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Ice-Fili Case Solution
The Russian ice cream industry would mainly encapsulate the production of ice cream products and marketing and selling them in the Russian market. Survival in the Russian ice cream industry was considered a big feat. The industry faced two major episodes in the 20th century. First, there was the dissolution of the Soviet Union in 1991 where there was a transition from a state-controlled economy towards open market operations. The restructuring was a major facet of this economic change. Secondly, in 1998, Russia faced a financial crisis where the country failed to fulfill debt payments. This led to a drastic reduction in purchasing power and demand. This was, however, countered with exports of ice cream which saw an increase during the time.
Following questions are answered in this case study solution
How structurally attractive is the Russian ice cream industry and how is it likely to evolve?
How well positioned is Ice-Fili about its competitors regarding resources and capabilities?
Case Analysis for Ice-Fili
The Russian ice cream industry has witnessed steady growth in capacity since these turbulent times. The production fell from 468,000 tons in 1990 to 223,000 tons in 1996 mainly due to the privatization and economic situation. This had also led to foreign firms entering the market and importing ice cream. After 1998, the foreign import costs rose, and it enabled the market to revive. A steady increase of production was witnessed, and production volumes reached 376,000 in 2002.
After the economic crisis of 1998 imports of raw materials went down and local suppliers had to be relied upon for the same. The distribution structure is such that most ice cream is distributed by small distributors. There are five main retailers that include kiosks, minimarkets, grocery stores, supermarkets and restaurants and cafes. The kiosks and minimarkets account for a major chunk of sales and are important channels of distribution where mostly impulse purchases are done. Supermarkets and restaurants and cafes are growing segments in the Russian market that have shown potential for future growth in the industry.
i. Porters Five Forces Analysis
To help us analyze the Russian ice cream industry’s competitive structure, we would use Porters Five Forces model that would analyze the industry using bargaining power of buyers and suppliers, rivalry amongst firms, threat of substitutes and threat of entry by potential competitors.
The threat of entrance of new competitors is high. It is easy to enter the market although new entrants may face initial costs many local competitors have been able to enter easily as they were already producing frozen food and had the assets available. There are no barriers to entry in the market due to its size. The threat from international competitors is also high given the revival of the Russian economy.
There is very high rivalry amongst competitors in the market. Both local and international companies are competing based on price, quality, and differentiation. Many foreign companies left the market after the 1998 crisis for e.g. Ben & Jerry’s. Unilever and Baskin Robbins exist and provide high competition. Baskin Robbins has focused on restaurants and cafes and since this segment is set to grow it will provide high competition to Ice-Fili.
There is also a high threat of substitutes in the market. The substitute products for ice cream mainly constitute soft drinks, beer, sweets, candies, chocolates, and yogurt. These products have been marketing extensively, and the demand is continuously rising whereas the ice cream market is witnessing a decline.
The bargaining power of buyers is high since they are highly price sensitive. Moreover, there is a lack of brand loyalty in the Russian consumers and given that there are no switching costs it is easier for them to switch. Lastly, the bargaining power of suppliers is low since there are numerous suppliers in the market. Raw material suppliers are dispersed, and alternatives are available for companies. Therefore, the bargaining power is low.
ii. How will it evolve?
In line with the analysis and background of the Russian ice cream industry, it can be said safely that the market will grow in the future. As the Russian economy stabilizes and the middle class continues growing, demand for consumer products such as ice cream will witness a rising trend. Moreover, the figures for production volume, consumption volume, consumption per capita and population have all shown a rising trend since 1998. Moreover, the distribution channels of supermarkets and restaurants and cafes have been growing fast and can be tapped into. Although there is seasonality in the market given the consumption increases in summers, the market is developed enough to sustain itself during off seasons. Also, in the future as is being witnesses, an emphasis is going to be given to health and nutrition so new products that are healthy and nutritious would enter the market. Lastly, the size of the market is large with numerous manufacturers, importers, suppliers, etc. This can potentially result in vertical and horizontal integration. Big companies such as Ice-Fili and Nestle would be looking to acquire regional and smaller producers to capture market share. Mergers and takeovers would be a key aspect of how to industry consolidates or restructures itself in the future where small players are acquired, and few large players gain most of the market share.
Moreover, in the future it is possible that companies would invest heavily in advertising and promotion for their products. Given the menial share of advertising in the current budgets, this would have to be increased to attract consumers and build brand loyalty. This would be essential because consumers would shift towards more powerful brands and associations would increase. To generate recall and establish loyalty, companies, both local and foreign, would invest in promotion and advertising.
2. How well positioned is Ice-Fili about its competitors regarding resources and capabilities?
i. Ice-Fili background in Russia
Ice-Fili was established in 1937 by the name of Moshladokombinat N 8 and became the first large-scale Soviet ice cream manufacturer with an initial capacity of 25 tons per day. Over time, it went through three major equipment developments and in 2000 was able to produce 200 tons of ice cream per day. The company went through a lot of turmoil given the dissolution of Soviet Union in 1991 and the financial crisis of 1998. Surviving these two turbulent times meant the company was thinking strategically and positioned to survive over time. The company is a market leader and historically known brand in the Russian market. Even though the company is a market leader, its market share has seen a downward trend. The company was privatized in 1992 and since then has restructured itself to be at par with competition based on manufacturing equipment, technology, packaging and management style. The company is faced with stiff competition from both local and foreign firms given the number of firms in the industry standing at an enormous 300. Given the numerous competitors the company still has an edge over some in different areas.
ii. Positioning of Ice-Fili
Compared to competitors, Ice-Fili has an extensive offering of 170 products in its portfolio as of 2000. Baskin Robbins in the US offers 650 varieties of ice cream. Ice-Fili continuously adds to this portfolio with 20 variants being added annually. The company is also active in innovation with the introduction of diabetic ice cream in 1998. Eralash, one of its products, also received an award for Product of the Year in 2002. Lakomka, an ice cream snack, accounts for 30% of sales volume and is the most recognized ice cream brand in Russia, but Ice-Fili failed to trademark the brand resulting in five companies manufacturing the brand. On the pricing front, Ice-Fili priced its ice cream at approximately 6 rubles that were lower than Nestle, which priced its products at 10 rubles. Regional producers priced at around 3 to 4 rubles whereas local producers’ products were cheapest at 2.5 rubles. Many producers leveraged their facilities for other frozen items, but Ice-Fili had a limited production of mayonnaise.
Ice-Fili was faced with a downward trend in consumer demand as did other competitors. Exports accounted for less than 1% of sales which is low given its size and production capacity. The company used only high-quality natural ingredients for the production of its ice cream without artificial preservatives or colorants. Nestle used coconut oil and preservatives instead of milk based ingredients as cost-saving alternatives. Other foreign producers used chemical preservatives to increase shelf life. Ice-Fili prides itself on not using any chemicals or preservatives to increase shelf life or save costs. The company had invested heavily in equipment in the 1990s for modernization, overhaul, and expansion. The company has up-to-date equipment, and 75% of machinery is in line with technological advancements. The suppliers were mostly American and Danish firms, but the local supplier base was expanding fast.
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