The joy of chocolate, Russian-style

20.08.2010 — Analysis

The Russian confectionery market is unfazed by economic shocks. 2009 proved that there is a reliable demand from all segments of the population for sweets, even during a time of massive layoffs and delays in salary payments. However, domestic producers risk losing their market share to multinational companies and competitors from the CIS countries. As a columnist for RusBusinessNews explained, the old Soviet tendency to save on raw materials at the expense of quality and to ignore changes in consumer preferences might undermine the position of Russian candy makers.

All the major stores in Ekaterinburg have a confectionery department. Supermarket shelves are filled with treats made by dozens of different companies from the Urals and other parts of Russia. Shelves are crammed with a selection of products made by both multinational companies and factories in CIS countries.

The demand for sweets remained strong in Russia, even during the economic crisis, despite the financial instability of the past year and a half and the overall decline in people's incomes. "The condition of the confectionery industry in 2009 was virtually unchanged from that of 2006-2008. In fact, there have been no large-scale changes in the pool of players, the range of products offered, or in the companies' pricing policies," notes Kirill Goncharov, the director of development for the Ekaterinburg company Konfetny Dvor. Although a decline in sales has been felt by the producers of more unusual sweets, whose exotic ingredients contribute to their higher price. "For example, you have a cake made with strawberries and a cake made with kiwi fruit. In more prosperous years, people were attracted by the exotic kiwi and would buy that cake regardless of its cost. But as soon as incomes declined, people began to cut back, and kiwi cakes no longer found their way into the consumer basket. They're just more expensive - plus, all Russians love strawberries, while kiwis have a more limited appeal," acknowledges Roman Danilin, the manager of the Fresh Cakes product line for the public corporation Khlebprom.

The grain scorched and the chocolate melted

Since the beginning of 2010, the manufacture of confectionery products has increased by 2% throughout the country and 7.5% in the Urals (according to data from the Russian State Statistics Service). During this period, businesses in Sverdlovsk took a giant step forward, increasing their production by more than a third. But the factories had to adjust their operations because of the summer heat, and these modifications turned out to be worse than the economic crisis.

Many stores lacked refrigerators to store chocolate products, and their air conditioners could not keep temperatures low enough to properly preserve the candy. "Stores accept a shipment of goods on the assumption that they'll be off the shelves within 2 or 3 weeks. But, on one hand, people stopped eating sweets because of the heat, and on the other, the candy melted because of the lack of air conditioners and refrigerators in the stores. As a result, sales of candy and other products made with cocoa beans were suspended during the hot weather. At first the stores were glutted, and then the shelves were empty - the merchandise specialists became skeptical about buying any new shipments because products were taking too long to sell," says Kirill Goncharov.

The abnormal heat has had more than just a short-term effect. Due to the fact that Russia lost much of its harvest in June and July, prices for grain and flour have risen 20-90% in the last month in some regions of the country. Experts claim that it is entirely possible that this could force up the prices of other products. "The market for flour and agricultural products mirrors the situation on the grain market. In addition, the world prices for sugar and cocoa beans are tied to the grain and oil markets. As a result, if the price of grain doesn't stop going up, in six months it will affect the market for chocolate, condensed milk, and all confectionery products," claims Kirill Goncharov.

Candy makers admit that a small number of importers bring in up to 90% of the raw materials from abroad that are used in Russian factories. Russian products, such as the flour itself, are an insignificant part of the raw materials costs and have a minimal impact on a commodity's overall production costs. "Of course, flour is one of a cake's key ingredients, but it costs very little. It's much cheaper than sugar or cream. Manufacturers aren't pleased if the price of flour goes up by a ruble or a ruble and a half, but it has almost no effect on the product's final cost," asserts Roman Danilin. Thus, the Russian government's attempts to restrain price increases on socially significant products are unlikely to affect confectioners, who will still be forced to revise their pricing policies.

A forced march for confectioners

Market players note that the current financial instability and rising costs of food are causing all segments of the consumer market (with the exception of those individuals at the very high end) to begin to look more closely at prices. Consumers can be divided into two groups. For one group, price is the primary consideration when choosing a product and quality is a secondary concern. The second group has more exacting standards. Thus, in the future, Russian confectioners either have to resign themselves to making the cheapest goods possible, or else they will have to find way to keep prices in check while maintaining quality. And they will have to do this quickly and professionally, because not only are inexpensive goods from Ukraine and Belarus entering the market, but also candy from multinational companies like Kraft Foods and Nestle.

One possible way to preserve sales volume would be to shift production away from making a large quantity of goods, to instead focus on making fewer products without sacrificing quality or ingredients. "Since 2009 there's been a ready market for goods that do not demand a significant investment for a one-time purchase. We began selling a line of inexpensive cakes under the brand name Usladov that are made using the same raw materials and equipment as our leading brand, Mirel, but weigh 800 grams instead of a full kilogram. This sort of retargeting has allowed us to maintain our momentum of sales throughout the economic crisis," says Roman Danilin. We have noticed that many Russian companies, especially chocolate manufacturers, still abide by the old Soviet maxim of "produce as much as possible, as cheaply as possible." Thus, when comparing the ingredients of chocolate bars made by a famous multinational company versus those from a major Russian factory, a correspondent for RusBusinessNews discovered that the former uses powdered milk and the latter - dried whey.

A second piece of advice: Russian candy-makers could attract customers and reduce costs by using new packaging and launching their own production lines. Most Russian chocolate manufacturers still use paper and foil wrappers, but foreign companies use vacuum packaging. As a result, the chocolate from domestic factories is half-melted, discolored, and unappetizing. The products from international manufacturers are better able to preserve their taste and appearance.

And finally, the third, and perhaps most effective way to hold down sales prices and improve competitiveness is to expand the product line while diversifying production. "Actually, pricing games won't get you very far in our market. Competitiveness is based on other factors, such as terms of delivery to the retail system, the attractiveness of the product, its packaging, and novelty value," explains Kirill Goncharov. "Different companies have different strategies. Some specialize in a particular type of product, while others try to diversify their range of offerings. Konfetny Dvor favors the second approach. When you manufacture 12 different lines of 60 products each, you don't feel your competitors breathing down your neck and you can be confident that customers will remember you as a confectioner who makes something really exceptional. In addition, this product diversification allows us to spread the risks. Because if a company specializes in just one product line, then all the production costs and risks are associated with a single product. Today we make many different products and can reallocate spending between the more and less costly products when we're manufacturing confections. Also, we're less dependent on the season for a particular product."

We agree that Russian candy makers lack the both imagination and desire to improve their selection of sweets as well as the sales people for their products. "The Ukrainian company Roshen is pushing Russian manufacturers right off the store shelves because they can offer consumers a lower price and a wider selection. Our local company Sladko, for example, launched the successful Metelitsa line many years ago, and did well for a long time by expanding their matrix and launching new products of the same quality. Russian manufacturers need to reexamine their product mix and experiment a bit. Because candy is an impulse buy. The customer sees something new, wants to try it, and buys it. If he likes it, then 9 times out of 10 he'll be back, even if what he bought is fairly expensive," the category manager for one of Ekaterinburg's retail chains told RusBusinessNews.

Evgeniya Eremina