Russians have been bingeing on health food in an effort to build up their immune systems in the hope of protecting themselves from the coronavirus (COVID-19).
That’s how Elena Shifrina, former model, MIT alumnus and now CEO of Russia’s premier health food company BioFoodLabs explains the surge in sales this year.
bne IntelliNews profiled Shifrina three years ago when BioFoodsLab was just getting going and within two years the Russian edition of Forbes magazine had already named her as one of most successful start-ups of the year. BioFoodLabs, and its leading brand Bite, have come a long way since then.
Today BioFoodLabs sells over 100 different products through most of the country’s leading supermarkets and is turning over RUB1.5bn ($19.4mn) a year, with revenues still growing before they shot up around 40% this year due to the pandemic. The company has set up an R&D arm and is constantly looking for new product lines, recently getting into “alternative” meat and milk, which have been very successful. And partly thanks to the high quality of its product and helped by the devaluation of the ruble, some 10% of its production now is exported to nearby countries in the EU.
Shifrina says that BioFoodLabs has many years of strong growth left in it, but eventually her goal is to IPO the company. It is another example of the emergence of a light manufacturing industry in Russia that is being driven by the enormous size of the Russian consumer market and the fall in the value of the ruble in recent years that has made local production ever more competitive against the imports from both east and west.
Food sales in the time of corona
BioFoodLabs began by producing healthy snack bars. The idea came to her in the dining room at MIT, where she did a short stint as an exchange student in 2011.
“We were so busy that we had no time to eat, so we used to fill up on snack bars, but we didn't want those filled with sugar. We were looking for something that was quick and easy to eat, but at the same time good for you,” Shifrina told bne IntelliNews in a video interview from her home in Moscow.
The business has grown strongly from the start, as contrary to the Russian sterotype, Russians are very concerned with the quality of their food, putting a premium on “natural” that comes from generations of kitchen gardens at the ubiquitous dacha, where every family took pride in the quality of the tomatoes, potatoes and fruit they grew on their allotment.
The coronacrisis crisis has been a boon for BioFoodLabs, which pushed sales volumes up by 40%-45% month on month over the summer, according to Shifrina.
“People want food that supports the immune system and we can legally put on our packaging that our products are “healthy”, as they contain no sugar or preservatives, but they do contain a lot of vitamins,” says Shifrina.
BioFoodLabs has moved on from just making healthy snack bars and now has 113 stock keeping units (SKUs), as products are called in the fast moving consumer good (FMCG) world. That gives the company some real clout with the supermarket chains.
“If we only had five SKUs then the supermarket would not deal with us directly and would tell us to go via a distributor. But that eats up 15%-30% of your margin,” says Shifrina. “We have from the beginning wanted to work directly with the retailers as a strategic decision.”
This relationship is coming into its own as BioFoodLabs works with all the biggest players in organised retail, probably one of the most advanced and sophisticated parts of the Russian economy, including market leaders X5 Retail Group, which owns a variety of leading supermarkets, and its rival Magnit. Only these two companies span all of Russia’s 11 time zones and reach most of the 148mn strong population, a market that is half again bigger than Germany’s, itself the largest consumer market in the EU.
And as bne IntelliNews has reported, Russian retail is going through its own parallel revolution, driven by digitisation that has also been catalysed by the coronavirus (COVID-19) pandemic. Sales in the food sector in general have been booming at the biggest companies, not falling, even if the overall retail sector turnover has been contracting.
Normally the supermarket agrees with a company such as BioFoodLabs to offer a proportion of the company’s products at a discount in order to build up the sales volume, as the supermarket is as interested in boosting sales of the products on its shelves as the producer.
“The supermarkets cancelled all the discounts. The products were selling so well that there was no need to discount it to get people to try it. The demand for healthy food was so high that customers were buying them on the strength of that promise alone,” says Shifrina.
Distribution and Logistics
BioFoodLabs business has of course been hurt by the lockdown that started in May. Just under a third of its products were sold through cafes and kiosks, most of which were closed for months in the middle of this year, but Shifrina says that the boost in supermarket sales and growing online orders more than offset the sales fall in cafes. Moreover, BioFoodLabs has been tapping the new retail distribution channel, the appearance and rapid growth of hard discounters.
BioFoodLabs is already in talks with Fix Price, one of the fastest growing of these hard discounters, that bne IntelliNews recently profiled. As these stores only sell goods that cost less than RUB199 ($2.30) and include staples such as pasta and flour, the Bite snack bars are a perfect addition to the discounters “impulse buy” model of boosting sales.
But working with the big Russian retail chains is the real “not meat” and potatoes of BioFoodLabs’ business.
“Just Pyaterochka [the discount supermarket chain arms of the X5 retail Group] has 8,000 stores across the whole country and Magnit has another 9,000,” says Shifrina. “Half our product is sold in the two biggest markets of Moscow and St Petersburg and the rest is sold everywhere else, with the 11 millionki, the cities with over one million population, being the most important.”
The supermarkets make distribution easy. BioFoodLabs’ production facility is based just outside Moscow in the Moscow Oblast and has more than tripled in size from its original 1,000 square metres to 3,000 sqm now, with another 2,000 sqm of storage space. All the company has to do is deliver its finished products to one of the many distribution centres run by the supermarkets and they transport the goods throughout their nationwide chains. As Russian retail sales are increasingly going online, all the leading companies – both traditional and e-commerce – have been investing heavily into their distribution and logistics systems, which have already become very sophisticated.
Alternative meat and milk
Shifrina has been funding all this growth out of retained earnings and apart from a 14% stake she sold in 2017 to create some working capital as a buffer to the inevitable shocks an emerging market like Russia suffers from, she has taken on no bank loans or other outside investment.
“The company’s turnover has grown to RUB1.5bn ($19.4mn) with a 25% profit margin,” says Shifrina. “But actually we experiment a lot on developing new products, so the actual profit margin is more like 15%-20%.”
Shifrina set up an R&D centre and hired technicians to develop new products in keeping with the company’s philosophy of producing extremely healthy food. The newest addition has been a line of “alternative milks” that confusingly don't contain any milk at all. The company has also started to get into yoghurts and snack bars that contain prebiotics that induce the growth or activity of beneficial micro-organisms and need to be kept on the cold shelves in the supermarket – in other words, the bars are fresh food rather than the dried food that the original snack bars were. The company’s next big thing will be “alternative meats,” which of course don't contain any meat either.
“Access to the cold shelves is a game-changer, as the foot traffic there is ten-times higher than elsewhere in the store,” says Shifrina. “If you think about it, what do you buy when you go to the store? You usually go there to get fresh foods, as you can buy dried foods much less often as you can keep them at home for longer.”
The alternative milk has been especially successful and BioFoodLabs offers a range of goods that include almond milk, walnut milk and coconut milk, which it has developed itself.
Some of inputs of these new products can be sourced in Russia, but much of it has to be imported from BioFoodLabs’ partners in Spain and Germany. Russia has walnuts, but not almonds or coconuts. The “milk” part is based on a pea protein that is Russian – Shifrina eschews soya protein as it has a poor image in Russia – and seaweed extract that is an emulsifier and stops all the ingredients from separating in the carton. If all that doesn't sound very appealing, a key part of the recipe is to make it taste really good using only these natural, if unfamiliar, ingredients.
“Another reason I don't like soya proteins is the pea proteins are much more tasty,” says Shifrina. “If you are making alternative meat then you add some meat aroma from our German partners – they make the best aromas in the world. We let my mother try and she loved it! She says she can’t tell the difference.”
Selling health foods to Russians, who are not famous for their good diets, is actually easier than it may first appear. Despite the dacha tradition, Shifrina says that as the middle class grows people are busier and spend less time growing their own food. During the 1990s half of all potatoes grown in Russia were grown in gardens at the dacha. Now consumers are prepared to buy what they used to grow.
At the same time, Shifrina says market research shows there is a global trend towards vegetarianism, which is also happening in Russia.
“The new young generation don't want to eat meat. They worry about the environment and it is trendy. It’s the biggest trend in the world,” says Shifrina. “A study found that by 2035 half the world’s population will be vegetarian and the same thing is going on here in Russia.”
The taste is important, as people are not abandoning meat and dairy products, but adding alternative foods to their shopping baskets in addition to more traditional products simply because they like them, which come with the added advantage of being better for you. Tetrapak did a survey, which found that 60% of those customers that bought alternative milks also bought traditional milk as well.
“People buy the alternative products because they like them. They want to grow the range of food they buy,” says Shifrina.
The other part of the package is nutrition. Russians do have a bad diet even if they value natural foods and after the age of 45 Russian men have a 55% higher chance of falling prey to diabetes or cardiovascular disease, as they eat too much fat and sugar, says Shifrina. Another study found that 90% of Russian women are not getting enough protein and 85% take in less iron than they should. So BioFoodLabs has added these elements to their products that are popular with women. Likewise, the company is producing a snack bar aimed at children that is gluten- and sugar-free. These have been a big hit with mothers in the Scandinavian countries, where there is no similar product on the market.
Innovations like these, combined with the high quality and pleasant taste, plus the competitive advantages from the devalued ruble, mean that BioFoodLabs is already exporting 10% of its production to other nearby EU countries. Shifrina says the export part of the business is expected to continue growing steadily, but she is still busy building up the product lines and filling out the corners of the Russian market.
“When we launched we conceived of the Bite bars as a premium product, but we have found that they sell just as well in the regions and not just in the richer, urban markets of Moscow and St Petersburg. You can find Bite bars all over the country now,” says Shifrina.
BioFoodLabs has ticked a lot of boxes that match the changing Russian eating habits and the new-found interest in living a healthy lifestyle that has been emerging for many years already; gym club membership seems to be de rigueur amongst most young urbanites in Russia these days and vodka gave way to beer and wine several years ago as the most popular alcoholic drinks.
The success and fast growth of BioFoodLabs has already piqued the interest of the multinational food producing giants. Shifrina had calls from and took meetings with the likes of Mars and Nestle, but says she doesn't have much interest in selling out to a strategic company in the short term.
“We have a lot of growing left to do. We are nowhere near finished,” says Shifrina. “But eventually I would like to IPO. That is my dream.”