«If you don’t think about the future, you cannot have one»
John Galsworthy, novelist and playwright, author of «The Forsyte Saga», Winner of Nobel Prize in Literature
If a company wants to be successful on the Russian PPE market tomorrow, it should know already today in which direction the market will be developing and what trends will manifest themselves on it in the coming years.
What will influence the Russian PPE market within three next years?
1. The economic situation in Russia.
The demand for personal protective equipment, in many respects, depends on the growth of the of the companies’ PPE budgets. Budget formation is directly related to the economic situation in the country. When preparing an expense budget, a company takes many factors and risks into account. Moreover, external factors (oil price leaps, currency exchange rate spikes, sanctions etc.) affect the budgets now less than internal factors (economic development, consumer demand growth, tax policy changes etc.). Unfortunately, the forecast for the Russian economic development is far from being optimistic. The results for the 1st quarter of 2019 show economic growth of 0.5%. According to the Ministry of Economic Development, the growth of the Russian economy in 2019 will be 1.3%, and the forecast for 2020 predicts an increase of 1.7%. The main driving force behind the Russian economy is the oil and gas sector. Despite the increase in average oil prices over the three past years from $ 50 to $ 65, oil and gas companies draw up their budgets based on the most conservative forecasts. For example, the expense budget of PJSC Gazprom Neft has been approved at the price rate of $ 45 per barrel of oil. In reality it means that the companies cannot increase their PPE budgets. The per capita income in Russia has been falling for 6 years in a row. I think all businessmen in Russia will agree that it has become more difficult to do business and that costs have seriously increased. Unfortunately, investments are declining and only few new companies are opening. At the same time many plants with foreign capital have been closed, for example, the Ford automobile plant in St. Petersburg. The difficult situation in the economy affects companies, making some of them reduce PPE expenses. But a negative forecast does not automatically mean a reduction in sales and a slowdown in business development. To be successful in a stagnant market, you need to increase efficiency, actively look for growth zones, think creatively and develop professional skills.
Leading distributors and manufacturers in the Russian PPE market: «Vostok-Service», «Technoavia», «Tract», «Energocontract», «Zelinsky Group», «SOMZ» and others, proved in the 90s, when the economy was seriously shrinking, that it was possible to grow despite negative trends in the economy. Crises happen in all economies of the world, any decline is always followed by growth. In general, Russia has a great growth potential in the PPE market in the coming decades.
2. Changes in legislation.
Changes in the legislative framework have a very strong impact on the PPE market. From 01.03.2020 mandatory marking of safety footwear with QR codes will be introduced in Russia. A pilot project for QR marking of workwear has already been launched, the possibility of similar marking of PPE is being considered. How will this decision affect the PPE market? The complication of procedures involving both manufacturing and sales will take place, costs will increase and some of the market participants will leave the market or change their sphere of activity. The trading process will become more transparent, which will entail some «whitening» of the market, but this will not cause a drastic redistribution of market shares between companies.
Companies operating in the Russian PPE market over the past three years have become more law-abiding and transparent, and the share of counterfeit products on the PPE market is now rather low. I estimate it to be not more than 5-6%. A serious factor that can change the PPE market situation will be the transition to a risk-oriented approach to evaluating hazards and issuing PPE to employees in accordance with the special assessment of working conditions. The process has already been launched, and at the end of December 2019 draft amendments will be ready. The first versions of the draft were, in my opinion, rather raw, ill-considered and could lead to a significant reduction in the PPE market. It is encouraging that in 2019, the Russian PPE Association (ASIZ) actively joined the work on developing risk-based approach documents. Representatives of the PPE Association are included in the working group, which means that the opinion of market participants will be taken into consideration when elaborating the documents.
A risk-based approach entails a higher responsibility of the employer regarding the setting up of the occupational safety system at workplace and also in terms of issuing PPE to the workers. The role of the state as a regulatory body is diminishing. Are the employers ready to take a new approach to safety issues? I don’t think they are at the moment. In order to prevent a decrease in PPE availability and compliance at workplace, the PPE market participants will need to have a better command of the risk-based approach than the end user. The transition period will run for 5 years. And if the end users will have the opportunity to reduce the PPE expenses — most will take advantage of this. This must not happen. The level of sales managers’ competence should be significantly increased in order to help the end consumer to find out how the application for issuing of PPE is to be formed and compiled in the changing situation.
3. Increased cooperation between companies and market consolidation.
Slowdown in the rates of economic growth, greater transparency of bidding process, easy access to large amounts of information via the Internet and new legislative requirements (Federal Laws #223 and #44) are among the reasons for increased competition in the Russian PPE market. The appearance of new players in the market has decreased. Stronger competition, in theory, should entail market consolidation. But the Russian market of PPE is not yet sufficiently developed for active mergers and acquisitions. Only sporadic asset purchase and sales transactions are currently taking place. As an example, I can cite the acquisition by «Vostok-Service» Group of hand protection products manufacturer – «Likom» LLC. The situation is also aggravated by conservatism and the decline in investment activities of foreign companies. The volume of the Russian PPE market is now 150 billion rubles ($ 2.2 billion) and has a good growth potential. If the economic situation and the investment climate improve, American and European players with billion turnovers will come to our industry. For reference, the turnover of the largest player in the US PPE market, W.W. Grainger Inc. is more than $ 9 billion with a capitalization of $ 16 billion. Entering the market through the purchase of a local enterprise is optimal for such companies. Increased competition leads to earnings dilution, and the current desire of the end consumer to save on PPE also contributes to this. Stronger competition also entails increased cooperation among market participants. This cooperation for many companies is the only way not to disappear from the market. By cooperation, I mean joint mutually beneficial activities without mergers and acquisitions. The tendency to centralize competitive bidding, to increase contract terms to 2-3 years and consolidate applications from subsidiaries of state corporations (Rosneft, Russian Railways, Transneft, Gazprom, etc.) has become common practice. The values of tenders and the terms of contracts have seriously increased, as well as the product ranges. The values of guarantees required to participate in competitions have grown significantly. Objectively, about 15-20 companies in the market can now participate in the competitions with the total amount of 500-700 million Rubles. What shall other companies do? They can cooperate with each other to form alliances for joint participation in competitive bidding, where every participant should be responsible for a certain segment: workwear, safety footwear or personal protective equipment, etc. This scheme requires trust between participants and ability to reach compromises, but it is working. Cooperation can be used not only for participation in competitions, but also in manufacturing. We are talking about both contract manufacturing, cobranding and joint use of production sites. Possible option is a joint procurement of materials from the same manufacturer to get the best price. This kind of cooperation is actively developing in the Russian PPE market. There are already some examples of successful projects.
4. Diversification and expanding the range of products and services.
In order to develop successfully under increased competition, companies are looking for new ways of development, one of which is the stepping up of market participants’ specialization, business diversification and extension of product and service ranges. This trend has been actively developing over the past 3 years and will continue to do so. Both manufacturers and distributors in the Russian market participate in this process. I can give a few examples:
- The «SOMZ» Company, Russia’s largest manufacturer of head protection products, opened up a production site for flame retardant garments 2 years ago.
- The «Liga Spetsodezhdy» Company started up production and sales of gas detector equipment under the trade mark «Leader» and became a serious player in the gas detection market. Until recently «Liga Spetsodezhdy» was focused only on sales of workwear and safety footwear.
- «Spetscomlekt» Company (St. Petersburg) has been actively developing the in the field of industrial medicine for the last 2 years, promoting the «Hepoglos» hemostatic bandage products and mannequins for training in administering first aid. This promising segment in the western PPE market has appeared in Russia too. During the OSH exhibition (BIOT) in December 2019, «Spetskomplekt» will hold an all-Russian competition among industrial companies in administering first aid.
- «Energocontract» Company — an acknowledged leader in the segment of flame retardant garments has entered the market of all-round workwear, safety footwear and PPE. A subsidiary of «Energocontract» – «Etna» Company is actively working in this market. This trend will be relevant in the coming years.
- «Sever-Service» Company, specializing in deliveries on the by-order basis of workwear, safety footwear and PPE to large Russian companies, became an exclusive dealer of high-quality workwear from PROJOB AB (Sweden) in 2018 and opened a retail store of this company’s products.
The market of services is also booming. One of the most promising types of services now is PPE outsourcing. More than 200 end users have already chosen this service on the PPE market. Among them: «Severstal», «Vorkutaugol», «Sibur», «SUEK» and part of the NLMK subsidiaries. «Kola MMC» and «Nizhnekamskneftekhim» show great interest in this service too. The leaders in the provision of PPE outsourcing services are «Vostok-Service» and «Technoavia» companies. «Energocontract» Company has also begun to provide this service. Companis switching to outsourcing conclude long-term contracts for 3-5 years. In fact, the company gets linked to the supplier for a long time. Big companies actively offer outsourcing of PPE as a service, and users show interest in it. Second-tier and regional companies run the risk of losing their customers. And the only way out is to start offering PPE outsourcing or new services to the market. For example, an interesting idea is to offer an online marketplace as «Alvatex» Company (St. Petersburg) does. Rental of workwear service has not lost its relevance either. Good growth prospects have industrial washing of workwear. This service is being developed by «Technoavia» Company.
«Differentiate or die», this slogan will be relevant on the Russian PPE market within the next three years.
5. Generational change in the PPE market.
The Russian PPE market is more than 25 years old. The process of generational shift is ongoing, but now it has become more vivid. The first companies in the PPE market were founded in the early 90’s and now their owners are about 50-60 years old. All of them are experienced, in most cases they are in excellent physical shape and have not lost motivation. But many are already thinking about transferring their business to children or trusted younger employees. The Russian market has not yet formed a clear idea of how in a proper way and without losses to arrange the transfer of a company’s management. Western family-owned companies have accumulated considerable experience in this field. For example, UVEX and JSP companies are now run by the third generation of owners. In companies like Portwest, Engelbert Strauss and ARCO the fourth generation is actively engaged in business management. Generational change of employees in companies is an equally important issue. The key employees in many companies are already over 50. They are still active, but can no longer work as before, 10-12 hours a day. These employees are loyal to the company, have vast experience and know key customers from top to toe. For many companies, experienced employees are the backbone of business and corporate culture.
To be able to integrate «veterans» into the structure of a changing business is not an easy task, but it must be solved for the sake of successful development of the company. Here the process must go its natural way. The value of experienced employees increases precisely in times of crisis, when you need to take difficult decisions and not lose optimism. Young employees are closely watching such reorganizations.
Involving interested and motivated youth is a prerequisite for successful business development. This task is not only relevant for the PPE market — it is now the task for all sorts of business in Russia. How to captivate young employees with the topic of PPE? Each company will settle this issue in its own way. Generation Y, Z is looking for interesting creative work and wants more freedom. Rigid corporate rules, strict control of working hours, dress code, early planning meetings, lack of trust scare talented young people away. The ability to make the world a better place, the freedom to express one’s thoughts and take independent decisions, the spirit of good fellowship, the possibility of development, and a long-term strategy are the things that can attract the best young employees to the company. In today’s world, you can do high-quality work remotely, working from noon till 9 p.m. The main thing is that the employee should be motivated and yield the result. Changing the classic rules of running business and a new business culture are difficult for business owners to perceive. But life is changing a lot, and in order to remain successful in the future, it is vital for the business owners to keep abreast of the changes and change themselves respectively.
6. The impact of the Internet and social media on the PPE market.
Internet PPE trade has a great potential. Sales through these channels are growing at an annual rate of 20-30%. Amazon.com, the world’s largest online retailer, sets an example of how to quickly gain a place in the PPE market. PPE companies now offer their products through their own online stores and through e-commerce leaders, such as: Wildberries, Ozon, «Vse intrumenti» (All tools, Russia). To be successful in e-commerce, one needs new skills, qualified young employees and the focus of business owners on this sector. As an example, I will mention «Avangard – Professionalnye Resheniya», which is actively involved in online trading and, where the company’s leaders personally pay special attention to it. «Avangard» has more than 200 million rubles sales plan through online channels in 2019, and this plan is being implemented.
Social media in the near future will become one of the main channels of information and promotion of products and companies. The leaders of the Western PPE market pay great attention to promoting their companies and products via social networks. For example, 3M has more than 6 million Facebook subscribers, UVEX has over 35 thousand Facebook followers on their PPE segment, Engelbert Strauss, the leader in the German PPE market, has 13 thousand subscribers on YouTube alone. According to Getsiz, budgets for promoting the leading American PPE manufacturers in social networks in Russia amount to hundreds of thousands of rubles every month. Among Russian companies «Tract» has the largest number of subscribers on Facebook — 3.5 thousand, while other Russian market leaders have less than 1.5 thousand users. The time for classic advertising in magazines and thick product catalogs is slipping away. Now almost every health and safety engineer under 40 years of age has a personal account on Facebook, Instagram and other messengers. And they spend a lot of time there. This must be taken into account and used to successfully promote companies and their products.
The struggle for the PPE consumer goes over to social media and the Internet.
7. Introduction of Smart PPE.
The introduction of new technologies is an ongoing process. But now the global PPE market is preparing to take a new technological leap that will change our perception of personal protective equipment. The concept of Smart PPE, which combines PPE with the Internet and enables to transfer a mass of data, is already becoming a reality. At the next A + A Fair in November 2019 in Dusseldorf and December OSH (BIOT-2019) exhibition in Moscow we will witness a real breakthrough in this field. Within the next 3 years safety glasses, helmets, footwear and garments using Smart technologies will become an everyday routine, as was once the case with mobile phones. End users in Russia can already purchase a «smart» safety helmet from «SOMZ» Company or Smart-glasses from Univet S.r.l. It is difficult to promote and sell Smart PPE as the price of these products is still very high, but this growing trend in PPE is already making itself felt on the market and cannot be ignored. If you want to be a leader in the market, you must start thinking, which of the manufacturers to beging cooperating with in this field and to look for potential customers. Whoever is able to offer high-quality and reliable Smart PPE will have a great advantage in the market. As an example, I will mention «Energocontract» Company, which has already begun to collaborate with the Italian manufacturer of safety glasses Univet S.r.l. promoting their VisionAR smart glasses using augmented reality technology.
8. Increasing role of the professional community on the PPE market.
Professional communities and associations play a major role on the developed PPE markets. As an example, I will mention ASSP (American Society of Safety Professionals). It is a global organization of more than 38 thousand occupational health and safety professional which has a great influence on PPE markets in different countries. Without the opinion and assessment of the professional community in the developed countries it is impossible to pass a law affecting the occupational safety and health sphere.
There are many professional associations in Russia, and in some markets, such as the pharmaceutical, their opinion is seriously taken into account when elaborating new regulations. In the Russian PPE market the Association of PPE manufacturers and distributors (ASIZ) is the only professional community. At present it has increased its activity.
We should not expect government agencies of their own accord to take into account the opinion of market players, for example, when drawing up the rules for marking workwear. Government agencies will only reckon with the consolidated opinion of market participants united in associations. In order for the PPE market not to suffer from changes in the legislation, it is necessary to unite and communicate, identify problems and work out solutions. It takes effort, time and money. In a difficult economic situation, professional associations can help protecting the PPE market from slumping sales and dominance of low-end products.
I hope that the thoughts that I have expressed here will be of interest to the readers of Getsiz.ru and become the subject of discussions. Please, send in your comments. I am ready to answer your questions.