The Russian dairy industry today primarily revolves around the production of whole milk products, including sour-milk drinks, sour cream and cottagecheese (and related products such as cottage cheese in chocolate coatings products 'chocoladnye syrki'). Russians have a deep-rooted cultural history of dairy product consumption, but until relatively recently dairy foods were primarily associated with a rural life style.
However all that has changed now, now that mass dairy prodution is well and truly on the map. The basic players in the market are Wimm-Bill-Dann - with around a 30 per cent share of the market - Danone, Campina, Ehrmann- which have between 7 to 10 per cent share - and Petmol with a 5 per cent share. In recent years it is the largest players that have reshaped the industry and bought it in to a new and more efficient manufacturing era.
"Now more and more manufacturers are forming holdings or groups of companies. This has proved a positive move for the industry," said Yuri Neznanov, head of marketresearch at the Russian National Dairy Institute. "Such associations have helped developed the supply of raw materials from the agriculture sector, and in turnmanufactures have started to develop more intensively. By definition, the big companies, have more resources, which gives them theopportunity to increase manufacturing volumes. The upstart is that under present conditions it is better to group together and to combine resources."
Currently, as elsewhere in Eastern Europe, the dairy sector is a mixture of both state-subsidised enterprises as well as independent foreign and domestic companies. This makes for a very mixed market environment, but one that in turn is gaining in both competitiveness and manufacturing efficiencies.
Neznanov points out that currently two of the biggest areas for growth within the sector are both the markets for hard cheese and juice. Wimm-Bill-Dann has been particularly aggressive in the development of its juicing facilities in Russia, but investments in hard cheese production facilities are also increasing rapidly. In October last year, the company announced the $13 million launch of a hard cheese product for the Russian market and in November it completed a $21 million investment in a juicing line at its Tula facility.
"What has driven the modernisation of dairy plants in recent year has been the race to break into the emerging market for fruit juices," said Neznanov. "And now that the dairy companies have started to realise greater income from the juice sector, manufacturers attentions are turning to the hard cheese sector."
As the dairy market develops, so to does the market for long life dairy products, another factor which is changing the face of the sector.In large Russian cities the emphasis is increasingly on yoghurts, fruit 'kefirs',UHT milk, and curdled milk - 'prostokvasha' andfermented baked milk - 'ryazhenka'.
"These are all traditional products, but long life processing is changing the way they are packaged and marketed, which in turn is helping to increase sales," Neznanov said.
There are also increasing signs of sophistication within the sector. Although probiotic products are still a very small market, their sales are slowly increasing and, says Yuri, such products are expected to hold increasing value in the future. "The Future belongs to products of this nature," he said.
"This market is in an early stage of development. What manufacturers have to overcome is the populations' skepticism in the medical properties of such products. But once the correct positioning has been achieved success will be assured."
In stepping into the Russian dairy industry, western dairy companies have also stumbled onto a lucrative market for imports, as Neznanov points out."The West-European companies are attracted to Russia as source of raw materials,cheap labour and the low cost of milk.Western dairy companies have received fast returns on their investments in the Russian dairy sector. On top of that the western companies get their foot in the door of a lucrative sector for the importation of their goods. Exports of dairy products to Russia are profitable. Indeed dairy products currently account for the largest volume of imports in the food industry as a whole."
On the other hand the market for dairy imports is still limited. Currently the primary market is for condensed milk in the Commonwealth of Independent States, which currently accounts for about 50,000 tons per year.
As for the future of the dairy sector in Russia, Neznanov believes that future efficiencies and profitability will rest on raw milk prices. Currently one of the biggest issues that faces milk producers is feed."In Europe dairy animal feed revolves aroundvegetative fibres, whereas in Russia natural milk is still the mainstay. Obviously with regards economies of scale this is not a good situation for the Russian dairy producers. However some dairies are now starting to turn to artificial feeding. If such programmes are taken up elsewhere in the industry in the coming years production costs will be significantly reduced, allowing the industry to develop more rapidly."
The interview for this article was bought about through the kind co-operation of Moscow-based market analysis company Market Advice.