Middle class and spending power in Russia has grown over years dramatically - Philips CEO

Август 13, 2013

What problems do foreign companies encounter while working in Russia and what kind of marketing tools should they use in order to attract Russian customers? The CEO of Philips Russia Mr. Arjan de Jongste in an interview with the Voice of Russia also talked about what new chances did they get after the world economic crisis of 2008.

How long has "Philips" been present in Russia?

That’s a very nice story. Because the company has been long time active in Russia. Actually it started with one of the founders of "Philips" in 1898, who was a true entrepreneur and travelled the continent and in that journey also came to Russia. Travelled around in Moscow and especially in Saint-Petersburg. In those days he came to meet people and actually made the biggest order so far for "Philips" – the light bulbs with the Tsar and the Winter Palace. So clear roots started very early in the "Philips" history in Russia. Of course it has seen different times like the history of Russia as well, but it shows we have deep roots in Russia.

If you now look – this is also the friendship year between Russia and the Netherlands – 2013. We see a lot of aspects of not only common culture, but at least overlaps where Russia and Holland have been cooperating. And Holland is certainly an important trading partner of Russia. And "Philips" contributes its small bit to that. Russia is at this moment an important growth market for us, not only in certain areas but actually for all our sectors in that sense. So long term history but also in modern times an important element of our strategy.

What are your main areas of business in Russia nowadays?

Actually all our divisions or sectors, as we call them. Biggest part is consumer here - traditionally a very strong part. I think we somehow are a very good match with the requirements and the preferences of the Russian consumer. Everything in health and well-being does appeal to the Russian consumer who wants to improve his diary life environment and is willing to invest in that. But that’s not the only one. We also do our lighting business here – energy-efficient lighting. And we have our sector of healthcare. We clearly see that if I talk about energy efficiency, efficient lighting and healthcare - those are topics to the heart of how to bring the country infrastructure to the next level. And the former government often indicated this modernization. And there is a good overlap between what we stand for and what Russia as a country is trying to achieve.

Can you see any difference between the demand for your goods in Russia and that in other parts of the world?
I think the answer is "Yes" and "No". I think our strategy is all about becoming locally relevant, which means that although there are global ideas, in their execution they are slightly different. I’ll give you an example in the consumer area. The appetites and the taste for food are different here in this country compared to Western Europe, China or North America. So the same products do not always fit the requirement of the Russian consumer. So we introduce special products – for instance what we call a "cube cutter" to make the famous salads in cubes, which is typically something for here. So it is a global concept but then tuned to the requirements of the local consumer.

Same with what we call a multi-cooker. Maybe in China they make rice with it. Here we make soups and other typical Russian dishes. We can continue.

In healthcare the education system trains doctors in a certain way. That means that the equipment they are going to use needs to reflect that procedures they have learnt. That also means tuning of the equipment, the economics of equipments. So another example where you basically say: "Look, this is global knowledge, these are global products but we need to tune it and leverage it into the Russian market."

Does "Philips" have any general concept of development in Russia? Maybe some kind of a motto?

No, I would not say that specifically here in Russia. Because I think our mission and our approach are very relevant to Russia as such. So we don’t need to have a different approach to that. What we do see is that a Russian consumer is interested in different things. I give you an example. While maybe in Western Europe promotion campaigns are very aesthetic from a desire point of view, Russian consumer wants to know the clear benefits. He is not afraid to invest in good products, but he wants to know what he gets. So the way you communicate to consumer is entirely different here in Russia than for instance in Western Europe. So you tuned way you create your benefits in a certain way, so that you know you can appeal to people and that they understand what the benefits are.

On the website of "Philips" you say that you support the sustainable development and promotion of green products. What is actually a green product?

Fundamentally we believe that if you want a long term player in a certain market and if you want to be locally relevant you need to be part and parcel of the society. And that means it needs to be sustainable to that extent. There are many elements in sustainability – it’s not just energy consumption. It also has to do what it brings to society and alike. If you can bring education, if you can bring healthcare on a different level, if you can bring safety in the streets on a different level – it is also an element of sustainability. But let’s focus on green.
Already quite some time "Philips" is focusing on what we call "EcoVision". It is not just electricity consumption, it has everything to do with how can we make sure that we use as little as possible hazardous materials which are difficult to recycle and damaging to the environment and to people.

How can we make sure that in the packaging which weighs a lot of kilos etc. we do use recyclable material? How can we reduce weight of products so that the energy footprint is minimized. And the last but certain not least – how can we make sure that our products are good in power consumption and year on year improve the performance. Those products we call green – products that stand out in the benchmark on those aspects. Which means we have committed ourselves to a year-on-year improvement in those elements and we point them out as green products.

I think the essence of it is a long term commitment of "Philips" to strive on its own but with partners, with NGOs to come to products that basically burden society and the environment as little as possible or enable totally sustainable equal system. So that you can reuse most of the materials and they find a way.
What green products do you produce?

Even our kitchen appliance products – there are products which we stipulate as green. Because if people use that, a lot of power is used – they are heavy, so the footprint is reduced, the packaging is innovated in a way that it burdens the environment as little as possible. But the most obvious example is of course LED-lighting.

LED-lighting depending on how you compare it, can reduce the energy consumption from 40 to 60 per cent. And that’s a lot. If you see and we have examples where people have to add to the electricity grid a lot of power stations. And power stations are a burden. But if you would replace instead old-fashioned lamps in housing, you could really reduce the need to build those power plants. And in that way I think that’s a very tangible contribution to sustainability.

In healthcare refurbishing of products when applicable, of course also modern, and therefore less energy-consuming. But I think the most to the heart speaking and easy to understand is of course the energy efficient lighting trend.

Are green products popular in Russia nowadays?

I think compared to the rest of the world the notion of green and sustainability is still limited in Russia.
I think most people might have heard about it, but it is not an explicit decision criterion at this moment. I think it’s a matter of education in creating awareness. We are sure it will come. I think five years ago you would not go to a retail chain and see the eco-labels on the fridges – they are there now. Which is a way to make people aware of that element. Especially when energy cost will rise and alike we’ll see the people get more sensitive to the hard benefits.

And there is of course also a growing part of the middle class, which is aware of that. We want to have a sustainable future also for our kids. This is a way how to deal with that and contribute that. But I have to admit it is not that developed like in the Western world, in the Nordics and in the US.

Are green products more expensive than the usual ones?

No, actually normal consumer products are basically designed for normal value. But it’s so intrinsic in our way of working to reduce every year the elements of sustainability that it becomes part and parcel of our proposition. And they don’t drive anymore the cost.

A new technology is LED. Of course in the initial buy it is more expensive. However the payback is there. So when you use it a couple of years, the return on investment in energy consumption is there. But it’s a matter of time. Those technologies will be affordable as anything else.

And I think every new technology starts at a higher price than the old technology in that sense. So in essence I would not say there is any more a big premium on green products.

What marketing tools do you use in order to attract people in Russia?

I think we use all the tools which are available, which is still I would say TV is still an important medium. And I think the growing role of digital is important in that. So those would be why I do mention TV. Because it’s still important, actually more important than elsewhere. But I see on the other side extreme growth in how digital plays a role in communicating our messages to specific target groups.

And in between there are of course a lot of platforms of key opinion leaders, opinion leaders in general which we need to reach via very targeted marketing events and alike. And that depends whereas it is B2C or B2B.
Other tools we don’t use. I think we use not so much direct mail and alike. We do more endorsement via authorities or people that are trusted by consumers. There is an element that people like to have a reassure of somebody who has used it and they trust rather than the company or another official who tells them what is good for them.

Can you give a few examples of such people?

Yes. We used for instance in beauty campaigns Zhanna Friske. We used professional hairdressers in hair care. In healthcare we use people that are highly reputable for being expert in cardiovascular diseases on how to use it and what you can do and that and that. Rather than our specialists saying: "This is the best in the world."
It’s typical Russian, not only Russian but also in the other CIS countries people like to hear it from people that they trust.

What difficulties do you encounter while working in Russia? How do you cope with them?

I’m now three years here. I almost forgot whether it’s difficult or not. I think you can adapt to things.
The difficulties which might arise have on the other side a lot of opportunities. If there are some obstacles, it is still a lot of procedures and very strict regulations in that sense. On the one side it’s good.

On the other side people look to the letter of the regulation rather than what’s good for them. I give you an example. We talked about LED. LED is more expensive than old technology. How to explain and how to work with the current legislation that the best price is not the best buy. Traditional lighting may be of different quality, it is from a maintenance point of view more expensive, so over the next three to five years the burden on the budget is higher. Although initially you have to pay less. That’s something which I think is sometimes difficult for innovative companies to bring across.

And I think we have our conversations, our dialogues with interest groups, industry groups on how to have the dialogue with the government and have also legislation support, innovation and infrastructure in the right way.
And I think these are the type of things where I would say it’s not difficult but you need to know and that’s still a way to go to have the right message in place, to stimulate the right things. The things that are being said, how do you make sure that the rules and regulations are fully supportive of that.

The other thing is that and that’s my dream - I wish that registration of products, approbation of products would be simpler and more harmonized with international standards. I think that would mean products would be quicker available in Russia and innovation could benefit the Russian population quicker. It’s now a pretty cumbersome and long process.

Just to give an example in healthcare: it takes you more than 8 months at this moment, which means the innovation comes 8 months later than anywhere else. And I think that’s a pity.

Do you have any cooperation programs with various organizations and educational institutions in Russia?
I already said earlier, we do not believe in just shipping products. Maybe we did it in the past, but that’s not where it’s all about anymore.

Secondly, in order to speed up to become locally relevant and meaningful to the Russian consumer, it’s only logic that you start cooperating with local partners. If you take education – yes we do sometimes cooperation with reputable institutes to set up an MBA for instance for physicians: how to manage a hospital, which we think is a good way to get and benefit for hospitals: how to manage that as a business - which is not necessary what doctors get as part of their education. And therefore use their budget in the best way. Which on the other hand helps us to convey our propositions in a good way.

You do that with local people, to understand where they come from and have the expertise. Or with other companies. We made a joint-venture in lighting with "Optogan", one of the leading LED-suppliers in Russia with participation of "Rosnano" where we basically say "Look, we want to couple local entrepreneurship with global knowledge and global know-how and make a winning team in that specific segment of street-lighting and road-lighting."

We work with "Electron”, leading healthcare medical equipment company that knows exactly already for 20 years how doctors work locally with important global technology which they could never develop on their own and combine that to a good proposition for Russia.

So getting close to the customer, leverage the knowledge, which is there locally but on the other hand also leverage the global technology, which is there within "Philips" for the benefit of the Russian consumer or customer.

Did the world economic crisis that started in 2008 affect your position in the Russian market?
Maybe not a position, but it was of course not a very nice time. And our business contracted, which made us very much aware that we are vulnerable.

So I think what Philips did very well in those times is making a very efficient organization.

A core of what you need to have to operate here in Russia remained and was consolidated between all the businesses. But you could expand the capacity easily by adding people. In that sense I think we are more resilient to ups and downs than ever before.

Of course Russia cannot be untouched by global economic trends. So I think we are warned and alert but on the other hand a long-term growth perspective in this country is untouched – that’s the firm belief. So it’s more how do you get through a certain period of draught. Then everything is going to change.

I think the crisis in 2008 has shown that markets have dramatically recovered, business is actually better than before crisis. So for us it’s clear: long-term strategy and making sure that you can act fast the moment it goes left or right. I think that’s anyhow in such a fast development area like Russia or other places in the world – the recipe you need to have.

Why is the situation after the crisis better for you than before?

I see the markets are bigger. The investment in healthcare for instance and the realization that we need to upgrade the infrastructure has created a market which is by far bigger than it was before crisis. That might go up and down with budget pressures etc. but nevertheless the realization to upgrade - it is there. If I see the notion of upgrading a lighting, that is a trend which might be managed a bit but that transition will happen because there is a clear benefit.

And for companies to be competitive you need to really look for every operating cost so there it will continue as well. Consumer amount is of course in a major form impacted if there would be economic crisis but I think we also realize that the middle class in Russia has grown and the spending power of that middle class has grown also over the years dramatically. And in that sense it’s a force to be reckoned with, which drives consumer market.
What are your plans for the future?

I think we embarked on a journey to extend further our local footprint. Not only with sales and marketing but also look for the partnership where relevant or necessary we will consider production.

Interesting for us are the local or global research and development where cooperation in clinical research or linked in into the worldwide networks – we will absolutely look very positively to that.

So the main thing is "Ok, how to even become more local than we are today?" and develop the dynamics from there, become a Russian company which belongs to "Philips". I think that’s the generic view. I think more and more becoming a solution company than just importing a product. I think that’s the other dimension. And if there is anything this is becoming a total solution including financial services and alike. So that we’re not just linked to budgets from the government but that you can really also venture into infrastructure and make it efficient and let it be big for itself.

I think those trends are for me what I see in 2-4 years in the immediate future. Now what’s beyond that I cannot figure out precisely because we still live in a very dynamic world.