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Russia: Yogurt Manufacturers Wage War Over Fast-Developing Market

  • John Helmer



Moscow, 20 April 1998 (RFE/RL) -- When can long life mean a shortened life expectancy? That's the marketing riddle of the Russian yogurt market, the fastest growing, most profitable yogurt market in the world. The answer is that long-life yogurt imports are facing increasing competition from Russian-made fresh yogurt, especially in Moscow and St. Petersburg.

For the time being, this is a contest being waged by the big French, German and Dutch manufacturers -- Danone, Ehrmann, Mertinger, and Fruttis -- against Russia's biggest milk combines, Lianosovsky, Ostantkinsky, and Ochakovsky from Moscow; Petmol of St. Petersburg. They are bidding for shares of a market that currently consumes about 200,000 metric tons of yogurt per year, worth upwards of $800 million. Growth of consumption is rising by 50 percent a year, according to importers. Their profit margin, at current Russian retail prices, is around 75 percent.

"The retail price of long-life yogurt is very high in Russia," says Gary Shenk of the Boston Consulting Group, which recently surveyed the Russian yogurt market for a client. "The margins for profit are much greater than elsewhere." According to Shenk, the big threat looming for yogurt importers is the rejuvenation of the Russian milk producers, and the demand, which imports originally sparked three or four years ago, for locally produced, fresh yogurt.

Fresh yogurt has a maximum shelf-life of 25 days, at least seven days of which is spent on the road between the factory in western Europe and the Moscow supermarket. Long-life yogurt, which contains almost none of the bacteria that gives fresh yogurt its taste and health qualities, has more than double the shelf-life, but is less appealing to consumers.

Market analyst Shenk says "the local producers have very strong brand-names. They advertise heavily. And they are improving quality to the level of Western imports. Every child in Russia grew up with kefir and smetana (cultured milk products). So, the identification and loyalty is there."

A number of small American producers in the New York City area have developed traditional Russian dairy products like kefir, smetana, tvarog, blinchiki, and pelmeni. These are sold mainly to local Russian consumers in New York and New Jersey. But, they are also finding their way into the freezers of Moscow supermarkets.

According to a U.S. Department of Agriculture official in Moscow, American dairy product exports to Russia reached a peak in 1992, and were mostly butter. Since then, they have dropped in value from $100 million to $14 million last year.

American ice-cream manufacturer Baskin Robbins has successfully moved from an import strategy, supplied from plants in Western Europe, to domestic production in the Moscow region. But frozen yogurt has yet to take off among Russian consumers.

The European yogurt makers are also considering the big costs and risks of Russian production. "It's not easy to build a Russian dairy plant," warns Shenk. "The milk season is shorter than elsewhere in the world. The number of cows has been declining since 1991, and yields per cow have fallen also. It's hard to find adequate sources of supply that aren't already controlled by the Russian dairy producers. It's costly to build the milk supply network, the quality control, and the logistics of distribution."

The temptation of the market is that, for the time being, Russian per capita consumption of yogurt is much lower than elsewhere in Europe, although traditional Russian cultured-milk products create the taste for yogurt. According to the Boston Consulting Group study, Russians, on average, consume less than two kilograms of yogurt each per annum, compared to 11 kg in Germany, 17 kg in France, and 30 kg in Bulgaria.

Danone of France has led the way in promoting yogurt to Russians. It opened a shop in the heart of Moscow, next to Red Square, several years ago, to promote the health benefits of fresh yogurt. It has invested heavily in the logistics of moving the fresh product from factories in Eastern and Western Europe on to Moscow's retail shelves. It has also started manufacturing the product in its Russian facility.

Danone's effectiveness prodded Lianosovsky Milk Combine of Moscow to diversify its production line. The Russian factory has attracted German investment to produce fruit juices. It has now added fresh yogurt, whose sales capitalize on the local brand-name awareness. Its success, along with Danone's, is turning Moscow consumers against long-life yogurt in favor of the fresh variety. The new trend has encouraged Ehrmann and Sudmilch to consider plans to open domestic yogurt production lines of their own.

"Can a purely long-life market strategy be sustainable," the Boston Consulting Group questions, "as the domestic fresh-yogurt producers get stronger?" According to Shenk, there is one answer for Moscow and St. Petersburg, and another for Siberia. Even Lianosovsky faces the same problems of distribution as the European importers, when it comes to selling fresh yogurt on the far side of the Urals. At that distance, there is no alternative to selling long-life yogurt, at least for the time being.

Regional dairy supply east of the Urals is a severe problem, Shenk notes. Russian experts say the culling of Russian dairy herds since 1991 -- prompted primarily by the economic failure of the collective farms -- has been more severe than at any time in Russian history. It will take at least another decade to recover, predict Western dairy experts.
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