Ice Fili

By Michael Rukstad
Sasha Mattu
Asya Petinova

Presented By
Saqib Arif (2018-EMBA-016)
Absaar Javed (2018-EMBA-019)
 You Cannot defeat a
NATION that enjoys ice
cream at -40 Celcius
WINSTON CHURCHILL
Abstract

● 2002- Mid Size Company

o Sales 25M

● Outlasted many well known brands:

○ Ben & Jerry (Took exit in 1997 from Russian Market)
○ Unilever (Left in 2001)

● Successfully transitioned from infant 1992 open market to difficult times of 1998
financial crises
Abstract
● Fighting to maintain its market share (decreased to half a million dollars) among
strong competitors like Nestle, Baskin Robbins, Haagen-Dazs positioned themselves
as

○ Franchised restaurants & Café networks

○ Premium ice cream producers

○ Small regional producers & other Moscow based Producers having lower
production costs were making strong inroads in metropolitan markets
Strategic Question

● Anatoliy Shamanov, Ice Fili CEO had a fundamental strategic question:

○ Could Ice-Fili maintain market lead over Nestle?

○ Should Ice-Fili invest in its own chain of Cafes in order to find new avenues?

○ How could Ice-Fili compete with regional producers without engaging in a

price war?

○ How could Ice-Fili attract the talent in a competitive market economy?

History of Ice Cream Consumption in Russia

● Many stories
○ Czar Peter the Great brought ice cream back to russia in 17 th century

○ Ice cream achieved popularity after the Bolshevik Revolution in 1917 (when it
became available to masses not just nobles)

○ Ice cream sellers were as numerous in winters than in summers

○ Baskin Robbins Manager claimed that

■ “Russian eat more in winters than in summers, sounds strange. Perhaps it’s
because in summers it melts by the time you get home, in winters you can
eat it as long as you want”
Ice Cream Consumption Comparison

● Russia: 2.5 Kg/Capita

● United States: 16 Kg/Capita

● France: 17 Kg/ Capita

● Canada: 18 Kg/Capita

● Ice cream is considered as

○ Inexpensive snack
○ Consumed “On the go”
○ Spontaneous purchases from kiosks or street stalls
Russians and Ice Cream Positioning

● According to a Russian Analyst

○ Russians have done very little to position ice cream as a family product

○ People don’t consider it as home desert

○ In US over a third of $20 Billion is from in-home consumption

Ice Cream Composition

Ice Cream Fat Contents Flavour Ingredients Industry

response
Russian 15% Less sweet Natural Russian ice
and more ingredients creams are
aerated with no best in the
preservatives world
Premium 10% More sweet Artificial
western and less flavors with
brands aerated preservatives

According to Industry trade association response:

“Millions of foreigners, after arriving Moscow and tasting our ice cream, they
proclaimed Russian ice cream to be the best in the world”
Sales & Advertisements

● Ice cream competition is with consumer dollars, including beer, soda, yogurts,
chocolate, and other confectionery candies

● Advertisement Budgets:

Product Advertisement expense (US $) Expense as %age of

sales (%)
Ice Cream <5 Million 1%
Beer 90 Million 2%
Soft drink 200 Million 7%
Market Demand

Product Production of Yr 2000 Compared to

Yr 1999
Ice Cream -3.5%
Confectionaries +8%
Soft drinks +25%
Beer +23%

• One industry expert sighted “Now a days, students prefer beer over ice cream”

• Russian beer market had grown from 23-25% annually from 1997.
Challenges

● Before 1991- State controlled planning, production & distribution of food products

● End 1980s: Ice cream production capacity increased substantially when President
assigned alcohol factories to produce ice cream due to anti alcohol campaign

● Result: 26 new ice cream factories, total no. reached to 76

● 1990: Russia produced 468,000 tons ice cream compared to overall USSR
production of 800,000
Economic Shocks
Shocks Faced- Open Market

● 1991-2000- Ice cream companies suffered TWO severe economic shocks which
are:

○ Open Market
○ Financial Crises
Open Market

○ Open Market

○ 1991: Soviat Union was dissolved due to unstable economic and political
situation

○ Next Two years (1992-1993): Shift from state run economy to open economy
due to which ice cream production dropped to the level of 1970’s

○ Foreign ice cream companies came in Russia

Open Market

● This caused temporary paralysis to local ice cream manufacturers because earlier
they focused on

○ Production

○ Storage

○ Involved in storage and wholesale of meat, milk and fish products

● Were not responsible for other activities in value chain

Open Market

● With open market, companies required financial investments to

○ Update production technology

○ Modernize infrastructure

○ Develop better marketing and packaging solutions

● Some manufacturers partnered with distributors

● Some resorted to selling forign ice cream products

● Some expanded into new markets like butter, mayonnaise, bread, fish, sausages
and confectionary
Financial Crises

Financial Crises of 1998

● Russia defaulted on its debt payments in August 1998

● Devaluation of Ruble to two-thirds

● Foreign companies reduced their imports due to buying power reduction of

imported products

● Nestle focussed on boosting local companies instead of importing its premium

products
Financial Crises

● Local manufacturers also reduced their reliance on imported raw materials

● Import of ice cream dropped from 19,000 tons to 6,000 tons/Year

● Export of ice cream increased and by Yr 2000, Russia exported 11,000 tons of ice
cream (manly to other states of Soviat Union)
Ice Fili
History

● Russian saying “A bad soldier is the one who doesn’t dream of becoming a
General” (Shamanov)

● 1937: Govt established company “Moshladokombinat N 8” (today Ice-Fili)

● Location: Outskirts of Moscow

● Production Capacity: 25 tons/day (2nd largest manufacturer (1st in Boston)

History

● Next Six decades: Production increased to 200 tons/day via three major equipment
modernizations

● CEO Profile:

○ Name: Mr. Anatoliy Vladimirovich Shamanov

○ Qualification: Graduate with specialization in refrigeration and compressor

tools and equipments
CEO Profile

● Tenure
● 1968-1974: Various positions at other specialized frozen foods

● 1988- CEO

● Company privatized in 1992

● Shamanov lead company restructuring to remain competitive in market

Comment on Challenges faced

Commenting on the Challenges

“We had to change everything- our technology, our packaging, our ways to

doing business. But the most important aspect was changing the psychology.

We had to adjust to the fact that nothing was going to be simply given to us.

We were in a free float and had to survive on our own without anybody’s help.

Some people could not adjust and left”

Products

● Russian ice cream producers produced lesser number of products

● Russian Ice cream variety: 240 products whereas Baskin Robbins alone had 650
products

● 2002: Ice Fili has 170 varieties

● Ever year Ice Fili introduced 20 varieties (modernization of recipe or more add ons)

● 1998: Ice cream for dibetic patients hence catering 140,000 diabetics in Moscow
Products

● 2002: American style ice cream taste and texture was introduced

● Also won Silver Medal for “Product of the Year” in category for “Eralash” in
Moscow food Exhibition (only ice cream company to be awarded)
 Product Price Comparison

Competitors Price Range

Other Domestic products 3-4 rubles
Ice Fili 6 rubles
Nestle 10 rubles or more

• According to an Ice Fili executive “a 1% change doesn't affect customer’s

purchasing behaviour but a 50% would. There are only a few seasonal changes in
price”
• In 2002- ice cream in boxes, containers and buckets increased significantly in
major metropolitan cities
Manufacturing

● Seasonal demand

● Product demand: variation from one to three times in peak season

● Production Volume: 10 tons/day to 150 tons/day

● In 2002- Russian ice cream Production capacity varied between 500,000 to

880,000 tons/yrs
Profit Margin Comparison

Product 1999 1998

Ice Cream production- Ice 15%-20% 30%-40%
cream sector
Confectionary 6%-8% 14%

• Value Added Tax Increase: In beginning of 2000- VAT increased from 10% to 20%
on ice cream fruit based and ice popsticks

• Shamnov commented on increase on VAT “Enormous funds were diverted from

projects to tax payments”

• By July 2000: VAT reduced to 10% on dairy ice creams and remained 20% on
others
• In 2000, Ice Fili produced 20,000 tons of ice cream compared to 27,500 tons in
1998
Raw Material

● Raw Materials:
Raw Materials

● Ice Fili sticked to raw material and no preservatives compared to forign

competitors which used alternate raw material and preservatives to increase shelf
life from 6-18 months

● According to Ice Fili Commercial Director Andrei Kabuzenko

“Changing these parameters may reduce costs but taste would be affected.
In case of producers who use additives, the taste could be corrected, the quality of
our ingredients becomes more important”
Equipment and Technology

● In early 1990’s Russians ice cream industry lagged severely behind its western
counterpart in technical capabilities in production, ingredient use and packaging.
As per Ice Fili chief production specialist
“Russian ice cream manufacturing is 40-60 years behind world’s technology
level”

In 1999, 90% of equipment used by Russian ice cream manufacturers were

imported which costed 1.5-5 million US dollars per complete production line.
Equipment and Technology (Contd…)

● In 1990’s Ice Fili spent significant sums of its internally generated cash flows for
modernization, overhauling and expansion.

● Shamanov noted
“Over the last two years, the company has pumped in $8 Million from its own
packets”

● Major equipment suppliers were from Danish and American firms because local
equipment was still of low quality, narrow assortment and lacked flexibility
Distribution

● In 2001, there were five retail channels for ice cream i.e., kiosks, mini markets,
traditional grocery stores called “gastronoms”, supermarkets and restaurants

Distribution Channel %age of market share

Koisks 49%
Mini Markets 29%
Traditional grocery stores 17%
(Gastronoms)
Supermarkets 2%
Restaurants 3%
Distribution (Contd…)

● Traditionally Ice Fili had not participated in distribution activities to regional

warehouses because of high capital investment and economies of scale

● According to one director

“Although Ice Fili has the greatest variety of products compared to the handful of
Nestle products, there is twice the likelihood of Nestle product rather than Ice Fili
product in Russia.
Distribution will be the Battlefield- availability of product will be the key”
Marketing

● The early success of foreign companies highlighted the inexperienced marketing

of domestic products

● According to industry observer

“The old type manager think that if they start a new line, or new line of ice cream,
the business will grow for sure without even trying to study potential demand and
competition.
As a result, periodically there is overcapacity and factories stay half busy for
several months or don’t work at all”.
Marketing Trend

● 90% of Russian consumer good spend on marketing as TV advertising

● Foreign multinationals also spend Two-Thirds on TV advertisements

● In 2001, Ice Fili became the first local ice cream manufacturer to market
themselves in TV advertisements via Two Russian TV Channels and Russian
MTV
Marketing Trend (Contd…)

● As per Ice Fili Marketing Director “We have 170 different products. We really
need to concentrate on minimizing products and focus on differentiating the
products we already have”

● In 2001, Ice Fili marketing and advertising budget was estimated to be $500,000/
yr

● During mid 1990s, Ice Fili developed new packaging in 1950s style to engender
fond emotions and attract customers
Corporate Organization and
Culture
Structure
● Before 2000, organizational structure

○ Complex and inefficient

○ E.g., 117 different salary structures

○ High fixed costs

● Since 2000, structural changes were done like

○ Pairing down compensation structure to one based on qualification,

hardships/ difficulty to work, health risks/ hazards, overtime and individual
initiative

○ Financial Penalty like smoking, tardiness and other

Management Structure

● Complex and inefficient

○ Senior manager new compensation packages (base salary and bonuses)

○ Senior managers small premiums and larger penalties

○ Other organizational levers to reduce cost and increasing production

efficiency included changing recipes, packaging and reducing waste
Management Change

● In 2001, company went a lot of management changes

○ Their distributor Alter-West (since 1992) became 37% shareholder

○ March 2001- Due to pressure from Alter-West and Moscow Govt, existing
CEO (Shamanov) was replaced with former Alter-West director but to
management issues Mr. Shamanov again became CEO and he also gained
controlling share of Ice Fili
Cultural Change

● Company sought young and energetic individuals in age of 30 to 40 yrs with

ability to thrive in open market economy.

● On the environment creating Shamanov smiled and said “Ice Cream is a very
sweet product. It causes smile and makes people happy, and so, this naturally
translates into our working environment”
Growth Plans

● Challenge of raising 50 Million capital for necessary financing future growth

● Growth Plan
○ Diversifying geographically to eastern europe

○ Taking advantage of “Cash Cow” opportunity for producing “dry ice” and
selling it abroad for construction purposes, medical uses and beverages
IPO Strategy

● Company thought of going for IPO but felt it is along way from that goal

● Ice fili was not optimistic going to west due to taste difference between Russian
western ice cream.
Regional Producers Threats

● Greatest threat came from regional producers via

○ New management style

○ New manufacturing facilities resulting in lowering cost

○ Product quality and packaging

○ Lower rent and labour costs

Regional Producers Strategy

● Newly established ice cream making accounted for 30% of domestic market

● By 2002, few regional producers exhibited aggressive growth strategies not only
in local market but also in Moscow and other metropolitan market.
Foreign Companies

● After 1998 financial crises foreign companies

○ Either left like Ben and Jerry’s

○ Or became fully capable of domestic manufacturing through regional

production plants as did Nestle and Baskin Robbins
Ben & Jerry’s

● 1992- Joint Venture with Iceverks

● Venture designed to encourage international cooperation and global understanding

● Received funding from US Agency for international development to help finance

venture.

● 50/50 partnership between russian investors and Ben & Jerry’s

Ben & Jerry’s (Contd…)

● Adapted their recipes to accommodate local ingredients

● Challenge faced- different taste compared to other local producers due to milk,
cream and sugar processing difference

● Flavors were imported from US

● With increase in demand, local versions of inputs were sought and variations of
the product emerged (Finnish sandwich cookie replaced Oreo)
Ben & Jerry’s (Contd…)

● In 1997- after five years B&J withdraw its venture due to

○ High operating costs

○ Lack of modern wholesale distribution system

○ Limited local management resources

Unilever

● 1994- Took over oldest and most famous perfume and cosmetics manufacturers of
Russia

● Expanded operations to full line household products

● Gradually decreased imports by more relying on domestic supplies

Unilever (Contd…)

● Unilever dipped into ice cream market as it was market leader in many other
markets

● Outsourced ice cream manufacturing to Two ice cream factories in Moscow

● Also imported ice cream from Turkey and Hungary

● Estimated consumption: 1000-1500 tons of Algida per year.

● To Cater this demand: 3000 Kiosks stalls were bought, one third of which were in
Moscow
Unilever (Contd…)

● It sold 17 brands in Russia

● In 1997, Marketing and advertising budget was

○ $6.2 Million for Algida ice cream

○ $1.2 Million for Vienetta ice cream

● By Feb 2001, Unilever withdraw itself from Russian Ice cream market
Unilever (Contd…)

• Unilever failure is claimed to be due to

“POOR DISTRIBUTION of its product”

As its stalls gets empty due to delay in distributions (Distribution was given to the
company which were distributing other unilever products, hence had no
experience of Ice cream distribution
Baskin Robbins

● 1945- Founded in Glendale, California

● 1973- Became wholly owned subsidiary of Allied Brewery

● 1978- Purchased by Allied Domecq (london based international food, drink &
leisure group

● 1986- Baskin Robbins Incorporated was formed and included two subsidiaries

○ Baskin Robbins USA

○ Baskin Robbins International

Baskin Robbins (Contd…)

• June 8th, 1990 – BR entered in Russian Market by opening 1st ice cream store as
joint Venture with Mosrestorancervis (Mosco Govt entity)
• 1st American Franchise operation in Soviet Union to sell its products in Russian
Currency
• Offered 60 out of 650 ice cream flavours
• “More expensive ice cream flavours (containing Alcohol and other expensive
ingredients) were not sold in Russian Market”
• Price: 30 Rubles/scoop compared to 6-12 rubles/scoop of domestic ice cream
Baskin Robbins (Contd…)

● Flooded operations by franchising system , supported its franchisers in design,

marketing, personnel training and advertising.

● According to Russian Investor “Russia definitely is lagging in franchise system.

But Baskin Robbins has managed to turn it into success”
Baskin Robbins (Contd…)

● 1996- Launched Production of ice cream in Moscow with

○ Capital Investment: $30 Million

○ Production capacity: 16,000 tons/year

○ Largest factory of BR in the world

● By 2001, its capacity utilization was 7-12%

● Franchise Network: 105 cafes in 35 cities

Nestle

● End of Nineteenth Century: Henri Nestle negotiated deal with Alexander Vencel
(Russian Businessman) as dairy supplier to Russian empire

● Continued its long term investment strategy, began investing in local production
and development of food and beverage products that fit Russian taste
Nestle (Contd…)

● Early 1990s: Entered in Russian Ice cream industry

● Developed its own independent storage capacities

● 1996-1999- Invested $30million in ice cream production

● 1996- Acquired a controlling share in an ice cream factory in the Moscow region

● 1997- Produced 9500 tons

● 1998- Produced 13,000 tons

● June 1998- Bought controlling share in an ice cream factory in Krasnodarskiy

Krai
Nestle (Contd…)

● 2000- Had 2nd largest ice cream market share after Ice Fili and produced
16,000-17,000 tons

● Produced non-traditional Russian Ice cream (using both Milk and vegetable
fats) under new brand name “Eskimo Kimo” and “Rozochka”

● Cost of product: 8-13 rubles (27-43 cents)

● Managed 23 domestic ice cream producers to become the only ice cream
producer left in country
Standards for Ice Cream Production
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