Dairy companies, affected by the Russian anti-sanctions, have adapted to new conditions. They are shifting their production to Russia and enhance deliveries of authorized products. However, there is no way to offset their losses.
According to the Federal Customs Service, the share of imports in the Russian dairy market in 2013 was about 25%, at the cheese market this figure reached 50%. The anti-sanctions, introduced by Russia, closed the market for producers from the EU, accounting for almost two-thirds of the imports of dairy products in Russia.
Western manufacturers of dairy products have adapted their business in Russia to the food embargo. Large companies, such as Arla and Valio, are trying to replace imports, shifting their production to Russian plants, including the ones of their direct competitors in Russia. Another way to save the brand presence in Russia has been found by a Lithuanian brand Svalia: instead of farmer cheese and cheese, the company has increased the supply of ice cream and chocolate-glazed curd bars (they are not included in the list of goods, prohibited to be imported). But, according to the Romir Scan Panel and the information from retailers, the companies have not been able to keep the pre-embargo level or restore deliveries in full.
Local production of Valio
According to BusinesStat, Valio was the largest producer and supplier of cheeses on the Russian market in 2013-2014. The volume of deliveries to the Russian market in August 2013-July 2014 amounted to 32,100 tons, the share reached 11.3% of total imports. The second largest supplier was FrieslandCampina Cheese, which delivered 27,800 tons of finished goods (9.8% in imports). Arla Food took the third place with 21,000 tons, or 7.4% of total imports of finished products.
Prior to the embargo, Valio imported from Finland about 90% of products, sold in Russia. Now it is trying to replace the lost sales volume by deploying the production in Russia. Valio has its own production plant in the village of Ershovo, Moscow region. To mitigate the impact of the food embargo, Valio has increased the local production twice: the company has launched a line of processed cheese Viola in “containers” (previously, the plant produced hard cheeses and “triangles”), the cheese production has grown from 4,000 to 10,000 tons per year. The company also has started producing Valio butter at the plant. In November 2014, the company’s press service reported that for the production of its new products it would use raw materials from countries, not subject to Russia’s food embargo. In total, Valio has invested 4 billion rubles in its plant since the opening.
The company’s products are also manufactured at Galaktika’s factories under contracts (near St. Petersburg), where the company produces drinkable yogurts Valio Clean Label, Valio Kefir, milk and cream. The Finnish company has increased its production at Galaktika’s factories in three times. However, the company’s own capacities and contract manufacturing at Galaktika have not been enough. To engage in the production of yogurt, farmer cheese and curd mousse, the company entered into a contract with a German dairy producer Ehrmann in January 2015, so now the mentioned categories of products are produced at the facilities of the latter in the Ramenskoye district of the Moscow region. As explained earlier by Valio’s News Service, it is technologically impossible to produce these types of products at Galaktika’s lines.
Since August 2014, the range of imported products by Valio in Russia consists of non-dairy products under the brand of Valio (spring water, juice, jelly, juice drinks), made in Finland, as well as in Russia. In addition, the company is trying to establish a supply of lactose-free products, which the Government has excluded from the embargo.
According to a representative of one of the largest retail chains Diksi Yekaterina Kumanina, the company’s supermarkets now have Valio’s yoghurt and cream cheese, while milk, sour cream and butter of the brand have been replaced by products of Russian manufacturers.
The press service of Valio in Russia did not respond to RBC’s question about how they were able to replace imports with locally made products. The company’s net sales in Russia in 2014 shrunk by 35% to €258 million, Valio explained that by the impact of the food embargo, imposed by Russia last year: in 2014, Russia accounted for 37% of the company’s exports.
The increase of production volumes in Russia has not helped Valio retain the customer loyalty: according to Romir (tracking purchases of over 10,000 consumers in 52 cities of Russia online), for example, in March 2015 Oltermani cheese, which the company produced in Russia, was bought by 4.04% of consumers instead of 10.05% as a year before.
Even after shifting the production in Russia after the imposition of the food embargo, the range of these brands on the shelves has declined, agrees Maria Kurnosova, a representative of Diksi. For example, compared to April 2014, Valio’s dairy products range in the retail chain has been reduced by one third, and the volume of purchases — by two-thirds.
Natura from Voronezh
Another Western company, the Danish-Swedish Arla Foods (Arla Apetina, Arla Natura) also stopped the importation of products in August. The Danes immediately said that they were not planning to walk away from Russia, although the company’s sales accounted for 1% of its turnover.
Arla has no plants in Russia but the company produces cheese under the contract at the Kalacheyevsky Cheese Plant in the Voronezh region, owned by Molvest Holding. After the imposition of the embargo, Arla has doubled the production on these lines, a growth of up to 15,000 tons per year is expected. In addition, the producer has started selling lactose-free milk, not available in Russia before. This is confirmed by Andrey Golubkov, who noted that at the end of March the assortment of Azbuka Vkusa was supplemented by lactose-free milk by Arla and Parmalat, earlier this category had only Valio’s products.
As noted in the report of Arla Foods, the Russian embargo had a negative impact on financial results of the company’s total sales but the company’s revenues still grew by 6.7% within a year, reaching €10,6 billion.
The head of the Russian branch of Arla Foods Mikhail Lyasko declined to comment on the changes that occurred in the company’s business. Molvest has not yet been able to provide any comments as well.
Foreign producers find it more profitable to produce in Russia — logistics and distribution cost less, according to the head of Soyuzmoloko Andrey Danilenko. In addition, localized production “saves” companies from currency fluctuations, in his words. “But, for example, both Valio and Arla are cooperative enterprises, and they have historically been very conservative in their rulings. They see restricted imports and are afraid of any negative administrative and political decisions, made on the territory of Russia, although it is not the case,” said Andrey Danilenko. He believes that dairy producers have the option to create joint ventures with local companies, similar to Valio or Danone, Russia has a lot of companies for such contracts but it requires some time and lump-sum investments.
Glazed curd bars instead of farmer cheese
Pieno Zvaigzdes from Lithuania (Svalia) obtained an even greater share of the company’s revenues in Russia than that of Valio — 35%. According to Romir, from 4.3% to 9.88% of Russians were buying butter, sour cream and farmer cheese of the brand Svalia in March 2014. By March 2015, the brand has decreased its presence in grocery baskets of Russians to zero — there are no such goods on the shelves.
In August 2014, the company has been forced to completely stop the import of its products (cheese, granular cheese, butter, yogurt and sour cream) into Russia. The Baltic manufacturer had no production in Russia, so its dairy products completely disappeared from the shelves.
After the imposition of the embargo, the number of positions of the brand Svalia in the assortment of Azbuka Vkusa has fallen from 23 to 4, according to the retail chain’s representative Andrey Golubkov. Domestic products have become the alternative. “The process of recovery of the Valio and Arla brands is under way, however, it is unlikely that next year they will be able to return to their previous positions — the drop was too deep,” he said.
Instead of dairy products, Svalia has started delivering ice cream and chocolate-glazed curd bards, confectionery products, which are not included in the list of products, prohibited from being imported in Russia. “Supermarkets Viktoria sell chocolate-glazed curd bars, ice cream and drinks under the brand Svalia. Products, removed from the range due to the sanctions, have been replaced with several kinds of cheese from Switzerland and lactose-free cheeses from Austria and France,” Yekaterina Kumanina said.
In response to RBC’s question about the growth of confectionery supplies, the Pieno Zvaigzdes HQ replied that this was confidential information. However, they informed that the sale of ice cream under the brand Svalia on the Russian market began 18 months ago — a few months before introducing the food embargo in Russia, and the company was actively promoting it.