Major food and tobacco producers are shining examples of “points of growth” in the Russian economy.

In the past few years, price fluctuations have thrown the oil and metal industries into chaos. Ratings have marked the rise and fall of the heavy machinery and chemical industries. Yet only food and tobacco companies have constantly increased their turnover. This year’s Expert 200 once again proves this rule to be true. Food producers are performing better than other leading Russian manufacturers both in terms of growth and labor productivity, lagging only slightly behind in profitability (Diagram 36).
Essentially, the food industry is an example of what the Russian economy can do when the investment climate is good. The payback period of investments is much shorter than in basic manufacturing industries. Investors can see returns after only a year or two. Even with the unpredictability of the situation in Russia, this period is completely acceptable to the majority of investors.

There is another important reason for growth, however. The relatively small companies in the food industry have yet to attract attention from politicians. Neither the state nor the oligarchs have shown any particular interest in their financial resources. Duma deputies have not demanded that their privatization be reconsidered. Even the communists believe it would be reasonable to keep private property in non-key sectors of industry.
Between 1995-1997, the amount of capital investment in the industry increased by almost 40% to $2.2 billion in 1997, significantly outpacing investment growth in the fuel and energy industry and in manufacturing as a whole (Diagram 37). Even after the 1998 crisis, investors continued to invest $1.5-1.6 billion annually in the food industry. In terms of investment volume, food manufacturers take a strong second place after the energy industry. Even metal producers cannot compete.
Foreign investors were even more optimistic about the food industry’s prospects. In 2000-2001, the foreign investment in the Russian food industry substantially exceeded investments in fuel and energy (Diagram 38). Today, almost every leading world food and tobacco manufacturer has production facilities in Russia.
In the years of this investment boom, the leading Russian market players managed to completely update their equipment and implement new technology. Compared to 1997, fixed asset depreciation declined by 10.6 percentage points, falling to an average of 35.9% in early 2002. At leading companies, this figure is substantially lower. Thus, in terms of product quality, large Russian manufacturers are on par with foreign companies. At the same time, the industry also underwent a period of consolidation and major Russian holdings are more than ready to compete with Western companies.
And there is certainly something worth competing for. The Russian food market is currently estimated at $50-60 billion dollars. There is every reason to believe that the market will expand in the near future, as the real income of Russians has increased for the fourth year in a row (Diagram 39), and this very factor determines the market for groceries and food products.
The dairy product and juice market is dominated by Russia’s biggest food holding, Wimm-Bill-Dann (number 28 in the Expert 200). In 2002, this company increased its income by 31.4%, an impressive result, taking into account the holding’s total earnings. Its main competitors on the dairy market are Ehrmann (178th) and Danon Industries (165th), foreign companies with Russian production facilities. Their business is expanding rapidly. Danon’s earning doubled in 2002, while Ehrmann’s increased by 1.6 times. However, Russian producers have an important advantage. The massive influx of low-quality food products in the 1990s made the majority of Russians less than eager to buy foreign products.
This factor has also helped Russian makers of meat products. In terms of earnings, the Cherkizovsky Company is in the lead, taking 48th place in the Expert 200. To all appearances, the company will keep its position as Russia’s leading meat packer for the foreseeable future, as it is so far ahead of its closest competitors. The most dynamic of these rivals is the Mikoyanovsky Meat Factory (its income increased by 41.5% for 2002) and the Klinsky Meat Factory (26% growth), which took 92nd and 195th place respectively.
After several years of rapid growth, the expansion of the beer market in Russia is slowing down. According to estimates from Baltika Brewery, beer consumption only increased by 8% for 2002, which is the lowest growth rate in the past several years. Nonetheless, certain market players managed to increase their income dramatically. Leaders in terms of growth in 2002 were the Turkish company Moskva-Efes, which targets the mid-upper price range, and the Russian company Yarpivo, focusing on less expensive brands. The earnings at these two companies increased in 2002 by 53.3% and 52.4% respectively.
In baked goods and candies, companies belonging to foreign corporations predominated. The Russian subsidiary of Mars (54th) and the Rossiya Candy Factory which belongs to Nestle (89th) took top spots both in terms of sales volume and growth rates. However, this leading role is deceptive. Unfortunately, we were not given access to the consolidated results of Krasny Oktyabr Holding (this company is represented by its Moscow enterprise in the ratings) or the Sladko Holding. If we had, perhaps the picture would look slightly different.
On the tobacco product market, however, foreign companies are indisputably in the lead. Out of the nine companies that made the list of Russia’s 200 largest companies, six belong to companies of international stature. The biggest of these is Phillip Morris Izhora, which took 36th place in the Expert 200. Only Russian companies Balkanskaya Zvezda (134th) and Donskoi Tabak (88th), along with its subsidiary Praimeri Don (200th), made the ratings. Praimeri Don led the tobacco industry in terms of income growth, increasing its earnings by 2.2 times in 2002. This high level of earnings growth was due to major investments from Donskoi Tabak, which plans to dramatically increase its market share to 15% by 2005, according to some estimates.

Read also:
Russia`s Biggest and Brightest: The Expert 200 for 2003
The Expert 200. Financial markets
The Expert 200: Oil and Natural Gas; Energy and Electricity
The Expert 200: The Machine Building Industry
The Expert 200: The Metal Industry in Russia
The Expert 200: The Chemical Industry

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