By emphasizing simple, natural dairy products, regional mid-size companies are pushing small producers off the market and taking customers away from big corporations.

Maxim Borisov

Perhaps one might still encounter a milkman delivering milk door-to-door in some remote Estonian hamlet. The issue of quality never even comes up: if the milk or sour cream is bad, the local milkman will be boycotted by the villagers and will lose his livelihood. The demand for products from a local milkman who has proven himself is also growing in big cities. Consumers are gradually getting tired of the “aggressive variety” on supermarket shelves known as advertising and want something simple and natural.
Today, many Russian dairy producers are trying to meet this demand in Russia’s regions. Having learned to make quality products, mid-size producers are currently growing by 50-60% a year compared to an overall market growth rate of no more than 10% (in monetary terms).

A new look at an old product

The Russian dairy market can be roughly divided into two segments: the “high-tech” dairy product segment, where Western technology is widely used, and the natural product segment, which uses techniques traditional to Russia.
In the first segment fall major Russian and Western producers, primarily Danone, Campina, Ehrmann, Wimm-Bill-Dann, Yunimilk, Ochakovsky Dairy Plant, Permmoloko, Piskarevsky Dairy Plant, and Rosagroexport. Their combined share of retail sales is 47.4% in real terms and 53.1% in monetary terms. These companies position their products in the mid-priced to upper market segments. One could even say that they are most interested in expensive product segments, such as milk drinks, yoghurt, desserts, and products enriched with active cultures. These products are more difficult to produce but they cost more and make higher profits.
According to Petmol Marketing Director, Ilya Grigoryev, these producers are slowly reducing the share of products promoted in more affordable segments, because they are simply no longer of interest to large producers.
But these segments are of great interest to another group of producers, smaller regional companies. They don’t have any expensive Western equipment due to their limited financial resources, and for this reason they focus on making simple, natural products. For the time being, the majority of these plants produce generic milk, kefir, cheese, and butter without brand names and only find customers at local markets. Their supply of products has a clearly seasonal character. When milk is plentiful in the summer they flood the market with cheap goods, while in the winter their supply dries up completely. They cannot guarantee their quality as a rule. Many of these producers stay afloat thanks to the support of regional governments that use these companies to solve some of the region’s social problems. Until very recently, most analysts believed that these plants would either eventually die out or be bought up and reequipped by major milk producers. However, in the last two to three years, several companies have appeared among regional producers that have been able to combat this trend. They have learned to maintain quality, they have escaped the seasonal cycle and created their own brands, which they have begun to promote in retail chains. At the moment, they are growing faster than big producers as they have formed a group of consumers loyal not only to their brands but to simple, natural dairy products in general.

Farewell to the drunken milkmaid

The first problem that growing milk producers face is the lack of quality raw inputs. It turned out that most of them had to start from scratch. “When we started our business, the dairy farms were in critical condition. We are talking about drunk employees milking the cows with god knows what kind of equipment inherited from Soviet collective farms that was simply hazardous for the cows. There was a dearth of workers and no desire to work in rural areas. The situation was horrifying,” recalls Arkady Ponomarev, General Director of the Voronezhsky Milk Plant. Another problem was the so-called “administrative barrier.” “Often the local administration would prevent milk from being delivered to our plant, even though we offered better prices and conditions. This was how they tried to protect local plants that couldn’t compete,” recounts Ponomarev.
To solve these problems, the company chose a small group of milk suppliers they could work with and began to help these farmers produce the kind of milk they needed. Farmers suddenly had the money for enriched winter fodder and new milking equipment.

Cleanliness first

In contrast to large producers who create their own new products and promote them en masse to consumers, regional companies emphasize traditional dairy products familiar to Russians. This, as those in the milk business maintain, comes with complications of its own. Promoting natural products can be difficult as their tastes are too similar to make a strong impression on consumers. “You can’t win consumers over with taste when you sell milk. The most important goal is to get the product to consumers in its original form,” says Anatoly Losev. “But in order to get this milk to market, it has to stay fresh for 7-10 days.” For this reason, both the Voronezhsky and the Ratmira Dairies are focusing on expanding the shelf life of “fresh” milk. The emphasis is on cleanliness at each stage of production, from milking to packaging. “Most regional companies don’t think much about cleanliness and as a result the milk only lasts for 2-3 days. There is no point in even thinking about taking milk with such a short shelf life out of the region,” argues Ponomarev.
Cultured milk products are the only way for small dairy companies to stand out in terms of selection. And they are the very products that earn this group of companies the loyalty of consumers to their brand as a whole. At the same time, these mid-sized producers understand that there are areas where they cannot compete with major milk producers. “Yoghurt and fruit-flavored dairy beverages are a very profitable category, but these products are very hard to produce. They are too high-tech for us,” Losev notes.
Regional producers are trying to stand out of the big-name crowd not only by improving taste, but by improving package design. The companies in question have become pioneers in packaging and are even ahead of the market leaders in terms of introducing new packaging.

Variety on the shelves

Today, growing regional companies have already won leading positions on their home markets, despite the fact that their prices are higher than those of other local producers. However, these companies have their sights set on the Moscow market, where competition is much stiffer. In Russia’s capital, the mid-sized dairies function according to a strict formula: firm price positions plus flexible relationships with retail chains. “Our main goal is not to meet the leaders head on. We are trying to constantly expand our presence in various market segments and find new niches. Between ourselves, we call this the `partisan strategy,’” explains Losev. Regional producers’ products cost about 1-1.5 rubles less than those of big companies on the Moscow market. For some products, however, dairies do take a slightly different approach to pricing. For instance, the Demiurg Company positions its products under the Smolenskaya Maslenka brand name in the premium segment and the price for these products is even higher than those of its competitors.
Regional producers are not able to launch large ad campaigns like national companies, which is why they hold on to retail chains by remaining very flexible in terms of logistics. “The chains are interested in us because while we offer natural products with short shelf lives, we deliver them on time using our own trucks,” explains Konstantin Ivanov. Few companies are able to deliver dairy products to retail outlets so that the stores still have time to sell them before they spoil.
Dairy producers also note that they are benefiting from recent attempts on the part of Moscow stores to stand out in some way. Consumers are tired of the same old thing on supermarket shelves. Regional producers’ products fit this aim perfectly. To strengthen their ties to particular large retailers, the companies we spoke with plan to put out private label products in the near future. “From the point of view of our own profit, there is no point in private labels, but from the point of view of our relations with retail chains, of course it is profitable,” explains Losev.

This cow is not for sale

The new regional companies are becoming more and more noticeable on the market. For example, the Voronezhsky Dairy has refused offers from large corporations to buy its business. “We should keep refusing, because there is an excess of investment money on the market and everyone is trying to figure out what to do with it,” says Ponomarev. “But when a business is growing by 40% a year, there is no reason to sell. Just the opposite, we are attracting a significant amount of money to expand production.” Ratmira also plans to increase its turnover in the future. This summer, the company will open a new factory in the town of Kimra to produce a new product, feta and salted cheeses. As those at Ratmira tell it, they decided a year ago to expand cheese production due to increased demand. “We invited cheese makers from Bulgaria to come and work at the factory,” we were told at Ratmira. “The new product will target expensive market niches.”
Demiurg plans to develop a line of low-fat health food products including various types of spreads, sauces, and mayonnaise. The company has already set up its own laboratory which is taking an active part in the research programs of the Russian Academy of Medical Sciences. Demiurg is also trying to get into other segments of food production and recently acquired a vegetable oil factory.
Specialists at these mid-sized dairies all believe that they have a few more years of easy growth. “I think that our growth comes from chasing small producers off the market. In other words, we are not competing with Wimm-Bill-Dann but expanding in a blank spot on the market and replacing the generic products of regional plants,” says Losev. “I think that regional factories need to focus on making products with a shelf life of less than 2 weeks at a reasonable price. There are even forecasts that prices for milk with a long shelf life will fall, while those for fresh, unprocessed milk will rise.” Perhaps small regional dairies, especially those located right next to dairy farms, will create a market for the same kind of organic, low-fat products that are all the rage in the West.

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