Although growth has been rapid for Nestlé in the Russian confectionery sector, there are a number of challenges to be tackled to ensure future expansion - low per capita consumption and ingredients supplies being the primary targets.
Having only entered into the Russian market in the early '90s, the company has built up its confectionery business to become the number one chocolate seller in Russia, in a market that is estimated will produce a total of 400,000 tons of product in 2004 .
The biggest step for its confectionery business came in 1995 when Nestlé acquired a majority stake in the Rossiya chocolate factory in Samara. Nestlé has made major investments into expanding existing manufacturing installations and introducing new technologies.
As with all industry in the country, the sector experienced a stalling period after the 1998 collapse of the economy. However, since then the market has been swift to pick up again and has been approaching annual growth of between 5 and 7 per cent. That growth is now starting to show signs of levelling off as the economy starts to cool a little and market development matures, which gives Nestlé's confectionery brand manager Elena Shevyakova reason to believe that future growth will come in at around 2 to 3 per cent.
Currently Nestlé's biggest rivals in the confectionery sector are Mars, Kraft and Cadbury, while local players United Confectioneries and Sladko are also prominent.
Although its product range has come a long way since it entered the market, the brand portfolio is still not extensive. Countlines include a combination of international brands such as KitKat, Nesquik and Nuts and a number of Russian brands such as Shok, which Nestlé says was specially developed for Russian tastes.
"The consumption of chocolate in Russia is still low in comparison withother European countries," said Shevyakova in an exclusive interview with CeeFoodIndustry.com. "The market itself is still fragmented, which means there area lot of different international and local players in the chocolate segments.The division of the market is also quite unique - the biggest chocolate segment is loose assorted chocolate sweets, whilst the second biggest segment is chocolatetablets."
However, as Shevyakova points out, the very fact that consumption is still only around 3kg per person per year - against the British who consume 10 kg per per person per year - gives rise to the belief that there is still huge potential for development in this market. On top of that, Russia is still by far the largest market for chocolate in terms of overall volume.
Key issues for the chocolate industry in Russia are similar to those in western Europe, the brand manager points out. Right now the company is chasing the growth of disposal income, and in particular thegrowth of the premium chocolat segment. With rising wealth in the upper echelons of society, luxury chocolate is an increasingly important niche.
Of significant bearing on the growth of the industry has been the supply and pricing of key ingredients. The brand manager points out how, in particular, the 5 per cent import on cocoa is prohibitively expensive, particularly compared to the rates levied in western Europe. "We are also faced with the problem of high sugar prices in comparison to international prices as well as the problem of a limited number of high quality milk powder manufacturers," Shevyakova said.
Although the potential is evident, it is also apparent that there are still a number of hurdles to overcome in order for the chocolate market in Russia to mature. But the sheer volume of the market dictates that even small gains will have significant bearing, making the market all the more lucrative for major players such as Nestlé. On top of that fragmentation would also suggest that there is more room for consolidation, particularly by the big players, suggesting that the state of affairs will certainly remain interesting in this sector in the years to come.