product. The creature explains that this makes it, i.e. their immune systems, stronger, and in return the creature/immune system is able to protect them.

The strange little dairy-powered creature is then seen perched on their shoulders throughout the day. When a stranger at the bus stop sneezes in the father’s direction, the creature karate chops to defend against the spray of cold germs. “The bus is running late microbes but microbes are here!” the creature narrates.

Lab milk?

The high degree of emphasis that Russians place on natural ingredients could become relevant in the newly emerging categories of lab-created food/nutrition.

There is still a ways to go in terms of R&D and economies of scale but it is possible that this unprecedented production process could become a major part of the future of food. Seed funding, venture capital, private equity, and even alternative investment platforms all act as drivers of this category development.

Different regions represent different opportunities for more ethical, clean, and sustainable lab-created alternatives. It’s possible that a lab-created functional dairy product will one day hit the Russian market, though plant-based milks will be the first large-scale test to see if Russian consumers are even willing to rethink dairy consumption in a less dramatic way.

The full report “Functional Beverage Market in Russia, 2021” is now available for purchase on Policy2050.com.

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