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/demand in recent years, after evaluating the market through the five forces framework, it becomes clear that the market far from attractive. Since the open market economy was first introduced to Russia in 1991, ice cream producer competition has more than tripled in sized to 300 firms by 2002. Significant funding would be required for ice cream manufacturing/distribution and a new entrant would also need to consider the markets pre-existing loyalty to domestic brands. There is also a luxury tax associated with ice cream production, which negatively affects the potential for current and future profit. While many foreign competitors exited the market during the economic crisis of 1998, the companies that remained presented significant competitive pressure and prowess. For instance, Nestl leveraged their international brands and large advertising budget to push their products into distribution channels for the Russian consumer. Without Nestls scale, a significantly smaller company would have difficulties competing in on the same advertising caliber. There are various ice cream substitutes available to the Russian consumer including beer, soda, yogurts, chocolates, and other confectionery candies. Demand for these substitutes is also higher than demand for ice cream because they have chosen to adopt aggressive and expensive advertising and branding strategies. 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, further pointing to the unattractiveness of the ice cream market. Ice cream production requires supply from equipment vendors and raw material retailers. However, 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. Due to this, the supply constraint has been drastically reduced for 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 three channels are extremely limited by physical space, they have the ability to pick and choose the ice cream producers and brands they wish to carry. Because of this, it is imperative for an ice cream producer to work jointly with kiosk distributors to sell their products and to maintain an amiable business relationship. Future Effects of Competitiveness on Price and Profits in the Russian Ice Cream Market Price and profit competition will evolve depending on the drivers of current market price. By analyzing the factors outlined below, we can determine how pricing is determined in the near future. Branding is a significant factor in determining a products price point. For instance, Nestl, Ice-Filis largest competitor, charges a high price because they have been able to generate brand loyalty and trust with their consumers. The focus of domestic 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 branding and advertising to drive their pricing decisions. Another reason that branding has been pushed so effectively is due to the raw power of advertising dollars spent. Foreign competitors like Nestl 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 television advertising and were now forced to ramp up advertising spend to remain keep up with foreign competition. Similarly, ice cream pricing and competition are driven by seasonality due to increase/decreased consumption in varying climates. 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 by 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. 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 kiosks inability to hold larger volumes of ice cream. As such, ice cream producers will need to re-evaluate their profit margins by focusing on how distribution costs will change to support the growth of in-home production. Could the Industry Become More Attractive Over Time? The Russian ice cream market definitely has the potential to become more attractive over time. The historical events that plagued it seem to be a memory of the past, and growth potential seems to be on the rise. Though there have been numerous competitors who have entered the market, since 1997 not only has production continued to rise, but ice cream consumption by volume and per capita has increased as well over this time period. This is particularly interesting when considering that the population of Russia has consistently fallen since 1990, which displays that either the market itself is expanding to new clientele and/or ice cream customers are consuming a consistently elevating amount. With the possibility of expanding competition through marketing warfare, the market of customers will continue to grow with more potential to brand as well as steal/develop more market share. As market and differentiation advantage is more readily established, there will naturally be the elimination of smaller competitors who cannot compete in marketing funds nor have established themselves in serving a customer niche. The introduction of new distribution through supermarkets will also assist in market expansion by making the ice cream more convenient for year-round availability as well as less impulsive demand buyers. The supermarket as well as brand innovations are seemingly switching customers in a direction away from just kiosk buying but that of home consumption, which will create a new level of consumer loyalty and buyer maturity as well as increased gross profits potentially. Sources of Competitive Advantage in the Russian Ice Cream Market:

A firms three main relative competitive advantages include cost, differentiation, and marketing. In Russia, the majority of per-serving ice cream prices varied from 2.5 to 15 rubles. Ice-Filis price point was mid-market at about 6 rubles per item when premium brands, like Nestl, charged 10 rubles. Regional producers sold at cheaper prices, but were not as widely distributed. Western premium brands, such as Baskin Robbins, could cost up to 30 rubles per serving. Differentiation in the market comes from the fat content of the ice cream, and if the rest of the ingredients are natural or if the company uses preservatives. Russian consumers put a much greater value on higher fat content and unique texture over the use of potentially unhealthy preservatives. Another difference between traditional Russian ice cream and premium Western ice cream is the use of oils (such as coconut oil) instead of milk as minimally processed products are valued more by the Russian consumer. For example, Ice-Fili had the differentiating competitive advantage of being GOST approved while foreign competitors did not. Marketing advantages in the Russian ice cream market include distribution channels, sales force, advertising, and brand equity. Smaller, regional ice cream producers are limited in their ability to break into the large city markets which are dominated by multinationals and large producers. Companies with kiosks and cafs need to be mindful of their sales training programs in order to most effectively sell their product. Ice-Filis Position in the Russian Market Ice-Fili traces its roots back to 1937 and was the Soviet Unions first large-scale ice cream manufacturer. Due to its long, established history in Russia, Ice-Fili already owned a large domestic factory when the open market was introduced and multinational companies were able to enter in the early 1990s. It may also be argued that Ice-Filis traditional Russian recipe (from the Soviet days when it was named Moshladokombinat N 8) gave it a brand equity advantage from its inception. Ice-Fili was the largest producer of ice cream in the Russian market. They had an extensive network of permanent and temporary kiosks/stands which have historically been the main distribution channel for ice cream in Russia. The company also prides itself on using only natural ingredients in its ice cream. No preservatives or colorants are added since Russian consumers have traditionally been more concerned with the amount of preservatives than fat content. Other producers used palm or coconut oil and preservatives to decrease costs. Traditional Russian ice cream (which Ice-Fili produces) contains 15% milk fat whereas Western premium ice cream contains 10%. This gives traditional Russian ice cream its unique flavor and texture. After the Russian financial crisis of 1998, Ice-Fili continued to use sweet cream butter from New Zealand (82% fat content) instead of the Russian butter (72% fat content) that its competitors were using after the 1998 financial crisis. By doing this, they were able to maintain product differentiation which, in turn, helped them to maintain customer loyalty. Competitor Strengths and Weaknesses: Ice-Fili has new regional producers (e.g. Russkii Holod) that have no links to the traditional, Soviet- style of ice cream manufacturing, yet continue to gain market share through cheap pricing. Their weakness is not having the money to support expansion through the purchase of

large, expensive equipment and factories. It is also very difficult for them to compete with multinational or large domestic manufacturers in the cities. Nestl, Ice-Filis most fierce competitor, has been doing business in Russia since 1996. They have advertised heavily and invested in local Russian factories to keep import costs down. Their issue is that their ice cream is not made with traditional Russian ingredients or natural products, providing a substantial competitive advantage for Ice-Fili, contributing to why the brand has remained afloat. Baskin Robbins has been around since 1990 and has factories in Russia. They have been one of the few ice cream franchisors, establishing a wide market of premium shops and cafs. Their biggest weakness is that their ice cream is highly priced (up to 30 rubles per serving) and that their staff and managers at the cafs and shops lack proper training. Brand Strategy M (We ARE Russian Ice Cream!)

Ice-Fili needs to engage in increased television and print advertising to keep up with the competition. Another possibility is to hire national celebrities to endorse the product (e.g. the Russian Gymnastics team) to maintain their ties to Russian tradition. It may also be profitable for Ice-Fili to focus on developing a brand and a customer loyalty program to motivate consumers to shift their preference. Ice-Filis stance as a brand should exude strong consumer pride in traditional Russian products. According to the adage, The enemy of my enemy is my friend, one possible strategy to pursue would be the acquisition or merger with one of the existing competitors. This could enable the new company to increase its market share, pool its resources (and thereby reducing costs) and a possible expansion into previous explored or unexplored markets. Some possibilities for a merger would be the companies Petroholod (P) and Lipetskiy Hladokombinat (LH) (pg 24, Exhibit 11). P could provide the expertise to invest into local retail thereby attacking some of the local ice cream manufacturers and possibly increasing the market share. Since P is also vertically integrated with distribution this could provide Ice-Fili the opportunity to pool resources and reduce costs, possibly increasing its share in distribution and eliminating as much of the distribution mark-up as possible. Exhibit 9 states that distributors claim a 40% mark-up so increasing vertical integration into distribution could result in significant cost savings. Since P also has a market in storage and wholesale trade of frozen products this could provide Ice-Fili an opportunity to expand its ice-cream sales into the wholesale market and increasing its market share as well. LH also has a vertical integration in retail and local cafs. A merger with this company would also give Ice-Fili the chance to cut into local ice-cream manufacturers shares and by expanding its reach through LH retails arm. With an investment into local cafs Ice-Fili can increase an untapped market like restaurants and supermarkets, with a combined 5% of sales (Exhibit 10). An expansion into local cafs could cut into Baskin-Robbins shares Overall, both companies can provide Ice-Fili with a successfully implanted cost advantage over competitors by reducing savings in the distribution and retail mark-up categories; a

marketing advantage through increased distribution and sales into local retails and cafs as well as a differentiation advantage. The differentiation advantage goes hand-in-hand with cost advantage. By reducing the markup costs, Ice-Fili has the possibility to continue manufacturing its ice-cream without any dairy substitutes which, according to Exhibit 9, can provide 50% cost savings and ultimately deliver a better quality ice-cream. Another possible strategy would be to look forward, survey the market and see if there is a demand for frozen yogurt products. With the rest of the Western world battling obesity, there might also be a market for more health conscious consumers. By exploring this possibility, but still maintaining the quality product they are known for, Ice-Fili could become an innovative, global leader in a ground-breaking, health-conscious ice cream market. Ice-Fili cannot afford to pass up the opportunity to expand into the dry ice export/import market which could clearly become their cash cow. Though this decision will require some start-up investment costs in the form of man power, design and creative technology, it would also allow the company to diversify their assets and leverage their resources in the highly competitive ice cream market. This would also provide the company with a backup plan of exiting the ice cream market if market conditions become extremely unfavorable. The dry ice expansion would also have contingent benefits for Ice-Fili, potentially allowing for more efficient transport of their natural products within Russia.