MGT 5794

Strategic Management

Spring 2006

Ice-Fili: Winning Strategem in a Contemporary Venue

-Team 5-

900-22-7377
904-46-8228
904-47-4673
904-50-0701
904-50-7922
904-52-3718

February 13, 2006

 Executive Summary

Ice-Fili had been successful in the past, surviving various tumultuous times including the

transformation of the Russian closed economy into an open economy and the financial crisis in

1998. As Russia’s largest domestic ice cream producer, they had held onto their market

leadership for many years. However, increasing competition from foreign companies, along with

the emergence of regional producers of ice cream led to Ice-Fili’s market share erosion in the

recent years. Porter’s five forces model was the primary method to analyze Ice-Fili’s industry

and its competitiveness in the industry. Segmentation analysis was used for further study of the

ice cream industry in Russia. The analysis was carried on key variables like distribution channel,

buying behavior, geographic locations, and product characteristics. Based on this model, various

alternatives were considered. From these alternatives, it was possible to form a recommendation:

Ice-Fili will need to focus on the strengthening of its distribution channel through various efforts

including marketing and raising of capital while focusing on its long history and brand

recognition. Above all, availability of its product to the consumers is the key to Ice-Fili’s

success.

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 Porters Five Forces

In order to analyze the industry and environment of Ice Fili, Porter’s five forces model

will be used to assess its competitiveness in the market. An illustration of the model specific to

Ice Fili is displayed in Exhibit 1. The analysis will lead to the identification of various

opportunities for Ice Fili, along with determination of the most appropriate strategy and

associated milestone for the strategy.

Buyers are people or organizations who create demand in an industry. If buyers have

significant bargaining power, industry returns can transfer to buyers in the form of lower prices.

Buyer power is determined by various factors such as switching costs, the relative volume of

purchases, the standardization of the product, elasticity of demand, brand identity, and quality of

the products. Buyers are presented with many choices when selecting a product in the ice cream

industry while distributors have the power to decide which products will be available to

customers. Absence of preservatives and a high proportion of milk fat differentiate the domestic

Russian ice cream from the foreign producers’. However, due to a vast number of similar

products and the lack of protection for innovation leads to indifference between various domestic

products. Customers are able to substitute one brand of ice cream to another or from ice cream to

other foods altogether at any point in time. Pricing information is also readily available to

customers and only large differences in price will affect the customers’ buying behavior. It

should be noted that the buyers of ice cream for Ice Fili or any other ice cream producers are the

distribution channel members, not the end consumers. As such, it could be inferred that the buyer

power of the distribution channel members relative to the ice cream producers is high, and the

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buyer power of the end consumers to the distribution channel members is also high. It could also

be implied that through this chain relationship, the end consumers also impose buyer power on

the ice cream producers.

The main suppliers in the ice cream industry comprise suppliers of raw materials or

ingredients and equipments. Factors affecting the bargaining power of suppliers include the

threat of forward integration and the concentration of suppliers. There exist numerous potential

suppliers of ingredients. The ingredients provided by each supplier are not unique or greatly

differentiated. Furthermore, ice cream manufacturers are able to switch between suppliers

quickly and cheaply. Therefore, the bargaining power of suppliers of ingredients is rather low. In

terms of the equipment, most of the equipment used by domestic ice cream manufacturers were

imported from other countries. Although the local supplier base has been developing rapidly,

approximately 10 ice cream equipment suppliers exist in Russia, Ukraine, and the Baltic

countries, which is relatively low compared to the total number of ice cream manufactories at

around 300. The suppliers of equipment are concentrated in this industry and make it difficult for

ice cream manufacturers to exercise leverage over the suppliers and obtain lower prices by

inducing competition among them. Furthermore, switching costs for large capital equipments are

high. Even though the development of new domestic equipment suppliers jointly financed by

Russian ice cream producers such as those converted from military facilities may present

opportunities for forward integration, the bargaining power of the suppliers of equipment is

relatively high compared to that of the material suppliers.

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 Barriers to entry deter new competitors from entering the market and creating more

competition for established firms. There are several major barriers to entry which include

economies of scale, initial capital requirements, product differentiation, cost disadvantages,

access to distribution channels, government policy, and competitors’ responses The ice cream

industry has considerably low barriers to entry since most equipment can be rented, purchased,

or utilized for multiple purposes, while employees need not be highly experienced and trained.

Also, there are no unique ice cream manufacturing techniques or processes that are employed. In

general, brand loyalty presents a problem for new entrants because existing firms have already

marketed their products and possess a large number of loyal customers. A new entrant must

spend considerable resources in order to get their name out and convince consumers to begin

purchasing their products instead of what they previously used. However, due to Ice–Fili’s weak

marketing and promotion, Russian customers tend to be indifferent consumers of ice cream

based on brand differentiation. Therefore, these non-loyal customers tend to switch from one

brand of ice cream to another rather easily. In terms of the product, there is low differentiation

and demand elasticity, contributing to a lower barrier to entry. The real threat originated from

regional producers. They tended to cut costs by taking advantage of lower wages. Regional

producers accounted for 30% of the domestic ice cream market. This was in part led by a

shrinking of the frozen food imports market, which had been impacted by the 1998 Russian

economic crisis. Many former frozen-meat and fish wholesalers found it easy to set up for ice

cream production since they could utilize their cold storage and production capabilities. By 2002,

these flexible and aggressive regional producers set up manufacturing factories and also

penetrated the ice cream market in Moscow. Regarding the accessibility to channels of

distribution, many channel members carried different brands of several companies, resulting in

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easy access to various distribution networks for new entrants. Government policy encouraged the

entry of new competitors, including foreign companies. The open market economy attracted

more foreign companies into the Russian market to capitalize on new opportunities. Foreign

companies such as Nestle had already set up two factories in Moscow since the beginning of the

open economy.

A threat of substitutes exist when the demand for a product declines due to either lower

prices of a better performing substitute product, low brand loyalty, new current trends, or low

switching costs. When the threat of substitutes is low the outcome is favorable for the existing

industry because fewer alternatives exist. There is low customer switching costs in the Russian

ice cream industry. Furthermore, some other substitutes like beer, soda, yogurts, chocolates and

other confectionary candies are competing with ice cream products, threatening the already

declining ice cream market. In addition, such products are backed by fierce advertising

campaigns. As a result, the ice cream industry production shrank to 3.5% in 2000 from the

previous year, while beer was up 23% and soft drinks 25%.

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Segmentation

Although several crucial segmentation variables exist for the ice cream market in Russia,

it should be realized that a superior market exists that encompasses not just ice creams but

frozen, dairy, confectionaries, and snacks such as candies. However, due to its resource

limitations including financial, marketing expertise, and human resources stemming from its

legacy of being in the closed economy of Russia, Ice Fili should initially focus on the ice cream

market. By dominating the ice cream market and developing it into a cash cow, various

opportunities could arise for Ice Fili to extend into a similar, yet broader market with higher

market demand growth (+8% for confectionaries) as opposed to the declining demand in the ice

cream market. (-3.5%)

As mentioned above, a number of segmentation variables exist for the ice cream market

in Russia. These include the distribution channel, buying behavior, geographic locations, and

product characteristics such as price. These variables were chosen based on the distinctiveness of

each segment. For example, the distribution channel was already clearly defined by kiosks, mini-

marts, gastronoms, supermarkets, and restaurants/cafes, which are all easily distinguishable.

However, it should be noted that these segmentation variables are not discrete and cannot be

used by themselves. In other words, there exists 3 distinct strategic groups that incorporate a

unique mix of certain characteristics of the 4 segmentation variables, and these strategic groups

should be considered as market segments instead. The strategic groups can be divided into:

leaders, regional, and boutique. The leaders are Ice Fili and Nestle, both competing for the

leading position primarily through brand strength. Regional producers focus on local tailored

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needs through low price, while boutique producers such as Baskin Robbins and Haagen-Dazs

differentiate based on high price and high-end products. The mix of the 4 segmentations

variables that each of the 3 groups employ can be seen from the segmentation table (Exhibit 2)

and graphs (Exhibit 3a and 3b). Ice-Fili and Nestle mainly distribute their products nation

wide through all the distribution channels. They usually have mid level prices and serve both the

on-the-go and household consumption market. The regional producers concentrate on the kiosks

and mini-marts, concentrated mostly in regional areas for low price on-the-go consumption. The

boutique producers rely on their network of restaurants and cafes in cities to serve the dine-out

demand with high-end products. The key success factors would be the increased availability of

ice cream products using the entire distribution channel, while meeting the specific demands of

various buyers with differentiated products.

The most attractive segment in the ice cream market based on growth potential is the

household consumption and the boutique restaurant and café segment. This is in fact supported

by the over saturation of on-the-go consumption at kiosks and mini-marts. The main reason for

this growth potential is due to the transition from closed to open economy in Russia. In the

closed economy, opportunities for extending into niche markets were limited and exposure to the

lifestyle in an open economy was limited. In general, developing countries tend to adopt the

lifestyle of a more developed open economy, and Russia is no exception. In terms of segment

attractiveness, the household consumption segment presents an advantage over other segments

because it is less sensitive to fluctuations in seasonal demands. On-the-go consumption that take

place outdoors might decrease significantly in the winter, but household consumption which

takes place indoors could be less affected by cold weather. In addition, household consumption

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in general presents a higher sales figure per purchase due to the increased volume of ice cream.

The boutique segment is attractive in terms of higher margins and might present an opportunity

for Ice-Fili to capitalize on its long brand history and image of quality Russian ice cream.

However, although ice cream in Russia was traditionally considered as an impulse, “on-

the-go” product, it had not been recognized as a product that could be stored at home and

consumed at any desirable time and occasion. The problem was that such kind of product usage

had not been developed in the consumers’ minds due to lack of marketing efforts. For the

boutique segment, Ice Fili had not positioned itself as a premium brand differentiated by

exquisite ingredients and high price, as with the case of Baskin Robbins and Haagen-Dazs.

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Competitors

Ice-Fili produces ice cream, a part of the consumer desert and drinks industry. The ice

cream industry competed with several products like soda, beer, yogurts, chocolate, and other

candies for a share of the consumer spending. Ice cream had been a shrinking industry whereas

the companies in other industries were experiencing high growth. Some of it could be attributed

to more spending on marketing and advertising by the companies in other industries. The ice

cream industry had lagged its competitors in positioning their products to be used under different

situations.

Exhibit 4 shows the total ice cream production and Ice-fili’s ice cream production during

the past 6 years. Ice cream production in Russia has been growing at a very slow pace over the

last 6 years. Ice-fili production volume had decreased durting those 6 years and had resulted in

significant erosion of its market share. It faced intense competition from foreign companies like

Nestle, Baskin & Robbins, and Haagen-Dazs (a part of General Mills) as well as small regional

producers. Ice-fili’s market share had reduced from approximately 50% to 10.3% in 1997 to

5.2% in 2001. The competitor’s for Ice-fili can be divided into 2 categories:

1. Foreign companies like Nestle, Baskin & Robbins, and others.

2. Small regional producers.

Foreign companies had several advantages over Ice-fili such as equipment and packaging

technology used for ice cream production and strong financial support from its’ parent

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companies. Furthermore, the image of foreign ice cream products was of higher value, justifying

the higher cost paid by the consumers. The foreign producers used chemical preservatives which

led to lower costs due to increased shelf life of the products and lower wastage. One of the most

significant advantages of a producer like Nestle was their strong distribution channel. Apart from

ice cream, Nestle produced a wide variety of other products like coffee, confectionary, chocolate,

pet food, bottled water and cereal. Thus, it could market its ice cream products through a large

distribution network for all of its products. This led to a high penetration level of its product

among the consumers.

The other competition to Ice-fili emerged from small regional producers. These producers

had significant cost advantages due to new equipment and manufacturing facilities, lower labor

costs, and lower rent costs as they were located away from the metropolitan areas. Also, these

companies had lower transportation costs as they sold their products closer to the region where

they produced. In addition, the distributors preferred the regional producers due to their

flexibility to produce an in demand ice cream tailored to local needs.

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Resources

Unlike its foreign rivals, Ice-Fili still used high quality natural ingredients instead of

artificial and preservatives to keep the tradition of the Russian ice cream. By doing so, Ice-Fili

produced ice cream with a taste more fit for Russian consumers. However, these raw materials

led to high costs because it was difficult to store and transport products that used such materials.

In addition, the taste of consumers in other countries was unknown. Although most product lines

already utilized imported equipment in Ice-Fili, 25% of overall volume was produced by old-

generation equipments, which cost 8 million dollars to modify. In its financial statement

from1996 to 2001, Ice-Fili did not have any long-term debt. Even though it was positive in that

Ice-Fili would not suffer financial distress caused by long-term debt, the downside was the lack

of an effective way to raise funds especially in the developing period where equity investors

were highly skeptical of investments. In addition, there was an obvious weakness for Ice-Fili in

the ice cream market, that is, the absence of a specific trademark for its own brand. “Lakomka”,

accounting for 30% of sales volume, was produced by at least five companies at the same time.

There was one brand named “Leningradskoe”, also used by many domestic companies.

Moreover, the lack of effective distribution networking was also one obstacle that hampered its

rapid growth in the whole market. On the other side, there had been an strengthening of human

resources resulting from a restructured organization and culture. Employees were more satisfied

because the company was run more like a family in which employees were cooperative with

each other. The restructured organization led to employees with greater responsibilities and

reinforced rewards and punishments further than they were in the Soviet time. In order to

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develop an intensive competition environment, Ice Fili also paid much more attention to recruit

many young managers with strong abilities to work in an open market economy.

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Alternatives and Recommendations

Over the course of the analysis, a number of alternatives were identified for success of

Ice-fili’s future. Some of the alternatives included exports to other USSR countries, alliance with

other fast food restaurants, creation of trademarks and patents for its products and vertical

integration with a distributor. However due lack of information, these alternatives were not

analyzed in detail.

Based on the key operating financial ratios of Ice-Fili in Exhibit 7, it can be seen that

operating profitability based on Return on Net Operating Assets (RNOA) and the profit margin

has been decreasing over the past several years. In order to improve its performance, Ice-fili

should focus on three key areas in its core competency of ice cream production for Russian

industry.

1. Consolidation of products and creation of power brands (highly successful products).

2. Strengthen distribution channel.

3. Increased marketing and advertising of its brands.

Ice-fili has one of the highest ratios of ice cream products to production capacity in the

Russia. Also around 70% of Ice-fili’s products are sold through kiosks. Since these kiosks are

small booth like structures, they have very little storage capacity and thus store only few

products. Thus consolidation of products will not impact its sales revenues in a significant way.

Also it will create a simplified production and packaging process for its products. This will lead

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to a reduction in the higher percentage of line expenses and thus cost savings for the company.

Apart from a higher income margin, the company can focus its human and financial resources in

its power brands and penetrate into the market.

To tap the broader market Ice-fili needs to strengthen its distribution channel across the

country. It distributes only 15% of its through Service-fili and its distributors compared to 41%

of competitors. This channel primarily distributes its products to mini markets, gastronoms and

restaurants, where Ice-fili needs to increase its exposure. Thus improving the relationships with

this channel can increase its market share at these points of sale.

The last important factor is to create an effective marketing strategy to advertise its

products. The advertisements should create brand awareness of Ice-fili’s products; portray its

advantage over the foreign players in terms of its quality. Also the advertisements should help

create a larger and growing market for the ice cream industry as a whole.

Exhibit 5 shows the Effective Value Added (EVA) to the company over the last 5 years.

The graph shows the decreasing trend in the last 5 years. One of the reasons is due to the

increased equity and thus the high cost of capital. Thus we recommend the company to raise

capital from debt in foreign markets. Raising market in developed financial markets like USA or

Europe would give the company benefits like low interest rates, easier method to raise capital.

The company could enter into derivative contracts to hedge its currency risk.

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 Exhibit 6 shows that Accounts Receivables were approximately 20% of its total assets in

2001. Also the ratio had significantly increased from 1996. This is a result of bad debts or poor

collection systems of the company. Thus the company needs to build up its internal controls over

the financial systems.

The combined effect of the three key factors of Ice-Fili’s strategy could result in a

success for Ice-Fili due to the improvement of its core competency. Ice-Fili’s weaknesses were

in its inability to increase product availability and to market the products with additional capital.

However, by strengthening its relationships with suppliers, building a better marketing

campaign, and raising more capital to finance these initiatives, Ice-Fili could be well on its way

to higher profitability in the future.

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Exhibit 1

Porter’s Five Force analysis for Ice-Fili

Bargaining Power of Suppliers

 Low concentration of suppliers of

ingredients and higher concentration of
suppliers of equipment relative to producers
 Low switching costs among ingredients
but high among equipment

Threat of entry Industry Competitors Substitutes

 Easy access to  Large number of  Existence of

manufacturing equipment producers including foreign substitutes such as
 Low skilled and regional confectionaries and snacks
employees  Increasing trend of
 Low sophistication shift towards and growth
of manufacturing techniques of other consumer goods
 Low brand loyalty  Low switching
 Easily extended costs
from other frozen foods
industry
 Low governmental
and legal barriers
 Easy access to
distribution channels

Bargaining Power of Buyers

 Low product differentiation

 Low switching costs
 Low demand elasticity

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 Exhibit 2

Segmentation of the Ice Cream Market

Distribution Channel Kiosk Minimart Gastronom Restaurant Supermarket

Shares 49% 29% 17% 3% 2%

Purchase Behavior Impulse Impulse Household Luxury/Impulse Household
Geographic Area National City/Regional City/Regional City City
Product Characteristics On-the-go On-the-go Storable Immediate Consumption Storable
Low Price, Low Price,
Taste, Quality,
Extensive Extensive Taste, Quality, Exquisite Flavor, High
Key Success Factors Variety, Shelf
Distribution Distribution Variety Quality, High Variety
Space
Network Network
Nestle’, Regional Nestle’, Regional Nestle’, Regional Baskin Robins, Haagen-
Competitors Nestle’
Producers Producers Producers Dazs

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 Exhibit 3a
Price and Location attributes

Exhibit 3b
Distribution Channel and Purchase Behavior Attributes

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 Exhibit 4

Production in '000 tons Production of Ice cream

400
350 Ice-fili's
300 production
250 volume
200
150 Production
100 Volume in
50 Russia
0 99
96

97

98

00

01
19

20

20
19

19

19

Year

Exhibit 5

Economic V alue Added (in rubbles)

30000
25000 Cos t of Capital
20000
15000 10%
10000 15%
EVA

5000 20%
0
-5000 1996 1997 1998 1999 2000 2001
-10000
-15000
Ye a r

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 Exhibit 6

Accounts Receivables / Assets %

25
Accounts Receivables /

20
Assets %

15

10

0
1996 1997 1998 1999 2000 2001
Year

Exhibit 7

Ice-Fili financial ratio analysis (units: thousand dollars)

2001 2000 1999 1998 1997 1996

Operating Assets(OA) 11,832 10,606 12,645 18,350 26,860 24,733

Operating liabilities(OL) 1,194 1,155 2,643 5,080 6,680 4,737

Operating income(OI) 1,702 1,727 2,090 2,742 5,856 6,753

Sales 25,147 27,206 32,672 35,988 68,892 34,083
Net operating
assets(NOA=OA-OL) 10,638 9,451 10,002 13,270 20,180 19,996
Return on
NOA(RNOA=OI/NOA) 16.00% 18.27% 20.90% 20.66% 29.02% 33.77%
Profit
margin=OI/SALES 6.77% 6.35% 6.40% 7.62% 8.50% 19.81%
Assets turn
over=SALES/NOA 2.36 2.88 3.27 2.71 3.41 1.70

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