Russian food companies want to give foreigners on the canned fruit and vegetables market a run for their money. To do this, they are mastering Dutch vegetable growing techniques and developing unique canning methods

Lilia Moskalenko

Competition between domestic and foreign manufacturers on Russia’s canned fruit and vegetables market is expected to heat up in the near future. The other day, two French transnational companies – Bonduelle and CECAB – announced the expansion of their presence in Russia. It is natural that Western companies would want to set up own production facilities in Russia. Over the last several years, they have been most active players on Russia’s canned food market, and their turnover increased by 20-30% annually. Today, they control of more than 90% of the market.
However, Russian producers have also become noticeably more active. A number of domestic companies have appeared, such as Pomidorprom, Baltimor, Bagaevsky Canned Food Factory and Khozyain, which plan to increase their market share and put pressure on foreign producers in the near future.

Supplying delicacies

Russian companies’ ambition is quite unexpected. The canned fruit and vegetables industry is considered one of the most backward in Russia. In the second half of 1990s, Bonduelle, Green Giant, Golden Pheasant, Annabel, and other foreign companies won the Russian market without contest. The difference between their glossy appetizing canned food and Russian featureless cans with cucumbers and squash puree was too striking. Until recently, most Russian producers have operated in the cheap market segment under the Soviet scheme. “This is the way the canned food industry used to operate. Fruits and vegetables were grown in southern regions and picked in summer and autumn by students and soldiers. Naturally, no one ever kept track of the harvest. In late autumn, the vegetables, or more precisely whatever was left of them, were delivered to factories a thousand kilometers away that produced as much canned food as they could,” explains Maxim Protasov, Chairman of the Board at Pomidorprom Canned Food Holding. Russia lacked the agricultural techniques required to grow fruits and vegetables efficiently, which also sent the industry into decline. In terms of performance, fruit enterprises were significantly inferior to other agricultural businesses, for example, grain farms where a market-oriented business culture had been established back in late 1990s. “And collective farmers, who supplied vegetables, had one rule: if you need seeds, it doesn’t matter what they are as long as they are cheap. If you need to grow cucumbers, they will the size of a fire extinguisher,” says Protasov.
By 2003, foreign companies’ share in the canned fruit and vegetables market was as large as 93%. In 2003, the market share of domestic producers proper – former Soviet factories producing cheap generic goods – was as small as 7%. But today, new domestic companies are actively putting pressure on foreign producers.
These new producers are vertically integrated holdings that completely control the production cycle from field to can. Major capital went into other food industries, for example the meat or dairy industries back in the mid-1990s. Yet there was not a single investor in the canned fruit and vegetables industry until 2002. “Financiers have a number of problems with the business,” says Mr. Protasov. “First, its production cycle is too long: the period from the moment of purchasing seeds to the moment of buying a can in a shop lasts one year. Second, the business is very risky because of the seasonal factor.” Agribusiness holdings, such as Agros and Millhouse, didn’t want to take the risk.
Today, the canned fruit and vegetables market is one of the most dynamic consumer markets in Russia, with a total size of about $1.2 billion and growth rates no less than 30-35% a year. According to expert estimates, this growth will continue for the next 3-5 years. “The rapid growth is linked, first, with dynamics of household incomes – consumption of non-staple products including canned fruits and vegetables is increasing. Secondly, home canning is shrinking to zero as demand grows – more and more often people buy these products in stores,” says Milada Gudkova, Strategy Development Director at Baltimor Company. Comparison of the Russian fruit and vegetables market with Western ones demonstrates that should expand by at least four times.

Vertical canned food
New Russian tactics can be divided into three stages: acquisition and re-equipping of canned food factories, development of fresh fruits and vegetables sources, and the creation and promotion of strong brands. Companies have stopped building new factories, as they have found it more profitable to overhaul existing facilities. “The infrastructure of a canned food factory is very complex – it cannot be built in a green field,” says Yuri Pogozhayev, a manager at Bagaevsky Canned Food Factory. “For example, it must have a correct water purification system and boilers, because a lot of steam is used in preserving.” According to Pogozhayev, construction of a factory from scratch amounts to no less than 25-30 million euros, whereas reconstruction costs nearly half that.
Despite the large investments in acquiring and reconstructing factories, re-equipment was the simplest stage in the canned food business. Developing good sources of fresh produce turned out to be much more complicated for Russian companies. “Vegetable growers have lost their technique: they don’t know how to cultivate the land correctly, irrigate it correctly, grow the correct seeds, and so on. It will take years for them to learn how to do all this,” says Mr. Protasov. Therefore, new producers had to start growing vegetables on their own. Incidentally, Ukrainian producers of canned fruit and vegetables followed this path and, as a result, achieved great success. In 1996, after purchasing several canned food factories, the local Chumak Company faced a shortage of raw materials: Ukrainian vegetable growers failed to maintain required quality and volume. To get the vegetables it needed, the company began to purchase land, introduce Dutch vegetable growing techniques, and retrain local farmers. The “vertical” strategy proved correct: in six years, local holdings had not only put significant pressure on foreign companies operating on the market but also began to export both finished products and vegetables to Western Europe. Though the canned food business will mean massive investments – about 40-50 million euros a year – the companies believe they can turn a profit. Growing areas in Volgograd Province, the Caucasus, and Russia’s South are much more favorable for growing fruits and vegetables than agricultural regions in Hungary or France.

A national selection
New holdings have focused on medium-priced and expensive segments, which are most promising in terms of the growing demand. They immediately rejected the cheapest market segment where Russian factories traditionally operated. “When we emerged on the market, the size of the cheap canned vegetables segment was doubtlessly one of the largest. Yet we realized that it would shrink: today, even people of modest means prefer to buy products of higher quality,” says Mr. Protasov. Furthermore, retailers increasingly often refuse to deal with cheap generic. By targeting medium-priced and expensive segments, Russian producers are entering into direct competition with foreign companies. According to managers from Russian holdings, they are able to compete only by setting prices slightly lower for the same or even higher quality.
Today, Russian producers are quite able to meet the price condition: reduction in logistic costs and lower labor cost than in Western and Eastern European countries enable them to sell Russian canned food 10-12% cheaper. As for quality, Russian holdings intend to improve their products by using unique recipes based on Russian tastes and preferences. Russian companies plan to widen their range of recipes by taking their cue from home canning. “In addition to the traditional black pepper, we put multitude of herbs and spices in our pickles, such as coriander, dill, horse radish, cherry leaf, blackcurrant leaf, and mustard seed,” says Mr. Pogozhayev. “That way, we get a wide variety of pickles and sauces”.
Russian companies are putting special emphasis on the fact that their products are completely natural and organic. “We use organic vinegar and not just vinegar, as it is natural and not synthetic – this is one of our secrets,” says Mrs. Gudkova. “It is produced by natural fermentation and living bacteria without a single chemical compound. The fermentation process is quite lengthy, from one and a half to two months, but this kind of vinegar is good for your health”.
In addition to unique recipes, Russian producers plan to compete with their Western counterparts by offering a wider range of products. Western companies operating on the Russian market usually have a narrow specialty from ten to twenty items. Thus, for example, Hungarian companies focus mainly on cucumbers, tomatoes, and beans, and French companies on corn, peas and bamboo, and Chinese companies on pineapples, peaches, etc. Russian producers, on the other hand, plan to include as many as 100-150 items in their product range. In addition to the traditional cucumbers, peas, and tomatoes, companies will offer pumpkins, squash, beets, and white mushrooms, basically everything that grows in Russia. “Mixed vegetables and a variety of national delicacies like squash or eggplant pate  will become our main way of hooking consumers,” says Mr. Protasov.  To widen its range of products, the Pomidorprom Company is currently outsourcing production of canned fruits using its own technologies and recipes to Chinese factories.  

More in Russian>> www.expert.ru