Coca-Cola has bought a juice factory and plans to dramatically increase its presence on the market. Its long-time rival, PepsiCo, is also eyeing a Russian juice producer. Croatian Podravka is negotiating the acquisition of a major food producer.
The reason behind all of this is the high investment attractiveness of the Russian food sector, which has been growing twice as fast as the country's industry as a whole in the past seven years.
On July 5, Coca-Cola Hellenic Bottling Company S.A., the Greek subsidiary of Coca-Cola, announced the acquisition of AquaVision, Russia's largest producer of juices and soft drinks, for 195 million euros from the Russia's Health Tech Corporation Limited (HTC). If the Russian regulatory agencies approve the deal, Coca-Cola will acquire the production facilities with a capacity at least twice that of any other Russian juice producer.
Two years ago, the U.S. company bought Multon, which produces more than 20% of the juice sold in Russia, for $500-$600 million.
AquaVision, which holds the trademark for the botaniQ umbrella brand, is the newest and largest asset in the Russian food sector, with a capacity of 300 million liters annually. HTC managers said when the factory opened that it would win over 20% of the Russian market within three years.
Before the deal was made public, Darko Marinac, head of Podravka, which sells the popular Vegeta mixture of spices and vegetables in Russia, said his company was negotiating the acquisition of a controlling stake in a Russian company with a turnover of $100 million.
Experts believe he was referring to Russky Product, the largest grocery producer. Its turnover is about $100 million, and it works in the same market segments as Podravka. Apart from spice mixtures, Podravka also makes snacks, drinks, teas, canned fruits and vegetables, ice creams, and canned meat.
Marinac said that if the talks did not succeed, the Croatian company would localize production in Russia to cut expenses.
Foreign companies have shifted their attention to the Russian food sector because it has been growing by 8%-10%, compared with the average 4% for the country's industry as a whole, in the past seven years. According to the Economic Development and Trade Ministry, in January-March this year the production of foods went up 12.6%.
The sector's leaders are companies that process and can vegetables, whose turnover has soared by 41%. The runners-up are the producers of drinks (37%), fats and butter (18%), and meat products (12%).
Exporting food to Russia is a lucrative business, but surveys show that Russian food producers, unlike carmakers and light industry, are not scared of their foreign rivals. According to the Russian Institute for the Economy in Transition, 54% of Russian companies in the sector believe that their products are competitive with imported goods in terms of price/quality ratio, 17% consider imported foods uncompetitive, and only 8% said their output stood little chance against foreign-made goods.
Russian food companies burgeoned after the 1998 financial crisis, when the government set the task of replacing imported foods with domestic products. Some companies grew by several dozen percentage points annually, with modest investment in modernization compared with huge outlays in mechanical engineering. As a result, 35% of facilities in the food sector were modernized by 2003, when foreign companies resurfaced on the Russian market.
Keeping aloof does not suit international companies, which are increasing pressure on the sector. As of now, they have nearly monopolized the beer market (six of the seven leading breweries, which control over 90% of the Russian beer market, are foreign companies). Of the six leaders in the confectionery sector - United Confectioners, SladCo, Nestle, Kraft Foods, Mars, and Dirol Cadbury, which account for 67% of sales - only United Confectioneries is Russian-controlled.
Russian food companies have preserved and strengthened their standing through integration. The leaders on the Russian dairy market, Wimm-Bill-Dann (WBD) and Unimilk, have taken over more than 60 companies and now control 20% of the market. France's Danone responded by building a factory near Moscow, which helped it to remain the third biggest producer in Russia.
However, integration and consolidation are not a 100% guarantee against foreign companies making inroads into domestic territory. A relevant example on the juice market shows that international corporations have enough funds to conquer the most stubborn opponents.
In 2005, that market was nearly fully monopolized by four players - Lebedyansky, Nidan Foods, Multon, and WBD, which controled more than 80% of the market. But Coca-Cola, seeking to strengthen its foothold in Russia, bought Multon, and two years later, it acquired AquaVision.
The owner of the botaniQ brand probably lacked a marketing budget that would allow it to stand up against its rivals. But Coca-Cola is likely to pay as much as necessary to take over from one third to half of the Russian juice market in the next two or three years.
PepsiCo is not sitting on its hands either; it is the main bidder for a 49% stake in Nidan Juices, which is to be put up for sale soon.
Money is not the only prerequisite for prospering on the Russian market. Foreigners also need connections, as the example of the United States' Bunge, a leading agribusiness and food company with integrated operations around the globe, has shown.
Bunge came to Russia with its Ideal and Oleina vegetable oil brands in the early 2000s. Unable to purchase a land plot for local production, it had to import oil from its facility in Ukraine.
In 2005, Bunge bought a blocking stake in Russia's Efko, the third-largest player on the vegetable oil market in terms of sales, which needed funds for diversification, for a reported $50 million. Efko also sold Bunge one of its non-core subsidiaries (allegedly for $15 million), which had a land plot in the Voronezh Region in central Russia.
Local officials, who refused to grant a building permit to America's Cargill, were surprisingly gentle with Bunge, which has already started building a plant in the region.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
