MOSCOW - If Russia's Agriculture Minister
Elena Skrynnik went to the trouble last week of
decrying adulteration of Russia's milk, then one
thing is certain - the Franco-American syndicate
that sells most of Russia's milk and dominates the
market is having trouble pricing down or buying up
milk producers in the regions where they claim
adulteration is "unfair competition".
That's because "unfair competition" is
what Danone of France and Pepsico of the United
States have been hoping would be more effective in
the Russian milk market than it is proving to be.
Naturally, what is unfair depends on who controls
the milk production chain, and who doesn't.
According to the milk sops in the Moscow
media, Skrynnik recently sent a letter to the
governors of regions specializing in milk
production, urging them to halt sales of
sub-standard milk. The adulterators are being
accused of adding cheap palm oil
imported from Southeast
Asia instead of the more costly butterfat required
by Russia's product standards. "The use of
tropical oils is unacceptable. The ministry will
regularly monitor the situation," Skrynnik is
reported to have said.
Rubbing it in,
Marina Balabanova, the spokesman for Danone, has
announced: "We sometimes face unfair competition
from the smaller players." Last June, Danone
bought out Unimilk, Russia's second-largest
producer of dairy products after Wimm Bill Dann.
The previous December 2010, Wimm Bill Dann
(WBD) sold itself to Pepsico. The oligopolistic
sequence, approved by the Federal Antimonopoly
Service (FAS) and by President Dmitry Medvedev,
resulted in about 60% of the Russian milk market
passing into just two pairs of hands - Danone's
and Pepsico's. At least that's the percentage
market share which was reported at the time.
Today the market share of the Danone and
Pepsico groups is reported to be 45%, suggesting
that they have been losing out to the smaller,
region-based Russian competition. According to
Balabanova, the Danone combination with Unimilk
currently has a market share of 21.6% in milk
volume, and 26.9% in value terms. A year ago, the
peak market share estimate for the two was 30.8%.
Balabanova was reluctant to concede that
her group has lost significant market share in the
interval, but she admits that there was a
contraction last year. "The reason is the increase
in raw material prices in late 2010 and early
2011. Accordingly, product prices grew slightly.
Consumers responded to this with a decline in
consumption. This time round, the market share of
regional producers, which produce very cheap
products, has increased. Their low prices mean
that their products cannot be natural, and they
use vegetable oil. All the major players are
affected by it."
According to Vladimir
Labinov, executive director of the Russian Union
of Dairy Enterprises, there is no doubt "the
market shares of both companies have really
fallen. This is according to the figures published
in the latest Nielsen reports."
In Vologda
- the Russian region traditionally associated with
milk production, like Wisconsin state in the US -
the sentiment is hostile towards Danone and
Pepsico for using their commercial weight to drive
raw milk prices below the levels at which the
smaller producers can compete.
Lyubov
Malek is the head of department of market
monitoring for the meat and dairy industry in the
Vologda regional government's agriculture
ministry. She says, "The big companies create
problems because they bring down prices for raw
materials. From this [tactic] the producers of raw
materials for dairy products suffer."
But
according to Malek, "On the market of the Vologda
region they [Danone and Pepsico] are not
competitors. The people there are very choosy in
dairy products, as Vologda region is famous for
its dairy products, and they're absolutely
natural. As for [regulation of] competition, it is
necessary that the FAS should work better, but it
is toothless." For the future, she adds, "local
manufacturers can get help only by themselves -
with improving production efficiency, quality and
technology. They cannot hope for the state help."
Vologda Oblast is the oldest region for
dairy farming in Russia. According to a 2005 study
of competition in the Russian dairy sector by
Polina Moshkina, "Dairy production traditionally
takes a key role in the agri-food sector of the
region. Dairy industry accounts for 70% of
commodity output of Vologda Oblast. Our study
allows asserting that this region has the largest
competitive potential in the European part of
Russia."
Based on data from the period
between 1999 to 2001, Moshkina reported the top 20
regions in the country for raw milk and milk
production:
Index of
comparative advantage (ICA) for the top 20
regions, average 1999-2001, %.
More recent studies and data
on regional advantage and concentration of
ownership are difficult to come by. The anecdotal
picture from commercial milk producers indicates
that Danone and Pepsico have been intensifying the
pressure on smaller producers. But at the same
time, the pressure isn't saving Danone and Pepsico
from the erosion of consumer favour and the
contraction of their market shares.
Dmitry
Shepelev, chief executive of the Ladon company,
believes the official attempt to crack down on
adulteration is partly linked to the efforts by
the giant producers to oust smaller ones from the
market. "These companies dominate. So it is not
surprising, they are lobbying for their
interests."
Alexei Garnov, sales director
for the Ryazan Agro Industrial Complex, said, "It
is difficult to say what the adulteration campaign
is aimed at - the displacement of small producers
or forcing them to produce quality products. As
for competition, consumers will choose products
for their quality, and many are willing to overpay
a little for a natural product. This is a normal
desire - to be sure of the product's quality which
you eat and drink."
Andrei Danilenko is
the chairman of the industry lobby, the National
Milk Producers Union (Soyuzmoloko). He believes
the Agriculture Minister has a limited objective
in attacking adulteration. "There are standards of
care, technical regulations in which it is
specified what can and what can not be used in
certain products. The point is that if someone
would use vegetable oil of tropical origin, it is
necessary to specify it on the product's package.
All that was said recently by Minister
Skrynnik is aimed to prevent consumers being
misled by the product name. So all products will
remain the same, but on the package label what it
contains will be indicated. The consumer himself
can decide what to buy. Too many people think they
are buying 100% natural products, but in reality
it is not so".
Labinov of the Union of
Dairy Enterprises believes there is no connection
between Skrynnik's statement against adulteration
and the Danone and Pepsico market tactics. So what
is unfair competition? "There is no connection,"
argues Labinov.
"The regionals are
violating in their use of non-dairy fats. The
giants are doing it differently, more civilized.
For example, they are turning out products which
deplete [milk content] by physical-chemical
composition, with the minimization of the share of
dairy ingredients in the recipe; they concentrate
more on marketing [new products] like Actimel,
Imunel, Rastishka [curds]. Our cheese is easier to
spread, and so on." According to Labinov, the only
way the regional producers will survive is by
"focusing on the production of traditional
recipes, lifting their demand for [higher] quality
of raw milk."
Output and trading
conditions this year are likely to work to the
small and regional producers' advantage, suggest
several industry sources. Andrei Yarovoi, chairman
of the Meleuzovsky Dairy Plant, predicts that
Russian milk production this year will grow by one
million tonnes, or about 3% over the 2011 total.
Growth in imports from the European Union
- a very likely development, according to Pawel
Redzisz, country head for Singapore's Olam, which
is investing in Russian dairy production - the
greater supply will put downward pressure on
prices, and butterfat will become more inexpensive
along with milk.
Mikhail Fedorenko is
responsible for agribusiness at FAS; he was the
official in charge of the reviews of the
competitive impact of the Pepsico and Danone
acquisitions. Asked about the current market
shares of Danone and Pepsico, and the impact on
the smaller producers of their price-cutting
tactics of the larger producers, he referred
questions to the FAS press center. It has replied
that FAS has followed up the Danone takeover and
found "no violations". It has not assessed Pepsico
and WBD. Also, the FAS says it does not have
market share data for the milk sector.
John Helmer has been a
Moscow-based correspondent since 1989,
specializing in the coverage of Russian
business.
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