MGT 5794
Strategic Management Spring 2006
Ice-Fili: Winning Strategem in a Contemporary Venue
-Team 5900-22-7377 904-46-8228 904-47-4673 904-50-0701 904-50-7922 904-52-3718
February 13, 2006
Executive Summary
Ice-Fili had been successful in the past, surviving various tumultuous times including the transformation of the Russian closed economy into an open economy and the financial crisis in 1998. As Russia’s largest domestic ice cream producer, they had held onto their market leadership for many years. However, increasing competition from foreign companies, along with the emergence of regional producers of ice cream led to Ice-Fili’s market share erosion in the recent years. Porter’s five forces model was the primary method to analyze Ice-Fili’s industry and its competitiveness in the industry. Segmentation analysis was used for further study of the ice cream industry in Russia. The analysis was carried on key variables like distribution channel, buying behavior, geographic locations, and product characteristics. Based on this model, various alternatives were considered. From these alternatives, it was possible to form a recommendation: Ice-Fili will need to focus on the strengthening of its distribution channel through various efforts including marketing and raising of capital while focusing on its long history and brand recognition. Above all, availability of its product to the consumers is the key to Ice-Fili’s success.
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Porters Five Forces
In order to analyze the industry and environment of Ice Fili, Porter’s five forces model will be used to assess its competitiveness in the market. An illustration of the model specific to Ice Fili is displayed in Exhibit 1. The analysis will lead to the identification of various opportunities for Ice Fili, along with determination of the most appropriate strategy and associated milestone for the strategy.
Buyers are people or organizations who create demand in an industry. If buyers have significant bargaining power, industry returns can transfer to buyers in the form of lower prices. Buyer power is determined by various factors such as switching costs, the relative volume of purchases, the standardization of the product, elasticity of demand, brand identity, and quality of the products. Buyers are presented with many choices when selecting a product in the ice cream industry while distributors have the power to decide which products will be available to customers. Absence of preservatives and a high proportion of milk fat differentiate the domestic Russian ice cream from the foreign producers’. However, due to a vast number of similar products and the lack of protection for innovation leads to indifference between various domestic products. Customers are able to substitute one brand of ice cream to another or from ice cream to other foods altogether at any point in time. Pricing information is also readily available to customers and only large differences in price will affect the customers’ buying behavior. It should be noted that the buyers of ice cream for Ice Fili or any other ice cream producers are the distribution channel members, not the end consumers. As such, it could be inferred that the buyer power of the distribution channel members relative to the ice cream producers is high, and the
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buyer power of the end consumers to the distribution channel members is also high. It could also be implied that through this chain relationship, the end consumers also impose buyer power on the ice cream producers.
The main suppliers in the ice cream industry comprise suppliers of raw materials or ingredients and equipments. Factors affecting the bargaining power of suppliers include the threat of forward integration and the concentration of suppliers. There exist numerous potential suppliers of ingredients. The ingredients provided by each supplier are not unique or greatly differentiated. Furthermore, ice cream manufacturers are able to switch between suppliers quickly and cheaply. Therefore, the bargaining power of suppliers of ingredients is rather low. In terms of the equipment, most of the equipment used by domestic ice cream manufacturers were imported from other countries. Although the local supplier base has been developing rapidly, approximately 10 ice cream equipment suppliers exist in Russia, Ukraine, and the Baltic countries, which is relatively low compared to the total number of ice cream manufactories at around 300. The suppliers of equipment are concentrated in this industry and make it difficult for ice cream manufacturers to exercise leverage over the suppliers and obtain lower prices by inducing competition among them. Furthermore, switching costs for large capital equipments are high. Even though the development of new domestic equipment suppliers jointly financed by Russian ice cream producers such as those converted from military facilities may present opportunities for forward integration, the bargaining power of the suppliers of equipment is relatively high compared to that of the material suppliers.
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Barriers to entry deter new competitors from entering the market and creating more competition for established firms. There are several major barriers to entry which include economies of scale, initial capital requirements, product differentiation, cost disadvantages, access to distribution channels, government policy, and competitors’ responses The ice cream industry has considerably low barriers to entry since most equipment can be rented, purchased, or utilized for multiple purposes, while employees need not be highly experienced and trained. Also, there are no unique ice cream manufacturing techniques or processes that are employed. In general, brand loyalty presents a problem for new entrants because existing firms have already marketed their products and possess a large number of loyal customers. A new entrant must spend considerable resources in order to get their name out and convince consumers to begin purchasing their products instead of what they previously used. However, due to Ice–Fili’s weak marketing and promotion, Russian customers tend to be indifferent consumers of ice cream based on brand differentiation. Therefore, these non-loyal customers tend to switch from one brand of ice cream to another rather easily. In terms of the product, there is low differentiation and demand elasticity, contributing to a lower barrier to entry. The real threat originated from regional producers. They tended to cut costs by taking advantage of lower wages. Regional producers accounted for 30% of the domestic ice cream market. This was in part led by a shrinking of the frozen food imports market, which had been impacted by the 1998 Russian economic crisis. Many former frozen-meat and fish wholesalers found it easy to set up for ice cream production since they could utilize their cold storage and production capabilities. By 2002, these flexible and aggressive regional producers set up manufacturing factories and also penetrated the ice cream market in Moscow. Regarding the accessibility to channels of distribution, many channel members carried different brands of several companies, resulting in
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easy access to various distribution networks for new entrants. Government policy encouraged the entry of new competitors, including foreign companies. The open market economy attracted more foreign companies into the Russian market to capitalize on new opportunities. Foreign companies such as Nestle had already set up two factories in Moscow since the beginning of the open economy.
A threat of substitutes exist when the demand for a product declines due to either lower prices of a better performing substitute product, low brand loyalty, new current trends, or low switching costs. When the threat of substitutes is low the outcome is favorable for the existing industry because fewer alternatives exist. There is low customer switching costs in the Russian ice cream industry. Furthermore, some other substitutes like beer, soda, yogurts, chocolates and other confectionary candies are competing with ice cream products, threatening the already declining ice cream market. In addition, such products are backed by fierce advertising campaigns. As a result, the ice cream industry production shrank to 3.5% in 2000 from the previous year, while beer was up 23% and soft drinks 25%.
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Segmentation
Although several crucial segmentation variables exist for the ice cream market in Russia, it should be realized that a superior market exists that encompasses not just ice creams but frozen, dairy, confectionaries, and snacks such as candies. However, due to its resource limitations including financial, marketing expertise, and human resources stemming from its legacy of being in the closed economy of Russia, Ice Fili should initially focus on the ice cream market. By dominating the ice cream market and developing it into a cash cow, various opportunities could arise for Ice Fili to extend into a similar, yet broader market with higher market demand growth (+8% for confectionaries) as opposed to the declining demand in the ice cream market. (-3.5%)
As mentioned above, a number of segmentation variables exist for the ice cream market in Russia. These include the distribution channel, buying behavior, geographic locations, and product characteristics such as price. These variables were chosen based on the distinctiveness of each segment. For example, the distribution channel was already clearly defined by kiosks, minimarts, gastronoms, supermarkets, and restaurants/cafes, which are all easily distinguishable. However, it should be noted that these segmentation variables are not discrete and cannot be used by themselves. In other words, there exists 3 distinct strategic groups that incorporate a unique mix of certain characteristics of the 4 segmentation variables, and these strategic groups should be considered as market segments instead. The strategic groups can be divided into: leaders, regional, and boutique. The leaders are Ice Fili and Nestle, both competing for the leading position primarily through brand strength. Regional producers focus on local tailored
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needs through low price, while boutique producers such as Baskin Robbins and Haagen-Dazs differentiate based on high price and high-end products. The mix of the 4 segmentations variables that each of the 3 groups employ can be seen from the segmentation table (Exhibit 2) and graphs (Exhibit 3a and 3b). Ice-Fili and Nestle mainly distribute their products nation wide through all the distribution channels. They usually have mid level prices and serve both the on-the-go and household consumption market. The regional producers concentrate on the kiosks and mini-marts, concentrated mostly in regional areas for low price on-the-go consumption. The boutique producers rely on their network of restaurants and cafes in cities to serve the dine-out demand with high-end products. The key success factors would be the increased availability of ice cream products using the entire distribution channel, while meeting the specific demands of various buyers with differentiated products.
The most attractive segment in the ice cream market based on growth potential is the household consumption and the boutique restaurant and café segment. This is in fact supported by the over saturation of on-the-go consumption at kiosks and mini-marts. The main reason for this growth potential is due to the transition from closed to open economy in Russia. In the closed economy, opportunities for extending into niche markets were limited and exposure to the lifestyle in an open economy was limited. In general, developing countries tend to adopt the lifestyle of a more developed open economy, and Russia is no exception. In terms of segment attractiveness, the household consumption segment presents an advantage over other segments because it is less sensitive to fluctuations in seasonal demands. On-the-go consumption that take place outdoors might decrease significantly in the winter, but household consumption which takes place indoors could be less affected by cold weather. In addition, household consumption
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in general presents a higher sales figure per purchase due to the increased volume of ice cream. The boutique segment is attractive in terms of higher margins and might present an opportunity for Ice-Fili to capitalize on its long brand history and image of quality Russian ice cream.
However, although ice cream in Russia was traditionally considered as an impulse, “onthe-go” product, it had not been recognized as a product that could be stored at home and consumed at any desirable time and occasion. The problem was that such kind of product usage had not been developed in the consumers’ minds due to lack of marketing efforts. For the boutique segment, Ice Fili had not positioned itself as a premium brand differentiated by exquisite ingredients and high price, as with the case of Baskin Robbins and Haagen-Dazs.
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Competitors
Ice-Fili produces ice cream, a part of the consumer desert and drinks industry. The ice cream industry competed with several products like soda, beer, yogurts, chocolate, and other candies for a share of the consumer spending. Ice cream had been a shrinking industry whereas the companies in other industries were experiencing high growth. Some of it could be attributed to more spending on marketing and advertising by the companies in other industries. The ice cream industry had lagged its competitors in positioning their products to be used under different situations.
Exhibit 4 shows the total ice cream production and Ice-fili’s ice cream production during the past 6 years. Ice cream production in Russia has been growing at a very slow pace over the last 6 years. Ice-fili production volume had decreased durting those 6 years and had resulted in significant erosion of its market share. It faced intense competition from foreign companies like Nestle, Baskin & Robbins, and Haagen-Dazs (a part of General Mills) as well as small regional producers. Ice-fili’s market share had reduced from approximately 50% to 10.3% in 1997 to 5.2% in 2001. The competitor’s for Ice-fili can be divided into 2 categories:
1. Foreign companies like Nestle, Baskin & Robbins, and others. 2. Small regional producers.
Foreign companies had several advantages over Ice-fili such as equipment and packaging technology used for ice cream production and strong financial support from its’ parent
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companies. Furthermore, the image of foreign ice cream products was of higher value, justifying the higher cost paid by the consumers. The foreign producers used chemical preservatives which led to lower costs due to increased shelf life of the products and lower wastage. One of the most significant advantages of a producer like Nestle was their strong distribution channel. Apart from ice cream, Nestle produced a wide variety of other products like coffee, confectionary, chocolate, pet food, bottled water and cereal. Thus, it could market its ice cream products through a large distribution network for all of its products. This led to a high penetration level of its product among the consumers.
The other competition to Ice-fili emerged from small regional producers. These producers had significant cost advantages due to new equipment and manufacturing facilities, lower labor costs, and lower rent costs as they were located away from the metropolitan areas. Also, these companies had lower transportation costs as they sold their products closer to the region where they produced. In addition, the distributors preferred the regional producers due to their flexibility to produce an in demand ice cream tailored to local needs.
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Resources
Unlike its foreign rivals, Ice-Fili still used high quality natural ingredients instead of artificial and preservatives to keep the tradition of the Russian ice cream. By doing so, Ice-Fili produced ice cream with a taste more fit for Russian consumers. However, these raw materials led to high costs because it was difficult to store and transport products that used such materials. In addition, the taste of consumers in other countries was unknown. Although most product lines already utilized imported equipment in Ice-Fili, 25% of overall volume was produced by oldgeneration equipments, which cost 8 million dollars to modify. In its financial statement from1996 to 2001, Ice-Fili did not have any long-term debt. Even though it was positive in that Ice-Fili would not suffer financial distress caused by long-term debt, the downside was the lack of an effective way to raise funds especially in the developing period where equity investors were highly skeptical of investments. In addition, there was an obvious weakness for Ice-Fili in the ice cream market, that is, the absence of a specific trademark for its own brand. “Lakomka”, accounting for 30% of sales volume, was produced by at least five companies at the same time. There was one brand named “Leningradskoe”, also used by many domestic companies. Moreover, the lack of effective distribution networking was also one obstacle that hampered its rapid growth in the whole market. On the other side, there had been an strengthening of human resources resulting from a restructured organization and culture. Employees were more satisfied because the company was run more like a family in which employees were cooperative with each other. The restructured organization led to employees with greater responsibilities and reinforced rewards and punishments further than they were in the Soviet time. In order to
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develop an intensive competition environment, Ice Fili also paid much more attention to recruit many young managers with strong abilities to work in an open market economy.
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Alternatives and Recommendations
Over the course of the analysis, a number of alternatives were identified for success of Ice-fili’s future. Some of the alternatives included exports to other USSR countries, alliance with other fast food restaurants, creation of trademarks and patents for its products and vertical integration with a distributor. However due lack of information, these alternatives were not analyzed in detail.
Based on the key operating financial ratios of Ice-Fili in Exhibit 7, it can be seen that operating profitability based on Return on Net Operating Assets (RNOA) and the profit margin has been decreasing over the past several years. In order to improve its performance, Ice-fili should focus on three key areas in its core competency of ice cream production for Russian industry.
1. Consolidation of products and creation of power brands (highly successful products). 2. Strengthen distribution channel. 3. Increased marketing and advertising of its brands.
Ice-fili has one of the highest ratios of ice cream products to production capacity in the Russia. Also around 70% of Ice-fili’s products are sold through kiosks. Since these kiosks are small booth like structures, they have very little storage capacity and thus store only few products. Thus consolidation of products will not impact its sales revenues in a significant way. Also it will create a simplified production and packaging process for its products. This will lead
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to a reduction in the higher percentage of line expenses and thus cost savings for the company. Apart from a higher income margin, the company can focus its human and financial resources in its power brands and penetrate into the market.
To tap the broader market Ice-fili needs to strengthen its distribution channel across the country. It distributes only 15% of its through Service-fili and its distributors compared to 41% of competitors. This channel primarily distributes its products to mini markets, gastronoms and restaurants, where Ice-fili needs to increase its exposure. Thus improving the relationships with this channel can increase its market share at these points of sale.
The last important factor is to create an effective marketing strategy to advertise its products. The advertisements should create brand awareness of Ice-fili’s products; portray its advantage over the foreign players in terms of its quality. Also the advertisements should help create a larger and growing market for the ice cream industry as a whole.
Exhibit 5 shows the Effective Value Added (EVA) to the company over the last 5 years. The graph shows the decreasing trend in the last 5 years. One of the reasons is due to the increased equity and thus the high cost of capital. Thus we recommend the company to raise capital from debt in foreign markets. Raising market in developed financial markets like USA or Europe would give the company benefits like low interest rates, easier method to raise capital. The company could enter into derivative contracts to hedge its currency risk.
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Exhibit 6 shows that Accounts Receivables were approximately 20% of its total assets in 2001. Also the ratio had significantly increased from 1996. This is a result of bad debts or poor collection systems of the company. Thus the company needs to build up its internal controls over the financial systems.
The combined effect of the three key factors of Ice-Fili’s strategy could result in a success for Ice-Fili due to the improvement of its core competency. Ice-Fili’s weaknesses were in its inability to increase product availability and to market the products with additional capital. However, by strengthening its relationships with suppliers, building a better marketing campaign, and raising more capital to finance these initiatives, Ice-Fili could be well on its way to higher profitability in the future.
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Exhibit 1
Porter’s Five Force analysis for Ice-Fili
Bargaining Power of Suppliers Low concentration of suppliers of ingredients and higher concentration of suppliers of equipment relative to producers Low switching costs among ingredients but high among equipment
Threat of entry
Industry Competitors
Easy access to manufacturing equipment Low skilled employees Low sophistication of manufacturing techniques Low brand loyalty Easily extended from other frozen foods industry Low governmental and legal barriers Easy access to distribution channels
Large number of producers including foreign and regional
Bargaining Power of Buyers
Low product differentiation Low switching costs Low demand elasticity
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Substitutes Existence of substitutes such as confectionaries and snacks Increasing trend of shift towards and growth of other consumer goods Low switching costs
Exhibit 2 Segmentation of the Ice Cream Market Distribution Channel
Kiosk
Minimart
Gastronom
Restaurant
Supermarket
Shares
49%
29%
17%
3%
2%
Purchase Behavior
Impulse
Impulse
Household
Luxury/Impulse
Household
Geographic Area
National
City/Regional
City/Regional
City
City
Product Characteristics
On-the-go
On-the-go
Storable
Immediate Consumption
Storable
Key Success Factors
Low Price, Extensive Distribution Network
Low Price, Extensive Distribution Network
Taste, Quality, Variety
Exquisite Flavor, High Quality, High Variety
Taste, Quality, Variety, Shelf Space
Baskin Robins, HaagenDazs
Nestle’
Competitors
Nestle’, Regional Nestle’, Regional Nestle’, Regional Producers Producers Producers
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Exhibit 3a Price and Location attributes
Exhibit 3b Distribution Channel and Purchase Behavior Attributes
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Production of Ice cream 400 350 300 250 200 150 100 50 0
Ice-fili's production volume
01 20
20
00
99 19
98 19
19
19
97
Production Volume in Russia 96
Production in '000 tons
Exhibit 4
Year
Exhibit 5
EVA
Economic V alue Added (in rubbles) 30000 25000 20000 15000 10000 5000 0 -5000 -10000 -15000
Cos t of Capital 10% 15% 20% 1996
1997
1998
1999
Ye a r
20
2000
2001
Exhibit 6 Accounts Receivables / Assets %
Accounts Receivables / Assets %
25 20 15 10 5 0 1996
1997
1998
1999
2000
2001
Year
Exhibit 7 Ice-Fili financial ratio analysis (units: thousand dollars) 2001
2000
1999
1998
1997
1996
Operating Assets(OA)
11,832
10,606
12,645
18,350
26,860
24,733
Operating liabilities(OL)
1,194
1,155
2,643
5,080
6,680
4,737
Operating income(OI)
1,702
1,727
2,090
2,742
5,856
6,753
Sales Net operating assets(NOA=OA-OL) Return on NOA(RNOA=OI/NOA) Profit margin=OI/SALES Assets turn over=SALES/NOA
25,147
27,206
32,672
35,988
68,892
34,083
10,638
9,451
10,002
13,270
20,180
19,996
16.00% 18.27% 20.90% 20.66% 29.02% 33.77% 6.77%
6.35%
6.40%
7.62%
8.50%
19.81%
2.36
2.88
3.27
2.71
3.41
1.70
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