Ice Cream Makers Worry the Market Is Frozen

Along with waistlines everywhere, the domestic ice cream market has been growing steadily. But the country's 360 ice cream makers are not satisfied.

Having sunk millions of dollars into production and a flurry of advertising, large ice creameries were hoping for a boom.

Analysts see three headline events for the market this year: the sale of the Ice-Fili ice cream plant in Moscow to portfolio investors, the strengthening of large Siberian producers' position and the return of British-Dutch company Unilever in April.

By the end of the year, the ice cream market may reach 395,000 metric tons, or $1 billion in retail prices -- a hefty sum of which imported ice cream accounts for only 2 percent, according to the Union of Ice Cream Producers.

Analysts at GfK Russia estimate that the ice cream market in Russia is currently dominated by 10 companies: Inmarko in Novosibirsk, Sam-Po in Samara, Perspektiva in Vladimir, Belgorod Khladokombinat, Russky Kholod in Barnaul, Kholod in Naberezhniye Chelny, Kholod in Kazan, Petrokholod and Talosto in St. Petersburg and Ice-Fili in Moscow.

Together, these companies control 39 percent of the market.

The producers' union said ice cream production grew 4.6 percent in the first half of this year to reach a total of 194,730 tons.

But growth rates ranged wildly, from negative growth in St. Petersburg due to an unusually cold June, to 12 percent growth on the Moscow market to a whopping 119 percent increase in the Siberian federal district, mostly due to booming business at Russky Kholod and Inmarko.

At Talosto in St. Petersburg, marketing director Nikolai Likhachyov said his company scaled back its annual ice cream production by 800 tons in order to compensate for falling demand.

He said small and medium-sized producers were the most likely to suffer and the loss in profits would severely limit their ability to expand next season.

"Some of them may go bankrupt," Likhachyov said, adding that this would pave the way for market consolidation as early as this year.

"While bigger companies are likely to swallow smaller ones, it is also possible that a number of large regional producers will merge," he said.

Valery Yelkhov, executive director of the ice cream producers' union, said that if August and September turn out to be scorchers, it could help the market compensate for a cold June.

"For the last three years, the market has been growing by 3 percent to 4 percent annually," he said. "If the weather remains warm until the end of the season, the market will grow by 5 percent."

Vyacheslav Klimentov at Ramzai, a retailer that sells ice cream at 600 kiosks throughout Moscow, was less optimistic.

In the capital, June sales were 30 percent lower than last year's, making this month crucial for ice cream sales in the city, he said. "July and August are a dead season in Moscow, because most people are out of town for vacation. We can only hope that late August is hot."

An advertising juggernaut somewhat countered the effects of a chilly June.

Inmarko general director Dmitry Dokin said major advertising campaigns by Talosto, Inmarko, Nestle and Unilever helped buoy the market. An increase in beer excise duties this year helped make ice cream relatively appealing as well. Also, Dokin said, consumers have grown weary of sukhariki and other "low-quality snacks."

Dokin said Unilever was the first to launch its aggressive advertising campaign, helping ice cream to win back ground lost to snacks and beer.

Domestic producers have anticipated the return of Unilever ever since the multinational heavyweight left the market two years ago. The company announced in February 2001 that it was halting production of its Algida ice cream in Russia, saying it had only been studying the market.

Market researchers at Gallup AdFact said Unilever spent almost $6.2 million on Algida advertising in 1999-2000 before it pulled out.

But in March 2003, the company announced that it would invest 5 billion euros ($5.68 billion) into its worldwide ice cream business. Part of its global strategy included Algida's return to Russia in April, though as an importer, not a producer.

Unilever-CIS corporate manager Yulia Goshko said the company is planning to import five lines of ice cream -- Magnum, Cornetto, Twister, Viennetta and Carte d'Or -- under the Algida umbrella brand.

"There are 42 Algida kiosks owned by InterIce in Moscow that sell our products," she said.

"Algida ice cream is also sold by most retail networks in Moscow and other large cities," she said.

Domestic producers say Unilever's return is too late. Alexander Saulin, who heads the marketing department at Russky Kholod, called Unilever sales "stagnant."

"They cannot compete with us," he said. "The quality here is just as good, while the prices are much cheaper. Until Russian ice cream costs $2 per piece, they won't make any money here. A Unilever cone retails for 25 rubles (80 cents). In the regions, domestically made cones sell for 3 rubles to 5 rubles."

Inmarko's Dokin said Unilever is experimenting with how much Magnum ice cream it can sell for $1 per piece when paired with a television ad campaign.

"This is their first cautious step," he said. He said Unilever would likely snap up a Russian producer with about 30 percent market share.

Yelkhov of the producers' union said he thought Unilever may acquire Ice-Fili next year. Other analysts have suggested that Unilever may be interested in retailer Ramzai.

Klimentov said Ramzai is not up for sale, while Vladimir Ryskin, executive director of NIKoil, which holds an equity stake in Ice-Fili, believes no stake in the ice cream maker will change hands next year.

"Its shares are undervalued at the moment," Ryskin said.

Apart from Unilever and Ice-Fili's shareholders -- Guta Bank, Russky Generalny Bank and NIKoil -- it is unlikely other major investors, or major assets, will appear on the market, Yelkhov said.Yet new market players may emerge. Sergei Anopriyenko, deputy general director of Smile, based in the Moscow region, says his company is negotiating with a U.S. ice cream producer, whose name he would not disclose.

Anopriyenko said the U.S. side would invest $5 million to $8 million in building a new premium ice cream plant.