Soaring costs hampering Russian ice cream makers

Related tags Ice cream Milk

High taxes on raw materials and soaring energy costs are severely
hampering progress in Russia's ice cream industry, according to one
industry body which is campaigning for government intervention. Yet
consolidation and tighter quality standards are also needed,
reports Chris Mercer and Angela Drujinina.

Rising water and energy costs were blamed as the main factors for price increases across Russia's ice cream industry by three quarters of producers, in a survey commissioned by the National Union of Ice-Cream Manufacturers and carried out by market research group Market Advice​. Only 18 per cent cited an increase in wages as the reason for higher prices.

As a result, 82 per cent of those surveyed said they would actively campaign to for government discussions on decreasing taxes on raw materials, though three-quarters also said they would like to see a reduction in taxes on equipment and more than half of producers wanted to bring back VAT for ice-cream exporters.

Raw materials prices have eaten away at many domestic firms' margins over the last year, with high raw milk prices even threatening profits at Russia's largest dairy group Wimm-Bill-Dann.

Guar gum, a thickener and stabiliser used in ice cream, baked goods and beverages has also become more expensive because of a poor guar harvest in India. In February, the price was around $2 per kilo.

And problems raising retail prices mean these rising costs have put ice cream firms under even greater pressure. In 2004 the average retail price for a kilo of ice cream was $2.2 with prices increasing by seven or eight per cent during the year.

However, this increase was below the inflation rate of 11-12 per cent and the Union of ice cream manufacturers said many producers would have to raise prices more steeply in 2005.

Cost pressures are also affecting ice cream quality according to union chairman Veaceslav Vygodin. "In their chase for income, many companies use cheap raw materials, which leads to a worse ice-cream quality,"​ he said.

Vygodin called for more uniform quality standards across the industry and said this was starting to happen: "We have already introduced standards for Russian and foreign ice cream based on natural fats, though manufacture of ice cream with natural fats will be regulated by the producers themselves. Regulations on registering fat-and-oil systems suitable for ice cream manufacture have also been approved."

The fragmented nature of Russia's ice cream industry has so far made it difficult to enforce standards. Three-quarters of those companies surveyed by the union were not part of any holding or alliances.

But, a current move towards greater consolidation may ease the problem, with 12 out of the 220 manufacturers responsible for producing about 50 per cent of Russian ice cream. Analysts have predicted that many smaller companies will either have to merge with their bigger neighbours or leave the market.

Greater consolidation would inevitably help larger companies to insulate themselves more effectively against rising costs, yet this would also free up more funds for much-needed innovation in a rather stagnant Russian ice cream market.

Ice cream volumes in 2004 were 385,000 tons, three per cent down on 2003. And Alexei Drobinin, vice-president of the market's number six player, Alter-Vest, said: "Stagnation tendencies have been around for a long time. Some companies have adapted themselves to the new conditions and now they are developing, others are at a loss."

Some promising innovation is already taking place. Russian dairy processor MyasoMolTorg has created a new ice cream brand called UFO that does not melt into a liquid but turns into semi-solid jelly, making it far less messy.

Vygodin, of the manufacturers' union, said new products should focus either on health or on re-vitalising old themes.

Ukrainian company Koroloveskoe Morojennoe is one company that has focused on healthy ice cream products, including its Zdorovyi Vybor (Healthy Choice) family brand, Derji formu (Keep in Shape) energy ice cream for men, Tonkaya Talia (Thin waist) low calorie ice cream for women and the vitamin-enriched Vitaminizrovannoe brand aimed at children. All these brands have been well received and sales are growing fast.

Related topics Markets Ice Cream Emerging Markets

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