Major brands like Starbucks, JDE Peets and Lavazza have either sold their Russian operations, rebranded or reduced product lines.
The Russian tea and coffee market is undergoing major structural changes following the exodus of global players, range reduction, and increased market share by dominant local firms.
Global brands have changed their approach to working in Russia after February 24, 2022, sometimes adopting opposing strategies. For example, Paulig Group sold its plant to one of its local partners, where they began producing the local Poetti brand following the imposition of broad market sanctions that limit trade with European and Western suppliers.
The Finnish company became one of the first Western companies to sell its Russian business, including its plant in the Tver region. On May 5, 2022, it sold its Russian assets to a local Milfoods company, which resumed coffee production under the Paulig brand in September 2022.
Lavazza officially announced its withdrawal from the Russian market in April 2022. Julius Meinl continues to supply the Russian market from factories in Italy and Austria and their local roasting partners in Russia.
The most noticeable changes have occurred in the coffee capsule market. The largest players, Nespresso and Starbucks, left Russia, and their shares began to be distributed among other companies. New players have appeared in the Dolce Gusto capsule segment.
In an interview with JM Coffee Lab, one of Russia’s leading coffee communities, Alexandra Smirnova, Marketing Director of Julius Meinl, explained that rising coffee prices globally, coupled with high volatility in financial markets and complex logistics for manufacturers, increased the cost of coffee by 50%.
The Dutch company JDE Peet’s, which owns the coffee brands Jacobs, L’Or, Tassimo, and Douwe Egberts, confirmed it stopped selling foreign coffee and tea brands on the Russian market before the end of 2023. Only local brands will be presented in Russia. The company announced this in their financial report for the first half of 2023.
JDE also lowered its profit target for the year due to uncertainty amid a switch to local brands in the Russian market. JDE c.e.o. Fabien Simon said, “In the first half of 2023, we transitioned from a multi-channel organization in Europe to a local portfolio in Russia. In parallel, we will expand our reach to global consumers with plans to acquire the Marat coffee & tea platform in Brazil and launch L’OR Barista in the US.”
As Simon added, JDE is not going to leave Russia completely. He noted that the company’s work on the Russian market does not contradict the sanctions. According to him, the Russian company division employs more than 900 people.
The suspension of supplies will affect the company’s brands, including Tassimo and Moccona, and new products for the global Jacobs brand, which will be sold on the Russian market as Monarch. It’s unclear whether JDE will continue selling other international brands, such as Maxwell House, in Russia.
Speaking about Monarch, Simon, in an interview with the US Wall Street Journal, said that the brand will use colors and fonts similar to Jacobs to make the products easier for customers to recognize. Coffee will be produced at the same plant in St. Petersburg.
Double Bee started in 2012 and is now one of Russia’s most popular coffee chains.
JDE Peet’s didn’t withdrawal from Russia after the beginning of the war in Ukraine, which led to criticism of the company. According to the Wall Street Journal, the Dutch authorities had demanded that Simon answer why the company did not follow the example of the American Starbucks. He said at the time that the American chain was more of a luxury item, unlike the everyday JDE Peet’s packaged coffee.
According to Simon, the company maintains a working relationship with Russian authorities: “Because we have been very transparent, it has removed a lot of unnecessary tension.” He emphasized that JDE Peet’s complies with all sanctions imposed against Russia.
The head of the company said that his priority now is to protect business in Russia to limit any reputational damage caused to its brands in other countries. Speaking about the localization of Russian business, he said that managers in Russia will make operational and commercial decisions, develop advertising plans for local brands, and select suppliers to use.
Previously, the company said it would refuse to sell some international brands in Russia, and it was also reported that Jacobs would be renamed. JDE estimated losses from rebranding for Russia in the first half of 2023 at $202.8 million.
Overall, the Russian coffee and tea market has significantly suffered from the reduction of range caused by the exodus of many Western players. This is confirmed by the latest statistics from NielsenIQ, according to which, over the year (until May 2023), the overall range has decreased by approximately 12.4% to 9.360 units in the tea market. For the year to May 2023, tea sales fell 5.8% in volume and grew 8.7% in value year-on-year. In total cash sales of hot drinks, tea accounts for 35.2%, instant, and natural coffee - 48.5% and 14%, respectively, and cocoa - 2.3%.
Starbucks finally left Russia on May 23, while a local rapper, Timati businessman Anton Pinsky, and the Sindika company acquired its local assets. The deal amounted to about 500 million rubles, according to Anton Pinsky.
The partners have launched a new coffee chain on the former Starbucks sites in Russia under the Stars Coffee brand. According to Pinsky, the new chain managed to “qualitatively improve the product” and expand the range.
Anton Pinsky said, “The coffee was softer because Starbucks had a problem with dark roasting, which made the drinks bitter. And they weren’t doing well with food because all 30,000 cafes worldwide offered the same thing. In this sense, our hands are free; we have added variety and raised the price to the level of inflation correction. Previously, the average bill was around 430 rubles; ours became 580, but this happened due to the expansion of the assortment. In terms of profit and turnover, we now have things going much better,”
In March 2022, Nestle announced that it was suspending investments in Russia and refusing advertising in the country. However, it denied closing its Russian enterprises, including the factory in Timashevsk. It was later announced that the company would produce and sell only essential goods in Russia, such as baby or medical nutrition. At the same time, coffee production did not stop.
The Grand NN coffee factory is one of Russia’s largest instant coffee producers.
The Russian assets of Ekaterra, a tea brand that decided to leave Russia after February 24, 2022, were sold to the United Tea Company LLC, one of Russia’s largest tea producers.
In Russia, Ekaterra (since renamed Lipton Tea and Infusions) produced tea under the brand names Lipton Yellow Label, Saito, and Brooke Bond at a factory in St. Petersburg. According to the city administration, in 2019, the factory processed up to 16,000 metric tons of products yearly. In August 2022, Ekaterra announced its withdrawal from the Russian market and suspension of production in the country. According to estimates of the Russian Association of Tea and Coffee Producers (Roschaikofe), the volume of the Russian tea market is currently estimated at 140,000 tons per year. Thus, Lipton’s capacities will make it possible to supply more than 10% of the market. The list of other leading players includes “May” (brands “Maisky,” Curtis, Richard) and “Orimi” (Greenfield, Tess)
According to Ramaz Chanturia, head of Roschaikofe, the demand for tea in Russia is steadily growing, which could create conditions for expanding production by leading local players.
Analysts believe an interest in leading local players may be related to signing long-term contracts with leading Russian retail chains to produce tea under private labels. As Chanturia also believes in the face of declining purchasing power in Russia, private-label tea is becoming more in demand due to its low price.
In general, the Russian tea market was able to withstand the consequences of the current crisis in Russia. Official market statistics also confirm this. According to NielsenIQ, last year, tea sales in Russia in volume terms decreased by 5.7% (of these, sales of loose-leaf tea decreased by 6.6%, and tea bags - by 3.6%) although they grew by 12.3% in value year-on-year basis to RUB 210 billion ($2,56 billion), which became mainly due to a significant rise of tea prices (up to 20%) in Russia in 2022. Tea bags account for 69% of sales in volume terms. 93% of the market accounts for domestic producers.
Generally, the Russian tea market is characterized by strong traditional consumer preferences. Black tea is the most popular variety in Russia, occupying about 80% of the market.
The main problem of the Russian market is its dependence on imported raw materials: the main suppliers are India, China, Kenya, Sri Lanka, and Indonesia. In Russia, only a few climatic zones are suitable for tea plantings. There are plantations in the Krasnodar Territory and Adygea, but they cannot meet the domestic demand.
There is also the ever-growing interest in non-standard types of tea, which are becoming an alternative to sweet, carbonated drinks or bottled iced tea with added sugar.
Since the 2010s, tea consumption in Russia has been declining. Domestic consumption has decreased by almost 100,000 metric tons over the past 10-15 years.
In coffee, in 2020, the research company Euromonitor International estimated the Russian coffee market (beans and ground) at 62.9 billion rubles. The top five brands were Jockey (owned by the Orimi group), with a share of almost 14%; Nespresso, with 12%; Paulig, with 12%; Lavazza and Nescafe Dolce Gusto, each with a share of 5.5%. There is no data for 2021 and 2022 from the company.