Ice-Fili Case Study

From the perspective of the five forces framework introduced in the module, how attractive is the Russian ice cream market?

Attractiveness of the Five Forces Framework in the Russian Ice Cream Market

Although the Russian ice cream market may initially look attractive due to its consistent growth in ice cream production in recent years, after evaluating the market through the five forces framework, we can conclude that it cannot be considered attractive.

Considering the 1998 financial crisis that the Russian economy has undergone, the pace of growth has been significant, signaling a relatively easy entrance into the market despite the growth risks associated with an entry into a volatile market. Another reason for easy entry into the market is the fact that ice cream is not an incredibly unique product offering. However, significant funding may be required for ice cream freezing and production, and a new entrant would need to consider loyalty to local brands. There is also a luxury tax associated with ice cream production, which affects both current and future profits.

Since the open market concept was first practiced in Russia in 1991, competition has grown at a steady rate as shown in the following table:

Year Number of Companies Growth

1996 100 NA

1998 150 50%

2002 300 100%

So while many foreign competitors exited the market during the economic crisis, the companies that remained presented significant competitive pressure. For instance, Nestlé leveraged their international brands and broad advertising spend to "push" their products to distribution channels and consumers. Without Nestlé's scale, a significantly smaller company would have difficulties competing in on the same level of advertising space.

There are various ice cream substitutes for the Russian consumer - beer, soda, yogurts, chocolates, and other confectionary candies. However, the fact is that demand for these substitutes is higher than demand for ice cream. Although one can argue that the increased demand is due to the larger advertising spend, the change in consumer preferences may also be a critical factor.

Ice cream production requires supply from equipment vendors and raw material suppliers. Data shows that neither equipment vendors nor raw material suppliers have much bargaining power in this industry. The number of local equipment vendors increased due to contracts and joint financing from ice cream producers. For raw materials or ingredients, another link in determining attractiveness of the Russian market is the broad availability of local and foreign suppliers. Because of this, there is also not a supply constraint in the procurement of raw materials.

As an ice cream producer, buyer decision is largely influenced by the distribution channel. Since three of five channels (kiosks, minimarts, gastronoms) cover 95% of industry production, this is where the bargaining power of buyers lies. Considering that these 3 channels are extremely limited by physical space, they have the ability to pick and choose the ice cream producers and brands they wish to sell. Because of this, it is imperative for an ice cream producer to work jointly with kiosk distributors to sell their products.

What are the current and potential likely future effects of competitiveness on prices and profits in the Russian ice cream market?

Future Effects of Competitiveness on Price and Profits in the Russian Ice Cream Market

To answer how price and profit competition will evolve depends on the drivers of the current price. By analyzing the factors outlined below, we can determine how pricing will evolve in the near future.

Branding is a significant factor in the determination of current pricing. For instance, Nestle, as the biggest competitor, charges the highest prices because they have been able to generate brand loyalty and trust with the consumers. The focus on local ice cream producers was not developing a brand, which is a main factor on why their prices and profit margins are not competitive against foreign competitors who have relied on brand advertising to drive pricing. It may make sense for local producers such as Ice-Fili to focus on developing a local brand and a loyalty program to motivate consumers to shift their preferences. Another reason that branding has been "pushed" so effectively is due to the raw power of advertising dollars spent. Foreign competitors like Nestle and Baskin Robbins are able to bring in deeper pockets of advertising dollars due to their scale outside of Russia and are reapplying advertising strategies that have worked in other markets. At this point, profits were being affected by the advertising campaigns; because most companies did not rely on TV advertising and were now forced to ramp up advertising spend to remain competitive with foreign competitors.

Similarly, ice cream pricing and consumption are heavily driven by seasonality. To compensate for this factor and the declining market demand, many ice cream producers may have to raise prices during ice cream production but can redirect equipment utilization to other products (e.g. frozen foods and meats) during the "low" seasons. Furthermore, as classified by the tax regulation, ice cream is seen as a "luxury" item and is not integrated to daily consumer habits. Therefore, prices are driven by the fact that ice cream is not an everyday necessity, so the demand of ice cream is elastic; if prices go up, the quantity demanded may not increase in the same percentage.

Profit margins for the ice cream market are high (15-20%) by Russian standards when comparing to substitute products, but delivering the profit margin requires a deeper understanding of the profit cost structure. In terms of taxing regulations, ice cream manufacturers are burdened with a value-added luxury tax on ice cream. If this government-regulated luxury tax increases, ice cream manufacturers may be forced to increase prices to compensate for potential losses or a decrease in profit margin. Companies were also forced to divert enormous amount of funds from investments or other projects to pay for taxes and tax increases. This can affect a company's ability to grow, considering that any free cash would be used to pay taxes instead of reinvesting into the company.

Because of the increasing trend of in-home consumption, buyers will most likely turn to supermarkets or gastronoms to support this change in habit due to a kiosk's inability to hold larger volumes of ice cream. As such, ice cream producers will need to re-evaluate

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