Arla Foods has signed an agreement with Russia’s third-largest dairy concern, Molvest Group, to establish its first production site in the country, which will produce yellow cheese.
The co-operative revealed that its broader Russian strategy involves marketing high quality branded products within cities of more than 500,000 people, and establishing local production sites via joint ventures or acquisitions.
Hailing a significant step into the Russian market – subject to regulatory approval – the Danish-Swedish company said the Molvest deal fitted with its ambition to become one of Russia’s leading dairy companies within yellow cheese.
CEO, Arla, Peder Tuborgh, said: “This is unlikely to be our final expansion into the Russian market, but this agreement alone is expected to double our turnover in Russia before the end of 2015.”
‘Quality’ product penetration
Arla said its Russian business grew by around 30% in 2011 and now turns over approximately DKK 500m (€67.24m), with growth largely driven by the export success of Lurpak butter, Castello cheese and Arla Natura cream cheese.
Tuborgh added: “As Russia is one of our strategic growth markets, this agreement is important because it provides us with the opportunity to combine our export business to Russia with local production.”
After several years of Russian export growth, Arla said it had decided to establish local production – in the city of Kalacheevsky in southwest Russia – for the first time.
Here, the co-operative’s subsidiary, Arla Foods Artis, will partner Molvest to convert one of the latter’s existing dairies for yellow cheese production.
The venture will involve Molvest collecting milk from local farms before processing it at the dairy, the conversion of which will cost Arla DKK 25m.
Thereafter, Arla will buy the milk and produce yellow cheese at the site for subsequent retail distribution and sale.
With production scheduled to start in early 2013, Arla said the partners aimed to produce around 6,000 tonnes of cheese in 2014, with an annual volume increase thereafter of 10%.
Hans Christensen, senior vice president at Arla, heads up the co-operative’s Russian, Polish and US operations, and he told DairyReporter.com that (after establishing a JV around five years ago) to establish Arla Foods Artis, dedicated production was the "natural next step".
He said: “This new venture in Russia means that we can offer a broader range and supply larger volumes. This in turn will strengthen our position vis-à-vis the Russian retail sector and grow our exports from Scandinavia to Russia.
“We’ve already seen similar effects in other markets such as the US, Germany and Canada.”
Doing business in Russia...
Christensen added that Russia was an attractive market because many consumers there were willing to pay for good quality food.
He told this publication: "Our products are selling strongly, and we provide high quality products at what we call 'lower premium' - not upper premium - prices."
"We are doing this to connect with that group of Russian consumers who have seen as big increase in living standards over the past 10 years or so, want international brands, and are willing to pay for that quality, although our products also provide good value for money."
With its headquarters in the Russian city of Voronezh, Molvest turns over around US $250m, and manufactures at eight processing sites across Russia and one in the Ukraine; products include liquid milk, butter, fermented milk drinks and cheese.
Asked whether Arla had any concerns about doing business in Russia - given reports of problems for Western firms - Christensen said that the firm did not envisage any, had built strong levels of trust with Molvest over the past 18 months, and also had good relationships with retailers in the country.
Arla acquired 75% of Artis Distribution in 2007 and subsequently established its Russian presence in the country (Arla Foods Artis) focused on selling Scandinavian cheese and butter.
Terms and conditions of the deal are subject to approval from the Russian Federal Antimonopoly Service (FAS).