Marketing Research and Import Substitution Strategy

Import substitution is one of the most effective business strategies in the modern Russian market.

Recently, the topic of import substitution has somewhat lost popularity in the media and professional discourse. However, this is largely due to its ambiguity from the perspective of macroeconomic policy and the public administration system. For specific organizations, often quite large ones, import substitution in the second half of the 2010s and early 2020s is one of the key development directions. At the same time, competition also exists in market segments with high import substitution potential. Finding such segments and niches can often be difficult, especially with a low degree of related diversification. All this necessitates active work in the field of marketing research.

About Import Substitution as a Business Strategy

In fact, import substitution is one of the most common strategies for working in a home market. In the case of exports, import substitution is not discussed, because then your product would be an import subject to replacement in the market. It is often used by companies producing goods (and sometimes services) that are objects of active international trade. If the share of imports in the domestic market is high, and local production has the potential to create analogues or goods comparable in key consumer parameters, then import substitution becomes a reasonable business idea.

Thus, objectively, import substitution is that business growth point considered as an opportunity by producers of most product items. After all, when producing goods within the country, there is at least no need to pay import duties and bear logistics costs for delivering products from abroad.

Additionally, import substitution is facilitated by specialized government structures in many countries. Russia is no exception here. There are many such measures, although from a business perspective, not all are highly effective. Nevertheless, they are being implemented. In particular, by tracking tenders conducted by infrastructure institutions supporting small and medium-sized businesses in the regions, one can see competitive procedures for finding contractors to develop business plans aimed at producing import-substituting products.

For Russian business, it is much more important that the very organization of the economic system, including in the territorial aspect, largely contributes to the development of import-substituting industries. Our country has relatively inexpensive labor and a cheap ruble, which periodically and somewhat unpredictably for businesses falls against leading international trade currencies, negatively affecting the prospects of importers. The large size of the country and the uneven development of socio-economic space lead to high costs for importing products and covering the entire market, which leaves, at a minimum, local niches for local players.

These are only the main reasons, and there are many others. Including the presence of specifics and barriers in the functioning of individual commodity markets, which are easier for Russian companies to overcome. For some sectors, primarily agricultural and food producers, state protectionist policies played a key role, closing the domestic market to companies from many countries, primarily European ones.

Searching for Promising Segments for Import Substitution

Although there are many opportunities for import substitution in Russia, not every company operates in a market where this business strategy is common.

In this case, it is necessary to understand why this happens. Most often, the reason is that there is no potential for import substitution in this market – either the dependence on imports is objectively irreplaceable (it is economically impractical to grow coffee beans in Russia), or imports are not significant due to the strong positions of domestic producers (it is difficult to talk about the potential for import substitution in the chicken meat market, for example). Then this business strategy is feasible only in other commodity markets or their niches, which need to be found considering the company's capabilities for related and unrelated diversification.

This can be done in various ways, but the most effective is the analysis of Russian imports. First, the organization's management determines the areas where diversification is potentially visible. This depends on the production, financial, personnel, and other capabilities of the enterprise, its geographical location, and so on. Then a list of potentially interesting commodity markets and niches is formed. They can be formulated more broadly, for example, engines and generators, or less broadly, for example, single-phase AC motors, but it is highly desirable that these names correlate as much as possible with the commodity nomenclature of foreign economic activity (i.e., HS codes).

The next stage is the actual analysis of imports to identify those segments where its volume is large, meaning import dependency is evident. Various sources are suitable for this. The most accessible option is data from the website of the Russian Customs Service. Data on imports can be downloaded down to ten-digit HS codes (i.e., the maximum possible detail), containing information on the imported volume in physical and value terms, broken down by periods (quarters), exporting countries to Russia, and regions of import.

For an initial "scoping" analysis, such information can be used, but at the same time, it is very general in nature. Its applicability is more related to the prioritization of commodity markets and niches, but for developing an effective marketing strategy, such data may be insufficient.

Therefore, after identifying the most interesting market zones, it makes sense to analyze databases of customs declarations for imported goods according to priority HS codes. Here, detailed information about the product (its description), companies acting as exporters and importers, delivery terms, and so on are already contained. All this together allows for a good study of the competitive environment from the import perspective, identifying the main market players, and provides food for thought about forming product and pricing policies in the future.

Essentially, based on the data from customs declaration databases for imports, an organization can conduct a truncated version of a desk marketing research of the market. If the role of imports is indeed significant, the resulting picture can, to a certain extent, be transferred to the entire market; at least, it will be clear how to compete with and displace imports. Such work can be carried out either within the company, if it has a qualified marketer in market analysis, or outsourced to a specialized marketing agency with advanced competencies in this field.

Marketing Mix for Import-Substituting Products

Based on the analysis conducted, if the possibility and feasibility of producing and selling import-substituting products have been established, it is necessary to develop a marketing strategy.

To create it, one can use the marketing mix tool or 4Ps, as it allows structuring the main steps to be taken within the import substitution project.

Many articles have been written about the marketing mix tool (4Ps, 5Ps, 10Ps, 4Cs, etc.), and it is also covered in detail in marketing textbooks. Let's focus only on some important points specifically related to the specifics of entering the market with an import-substituting product (based on 4Ps).

The first is the product itself. As we understand, it is intended to compete with imported analogues. But often, besides imports, there is also domestic production. Therefore, it is so important to study existing market offerings well. Typically, the quality level should roughly correspond to that of imports. But here it is necessary to analyze the influence of the product's qualitative characteristics on price elasticity of demand, since for Russian buyers, especially in the FMCG segment, domestic goods are a priori inferior to foreign ones. Consequently, the product's quality level should not form a cost price that would prevent effective price management.

If the import-substituting product will be sold in markets or segments where the brand is important, this issue can be worked out separately. For consumer goods, one can often observe mimicry, where Russian producers, for example of cheese or chocolate, conduct naming and style packaging in such a way as to maximally create the image of an imported product, increasing its value (sometimes this looks more like misleading the buyer). A number of producers who position their product based on quality (conditionally displacing lower-quality Chinese imports) may, on the contrary, incorporate ideas of "Russianness" or "Sovietness" into the brand.

We have already started talking about the second P – price above. The logic here is standard for entering the market with a new product in principle – the price is set below the main competitors, preferably by at least 10-15%, so that this difference serves as an incentive to change consumption habits. For import-substituting products, it is always important to balance the "quality-price" parameters, and in current conditions, the price factor often takes priority. In case of high dependence of the producer on imported raw materials (so-called localization policy), this strategy can carry high risks.

For choosing effective sales channels for import-substituting products, it is important to study the current distribution systems for competitive imports. Customs statistics databases help well here, where buyers are "visible," meaning the first link in the sales chain in Russia can be seen. Then one can trace the entire chain, analyzing the links and markups at each stage. Even in the case of low transparency of distribution channels, the cost of imported products and the final price of the goods (which can always be monitored – for both B2B and B2C markets) give an idea of the overall margin that accompanies working with imports and forms motives for intermediaries. If the import substitute offers a competitive alternative, the likelihood of a positive response in sales channels is high. All else being equal, trading organizations also find it more profitable to work with local suppliers than with exporters to Russia.

Promotion of a new import-substituting product can be very variable; here, the substantive characteristics of the product, the target profile of its consumers, and the chosen marketing strategy for working with the market are more important. From the perspective of import substitution, it is necessary to decide whether the advertising tools will promote the message that the product carries the idea of import substitution. This depends on the multi-attribute model of the product and, if provided for, its brand. Strategies can be diametrically opposite – from a central message that the product was created as an import substitute (important in markets where the state introduces direct preferences for such products) to mimicry of imports, where the product is presented as foreign-made as far as legislation and common sense allow.

Import Substitution and Development of Export Activities

Although import substitution and export development are practically opposite directions of a company's activity (from the perspective of sales geography), they also have much in common. This can be taken into account to improve the efficiency of the enterprise's commercial activities.

Implementing an import substitution policy often directly positively affects the business's export potential. And here's why.

It is no secret that commodity markets of various countries are at different stages of their development at the same time. There are more progressive geographical markets – often these are countries in North America, Europe, the Middle East, and so on (for individual product items and services, there are specific features). Less "advanced" markets can also be distinguished – Africa, Latin America, Central and South Asia. The Russian Federation as a socio-economic system, as well as its commodity markets, usually occupy middle positions – somewhere we are quite "at the forefront," and somewhere we are already significantly behind.

When a company implements an import substitution policy in the domestic market, it often competes with strong European and Asian producers. Thereby, the company's competencies grow, its management level improves, product quality is perfected, and the assortment expands. This can become a "ticket" to the markets of less developed countries, especially those located nearby and not setting high barriers for Russian business – EAEU countries, Central Asia – the first "belt" of such markets.

Such a business development strategy through import substitution to export often accompanies Russian companies representing engineering, food production, pharmaceuticals, and other industries.

In this case, however, it is necessary to realize that export activity has its own specifics. One needs to prepare for it just as thoroughly as for import substitution – engage in studying export markets, form a competitive commercial proposal for the target market, interact with foreign partners, including traveling abroad, using various tools – business missions, international exhibitions, etc. With all this, companies that have implemented an import substitution strategy in Russia are more likely to be competitive in export markets as well.