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.
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.
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